Trade liberalization and the inter-industry wage premia: the missing role of productivity

The literature concerning the effect of tariffs on the inter-industry wage premium has not addressed the role of total factor productivity (TFP) in determining both the wage premium and tariffs. This omission invalidates the use of the pre-reform tariff level as an instrument for the change in tariffs. Based on an analysis of Colombian data, I find that including TFP in the estimated model of the effects of tariffs on the wage premium leads to a 36% decrease in the effect of tariffs on the inter-industry wage premium relative to the model that omits TFP. More specifically, a ten percentage point decrease in tariffs reduces the wage premium by 1.1%. This finding suggests the importance of using policies that boost productivity to offset the effect of tariffs on the wage premium