Global Studies

The literature on wage inequality in liberalizing developing economies has largely attributed rising skill premiums to trade-induced increases in the demand for skilled labor within "sectors" (industries, occupations, or industry-occupation pairs). Although there is strong evidence from many countries of trade-induced increases in skill demand within manufacturing, we show that in Mexico, the most studied country in this literature, economy-wide increases in college premium can be explained without reference to these demand shifts. Evidence that skill premiums have increased because of within-sector increases in skill demand mostly comes from decompositions that suppress di¤erences in wages across occupations. We show that this is unduly restrictive, for example if incomes change and Engel curves for services are non-linear. Mexico’s college premiums were lifted by increased demand for professional services, many of which are not directly tradeable. This explanation also reconciles gender di¤erences in the changes in skill premium with changes in employment composition. Job opportunities in non-traded sectors may matter more for wage inequality than trade policy. [JEL: F16, O15, J21]