Trade liberalization and wage inequality: Evidence from the Philippine manufacturing sector

• Main Authors: Hernandez, Aeneas DR, Miranda, Brendan Emmanuel A., Regulano, Martin William P., Tecson, Andrae Jamal I.
• Format: text
• Language: English
• Published: Animo Repository 2022
• Subjects: Free trade—Philippines; Wage differentials—Philippines; International trade—Effect of wage differentials on—Philippines; Economics; Income Distribution; Industrial Organization
• Online Access: https://animorepository.dlsu.edu.ph/etdb_econ/31; https://animorepository.dlsu.edu.ph/cgi/viewcontent.cgi?article=1038&context=etdb_econ
• Institution: De La Salle University

The expansion of trade liberalization during the past four decades has undeniably led to many economic implications. While past studies in the Philippines focusing on the earlier episodes of trade liberalization report insignificant and contradictory results, there is still a lack of attention to the 21st century when the country continued its trade liberalization reforms through participation in numerous free trade agreements. This paper explores the impact of the reduction of tariffs in the Philippines coming from the rise of bilateral and regional trade agreements on wage inequality between skilled and unskilled workers during the early 21st century. Using a unique dataset that combines pooled cross-sectional labor force data and panel data on industry-level characteristics, we provide new evidence on the impact of tariff reductions on wage inequality between skilled and unskilled workers in the Philippines. Our findings show three important pieces of evidence. First, tariffs, ceteris paribus, have an insignificant effect on wages. Second, while an industry skill premium exists, tariff reductions have no impact on the industry skill premium. Lastly, import penetration and export exposure significantly affect industry skill premium. Overall, these results suggest that while trade liberalization through tariff reduction has no impact on wage inequality between skilled and unskilled workers in the Philippines, it may have an indirect effect through trade flows. Policy recommendations include studying the impact of specific trade agreements on labor markets, pushing for structural transformation in the manufacturing sector, and reforming education and skills training in the country.