External Trade, Skill, Technology and the recent increase of income inequality in Colombia

This paper’s main objectives are thus to investigate the evolution of the distribution of labor income in Colombia during the previous 20 years and to identify the factors that lie behind this evolution. We attack the problem from two perspectives. First, we use a partial equilibrium model of the labor market to study developments related to the distribution of labor earnings of a homogeneous sample of individuals (homogeneous in terms of labor market attachement and geographical location), using skills as our primary tool of analysis. That is, a simple supplydemand framework for different dimensions and levels of skill is utilized to evaluate the role these variables played, and how they affected the distribution of labor earnings at different points in time. Second, we relate income to several demographical, skill and labor market factors, to isolate the effect these have had on the evolution of that distribution along the entire income range, and on other measures of overall dispersion and on skill differentials. We assess the merit of different explanations and quantify the contribution of each factor to the total observed changes. This second approach uses semi-parametric techniques that allow an analysis of the entire distribution, without assuming a specific parametric form. The difficulty of measuring the effects of trade on income distribution has been long recognized. It has created much debate (see the various articles in Collins, 1998, Cline, 1997 and Kosters, 1991). For this reason we avoid making causal arguments and restrict ourselves to measuring the degree of association between variables. This provides valuable information on the way that foreign trade interacts with earnings and skills.