The Impacts of Trade Openness (Tariff Cuts) on the Wage Inequality: A CGE Approach

Abstract

Most debates on the role of trade openness and the wage inequality are based on the well-known Hecscher-Ohlin and Stopler-Samuelson (HOS) theories. According to the Heckscher-Ohlin theory, Countries have comparative advantages in those goods for which the required factors of production are relatively abundant locally while the Stopler-Samuelson theory refers to the income distribution effects of trade openness. In this paper, a computable general equilibrium (CGE) model and social accounting matrix (SAM) approach are used to assimilate the effect of tariff cuts on the earnings of production factors and relative wages by using Iran's data for 2001. The results confirm that general tariff cuts lead to a decrease in wage inequality while it leads to an increase in wage inequality in the foods, apparel and textile sectors. However, tariff cuts in agriculture sector reduce wage inequality.

Keywords

• trade openness
• wage inequality
• computable general equilibrium