Trade liberalization and the evolution of skill earnings differentials in Brazil

Abstract

From 1988 to 1995, when trade liberalization was implemented in Brazil, relative earnings of skilled workers decreased. In this paper, we investigate the role of trade liberalization in explaining these relative earnings movements, by checking all the steps predicted by the Heckscher-Ohlin-style trade transmission mechanism. We find that: i) employment shifted from skilled to unskilled intensive sectors, and each sector increased its relative share of skilled labor; ii) relative prices felI in skill intensive sectors; iii) tariíf changes across sectors were not related to skill intensities, but the pass-through from tariffs to prices was stronger in skill intensive sectors; iv) the decline in skilled earnings differentials mandated by the price variation predicted by trade is very dose to the observed one. The results are compatible with trade liberalization, accounting for the observed relative earnings changes in Brazil.