Seminario CEDE - Leonardo Bonilla

This paper examines the impact of trade liberalization on wage inequality in developing economies. We study a new mechanism that may amplify or lessen the inequality effect of trade. In particular, we include different degrees of substitutability between labor and intermediate inputs across sectors into a dynamic quantitative trade model. We use administrative data from Colombia and exploit exogenous tariff variation to estimate the key elasticities of the model through an indirect inference approach. We find complementarities between labor and intermediate inputs in the non-tradable sector and substitutability in the manufacturing and agricultural sectors. Armed with the estimates, we compute the gains from the trade reform, finding that different substitutabilities in the production function amplifies the wage inequality effects.