## A Noteon Terms of Trade Shocks and the Wage Gap

_IMF Working Papers, December 1, 2010_

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**Canonical URL:** [A Noteon Terms of Trade Shocks and the Wage Gap](https://www.imf.org/en/publications/wp/issues/2016/12/31/a-noteon-terms-of-trade-shocks-and-the-wage-gap-24436)

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## Bibliographic details
- Published: December 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455210862.001

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### Summary and main findings
- Using Chilean data, the paper documents that for resource-rich small open economies the effects of terms of trade shocks on the wage gap (between skilled and unskilled workers) depend on factor intensities in the non-tradable sector, following the model in Galiani, Heymann, and Magud (2010).
- For a skilled-intensive non-tradable sector the authors show that improvements in the terms of trade benefit skilled workers.
- The relation holds at the industry level: the wage gap widens in skilled-intensive sectors while it shrinks in unskilled-intensive ones, the more so as terms of trade volatility decreases.

### Methodology and scope
- Empirical analysis uses Chilean data.
- The analysis follows the theoretical model in Galiani, Heymann, and Magud (2010).
- Focus is on resource-rich small open economies and the interaction between terms of trade shocks and factor intensities in the non-tradable sector.

### Industry-level results
- Wage gap dynamics vary by industry factor intensity:
  - Skilled-intensive sectors: wage gap widens with improvements in terms of trade.
  - Unskilled-intensive sectors: wage gap shrinks with improvements in terms of trade.
- The magnitude of these industry-level effects increases as terms of trade volatility decreases.

### Policy implications and considerations
- The distributional impact of terms of trade shocks is mediated by the factor intensity composition of the non-tradable sector.
- Policymakers in resource-rich small open economies should consider sectoral factor intensities when assessing the distributional effects of external price movements and when designing labor-market and social policies to mitigate adverse effects on unskilled workers.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/a-noteon-terms-of-trade-shocks-and-the-wage-gap-24436_