ABSTRACT
The purpose of the trade reforms was to expose domestic producers to international competition, increase efficiency, accelerate growth, and reduce at the same time the prices faced by consumers. Trade reforms could lead to an increase in inequality by expanding the size of the informal sector. This chapter provides an empirical investigation of the relationship between wage inequality and trade liberalization in Colombia using detailed micro-level data from 1984 to 1998. It utilizes detailed data on workers' earnings, characteristics, and industry affiliation from the Colombian National Household Survey and links this information to industry-level tariff changes and trade exposure. The increase in the skill premium in Mexico over 1987–1993 is substantially larger than our estimate for Colombia: the return to post-secondary education relative to secondary education is reported to rise by 60 percent between the two years. The existence of industry wage premiums is hence perfectly consistent with perfect competition in the presence of industry-specific skills.
