Sergio Firpo and Alysson Portella. Decline in Wage Inequality in Brazil: A Survey Latin America has provided researchers with a fertile ground for investigations of trade liberalization impacts due to the large tariff reductions that took place in many countries in the region during the late 1980s and early 1990s. Overall, the evidence suggest that Stolper-Samuelson mechanism are unable to account for the whole story of changing inequality in the region, since most Latin American countries have seen the relative wages of skilled workers increase after episodes of trade liberalization (Goldberg and Pavcnik, 2007; Pavcnik, 2017). Moreover, there is scant evidence of sector mobility, at least in the short-run, an important assumption in general equilibrium models of trade. Some arguments have been put forth to explain this inability of the theory to account for the observed changes, including that the sectors most affected by trade liberalization were precisely those intensive in skilled labor. Other models, however, have emphasized other aspects of trade to make sense of the observed changes, such as trade-induced skill-biased technological changes, short-run factor immobility, and firm heterogeneity. In this section, we review studies that investigate both traditional and new models of international trade and wage inequality in the Brazilian context.

Following the overall trend in the region, Brazil experienced a large decrease in protectionism in the late 1980s and early 1990s. Ferreira et al. (2007b) report average nominal tariffs reduction to 13.9% in 1995 from 43.4% in 1987. Effective rates fell even more, to 20.0% from 55.8%. Neoclassical trade theory predicts that these cuts in tariffs should affect relative price, relative wages, and inequality. Gonzaga et al. (2006) test the StolperSamuelson’s theorem in the Brazilian context. They report a decrease in skill premium of 15.5% between 1988 and 1995 in the manufacturing sector. Based on mandated wage equations, they estimate that changes in prices due to trade liberalization are actually responsible for an approximate 25% drop in the skill premium during the period, concluding that other changes in the economy (such as skill-biased technological changes) counter-acted the wage effects of trade liberalization. Ferreira et al. (2007b) expand the analysis to the whole economy. Unlike other Latin American countries, Brazil observed a reduction in wage inequality in the period, which the authors suggest was driven by the larger incidence of tariff reductions in more skill-intensive industries, leading to larger reduction in prices in these industries, and consequently, to reductions in the relative wages of skilled workers. Their decomposition exercises show that industry-specific wage changes were unimportant, a finding consistent with previous work by Pavcnik et al. (2004). However, changes in occupational reallocation and economy-wide returns to skills both contributed to reductions in inequality, account for nearly 60% of the reduction in the Gini coefficient between 1988 and 1995.<sup>10</sup>

> 10However, the authors cannot fully attribute reductions in skill premium to changes in international trade.

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