2. A REVIEW OF THE GLOBALIZATION LITERATURE
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on wages today, the recently emergent phenomenon of outsourcing must be modeled. Western producers in many industries are increasingly taking the most unskilled labor– intensive parts of their production processes and relocating them in low-wage developing countries. Testing their outsourcing framework, Feenstra and Hanson (2003) find that international trade may well have been as important as computerization in moving the relative wages of skilled and unskilled workers. A similar debate rages in studies of developing countries among those who argue that globalization has direct effects, indirect effects, and minimal (or no) effects on wage inequality. Trade liberalization may directly affect wage inequality if the trade-related skill premium is a function of the structure of protection in developing countries. Hanson and Harrison (1999) find that the structure of tariffs in Mexico disproportionately protected unskilled workers. A similar pattern of protection is found by Attanasio, Goldberg, and Pavcnik (2004) for Colombia; Currie and Harrison (1997) for Morocco; and Pavcnik et al. (2004) for Brazil. Thus, it is not surprising that the relative wages of unskilled workers declined following trade liberalization. Given this structure of protection, trade liberalization should induce changes in prices, and thus lead to changes in relative wages consistent with the Stolper-Samuelson theorem. Robertson (2004) provides a clear example of the Stolper-Samuelson mechanism in his study of Mexican prices and wages for the period 1987–99. Mexican trade liberalization occurred in two steps. First, Mexico joined the General Agreement on Tariffs and Trade in 1986. Robertson finds that the relative price of skill-intensive goods rose in the immediate aftermath, accompanied by rising wage inequality. Subsequently, Mexico joined the North America Free Trade Agreement (NAFTA) in 1994. Increased trade with its more skill-abundant northern neighbors reduced the price of skill-intensive goods and also reduced wage dispersion. These comovements of factor and goods prices worked exactly as standard trade theory would predict, particularly in light of the fact that Mexico’s tariff reductions in 1986 fell principally on unskilled labor–intensive goods, whereas the NAFTA tariff reductions focused more heavily on skilled labor–intensive goods.5 A similar relationship was identified by Bigsten and Durevall (2006) for Kenya; Lal (1986) for the Philippines; Winters (2000) for India; and Gonzaga, Filho, and Terra (2006) for Brazil. The Gonzaga, Filho, and Terra analysis is distinctive in that they first determine the degree to which tariff changes were passed through to domestic prices. Indeed, they find little correlation between tariff level and skill intensity. That is, Brazil was not offering greater nominal protection to the skilled labor–intensive, import-competing industry than to the unskilled labor–intensive, export sector. However, the pass-through to domestic prices of the tariff reductions was much greater in the import-competing sectors than in the export sectors. After controlling for pass-through, Gonzaga, Filho, and Terra (2006) find a decrease in earnings inequality and a 15.5 percent decline in the relative earnings of more-educated workers.6 Goldberg and Pavcnik (2005), however, challenge this Stolper-Samuelson–type explanation for the rise in the skill premium in developing countries following liberalization. For trade to alter relative wages through the Stolper-Samuelson channel, workers should be observed moving from contracting sectors to expanding sectors because it is the rise in demand by firms in the expanding sector for the factors these firms use intensively that bids up their relative return. The problem, though, is that most studies observe relatively little