Trade Liberalization, Firm Performance and Labour Market Outcomes in the Developing World: What Can We Learn from Micro-LevelData?

for the most qualified segments of the workforce have often been deemed inevitable consequences
of trade liberalization.

In this respect, the traditional trade theory (which removes, by assumption, uncertainty and
unemployment) should have been reassuring, since its most celebrated theorem (the Stolper-
Samuelson theorem) predicts that a skill-poor developing country opening up to international
competition will experience a reduction in wage income inequality. However, the empirical evi-
dence contradicts this prediction, since it shows that the recent episodes of trade liberalization in
developing countries are generally accompanied by a dramatic increase in wage inequality. The
recent theoretical and empirical literature can explain this puzzling evidence, since it shows that in
the presence of imperfectly competitive markets, increasing returns to scale and firm heterogeneity,
trade liberalization can indeed exacerbate wage inequality even in a skill-poor developing country.

Plant-level evidence also shows that trade reforms in developing countries do not generally
bring a sharp contraction of import competing skill-intensive sectors. Further, the evidence shows
that trade exposure is associated with a greater wage volatility, but also with a greater investment
in technology and human capital. This evidence, too, can generally be explained by trade models
based on increasing returns to scale and imperfectly competitive markets.

A few recent papers address related issues from different perspectives. Harrison and Hanson
(1999) focus on three empirical issues concerning the impact of trade reform. First, they address
the question of the weak econometric link between trade policy and long-run growth, and argue
that it may be due to the fact that, because of the lack of data, trade policy cannot yet be
measured adequately. The second and third issues addressed by the authors are the small impact
on employment and the large impact on wage inequality of trade reforms in developing countries.
We will mention their results on these topics in the second part of the paper. Matusz and Tarr
(1999), and Bacchetta and Jansen (2001) survey the evidence on the adjustment costs of trade
liberalization. They show that the overwhelming majority of the studies find that adjustment
costs are small in relation to the benefits of trade liberalization. Finally, Tybout (2001) reviews

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