The education bias of 'trade liberalization' and wage inequality in developing countries

D Mamoon, Mansoob Murshed

Research output: Working paperAcademic

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Abstract

The aim of this paper is to examine the impact of increased trade on wage
inequality in developing countries, and whether a higher human capital stock
moderates this effect. We look at the skilled-unskilled wage differential. High
initial endowments of human capital imply a more egalitarian society. When
more equal societies open up their economies further, increased trade is likely
to induce less inequality on impact because the supply of skills better matches
demand. But greater international exposure also brings about technological
diffusion, further raising skilled labour demand. This may raise wage inequality,
in contrast to the initial egalitarian level effect of human capital. We attempt to
measure these two opposing forces. We also employ a broad set of openness
indicators to measure trade liberalization policies as well as general openness,
which is an outcome, and not a policy variable. We further examine what type
of education most reduces inequality. Our findings suggest that countries with
a higher level of initial human capital do well on the inequality front, but
human capital which accrues through the trade liberalization channel has
inegalitarian effects. One explanation could be that governments in developing
countries invest more in higher education at the expense of primary education
in order to gain immediate benefits from globalization; thus becoming prone
to wage inequality after increased international trade. Our results also have
implications for the speed at which trade policies are liberalized, the
implication being that better educated nations should liberalize faster.
Original languageEnglish
Place of PublicationDen Haag
PublisherInternational Institute of Social Studies (ISS)
Number of pages34
Publication statusPublished - Jun 2007

Publication series

SeriesISS working papers. General series
Number443
ISSN0921-0210

Bibliographical note

JEL Classifications: F-15, I-3

Series

  • ISS Working Paper-General Series

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