How Trade Liberalization and Labor Development Could Coincide in the Philippines

As the world adapts to the rapid pace of globalization in the 21st century, countries ease trade restrictions by gradually removing tariffs and non-tariff barriers to incentivize the free flow of goods across nations. This prevalence of trade liberalization policies propelled policymakers and economists to investigate the relationship between trade reforms and economic outcomes including wage inequality around the world. They found that trade liberalization, on average, has had a positive impact on economic growth, but prior studies that examine the effects of trade liberalization on wage inequality in developing countries have found mixed results. Recently, Murakami (2021) examined the impact of trade liberalization on wage inequality in Chile through the reduction in effective tariffs brought about by the regional trade agreements of the country. Following his empirical strategy, we examine the impact of trade liberalization on wage inequality in the Philippines. In this policy brief, we provide insights on our findings and policy recommendations that the Philippines can undertak

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

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