Trade policy and wage inequality in Chile since the 1990s

Using the results of seven nationally and regionally representative household surveys, this study analyzes the impact of trade liberalization on wage inequality through a channel in which applied tariffs, owing to the preferential margin given under numerous preferential trade agreements, would affect industry wage premiums during the 1992-2006 period in Chile. I find the skill premiums for high-skilled workers there to have decreased, especially after 2000; this circumstance is unlike that seen in most other Latin American countries or during Chile's initial reform period. The results of econometric analyses show that industries which experienced larger tariff reductions were those with initially higher shares of low-skilled workers and lower industry wage premiums, and a statistically significant negative relationship between applied tariffs and industry wage premiums, that is, tariff reductions contributed to an increase in initially lower industry wage premiums. However, the impacts of applied tariffs on industry wage premiums disappear, after controlling for unobservable timeinvariant industry characteristics during the 2000-2006 period. Thus, I find no statistically significant relationship between applied tariffs and industry wage premiums. The findings suggest that, unlike a theoretical assumption that tariff reduction-induced productivity improvements lead to increases in industry wage premiums, industries with initially higher productivity tend to have lower applied tariffs and higher wage premiums in such a short time-period. Therefore, I cannot conclude that bi- or multilateral trade liberalization during this period has contributed to wage equalization through a channel in which applied tariffs affect industry wage premiums.