Economic Policy and Wage Differentials in Latin America - Working Paper 29

updated 07/04/2006

This paper presents estimates of the impact of changes in liberalization policies on wage differentials by schooling level using a new high-quality data set for 18 Latin American countries for 1977–1998. The method controls for all fixed and time-varying country characteristics, some of which may affect the policies themselves. The results indicate that liberalizing policy changes overall have had a short-run disequalizing effect of expanding wage differentials, although this effect tends to fade away over time. This disequalizing effect is due to the strong impact of domestic financial market reform, capital account liberalization and tax reform. On the other hand, privatization contributed to narrowing wage differentials and increasing trade openness had no significant effect on wage differentials. Technological progress, rather than trade flows, appears to be a channel through which policy changes are affecting inequality.