Download INTERNATIONAL COMPETITION, RETURNS TO SKILL AND LABOUR MARKET ADJUSTMENT February 19, 2009

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Figure 2: High to low skill wage differentials of the manufacturing sector
Skilled/Unskilled Log Wage Differential
1.25
1.2
1.15
1.1
1.05
1
0.95
0.9
0.85
1999
1998
1997
1996
1995
1994
1993
1992
1991
1989
1988
1987
1986
0.8
ln(wage if skill>3)-ln(wage if skill<3)
ln(wage if schooling>12)-ln(wage if schooling<=12)
Source: Author calculations from Quadros de Pessoal .
We use the pre- and post-appreciation period (1986-1988 and 1989-1992 respectively) and
pre-appreciation differences between sectors in trade openness to identify exogenous changes
in international competition in a difference in differences specification. The advantage of this
is that it controls for pre-existing differences across industries and changes common to all
industries. The hypothesis is that the appreciation represents a higher increase in the degree of
product market competition in the sectors that are (ex-ante) more open (treatment group)
relative to those fairly closed (control group). More specifically, we estimate:
ln wit = (indop88K * post 89 * skillit )λ + θ (indop88K * post 89 ) + ( post 89t * skillit )ς +
(indop88K * skillit )ϕ + skillit β + Xitα + ZJtν + γ hhiKt + φij + τ K + µt + Ψ it
(1)
where wit is the wage of worker i at year t; indop88 K is the degree of openness to trade of
industry K 5 and post89 is a dummy variable that takes the value zero in the preappreciation period (1986-1988) and one during the appreciation (1989-1992), skill it is a
vector comprising measures of the skill level of worker i at year t; X it is a vector of individual
characteristics (age, age squared, gender, tenure), Z Jt is a vector of characteristics of firm J
at year t (size, labour productivity, age, proportion of foreign owned capital, regional dummy)
5
Defined as the ratio of total industry trade (imports plus exports) to domestic demand (industry sales
plus net imports).
6