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# **1. Introduction**

A far-reaching program of macroeconomic stabilization and rapid liberalization of trade in a developing economy are likely to have important and widespread consequences for the labor market. However there appears to be little evidence from a number of recent examples for the Stolpher-Samuelson theorem that trade liberalization in a developing economy will increase the relative demand for relatively abundant low-skilled labor, and so reduce income inequality.<sup>1</sup> The Brazilian case has been particularly well-researched and there is an emerging conventional wisdom that, despite the upheavals of price and exchange rate stabilization and tariff reduction, earnings inequality in Brazil has remained stubbornly high between 1980 and the present (Dickerson et al., 2001; Green et al., 2001). One explanation for this is that steadily rising average levels of schooling have offset increased demand for skilled labor. At first glance this is a persuasive suggestion. In the sample of Brazilian male workers used in the present paper, average years of education for men have risen by almost one year between 1988 and 1998, and the rate of illiteracy has fallen from 16.6 to 11.6 per cent. Research has also established that rates of return to education in Brazil are low for primary schooling but very much higher for advanced levels of education. This may contribute significantly to Brazil’s highly unequal distribution of earnings (Lam and Levinson, 1992). However while this may be true at the mean of the earnings distribution, little is known about rates of return across the range of this wide distribution. Furthermore, there is evidence that inequality peaked in the late 1980s and has been falling since, in contrast to what has happened elsewhere in the developing world and in particular in Latin America. If so this points to the possibility that important changes in the levels of and rates of return to education have taken place since the late 1980s. Consequently the reform experience may have been a very different one for workers in different positions in the income distribution.

Protected product markets in the developing world prior to the early 1990s appear to have been associated with protected labor markets in Brazil in particular (Carneiro and Henley, 1998; Carneiro, 1998). Liberalization of the economy to overseas trade exposes domestic producers significantly to greater product market competition and this in turn serves to introduce much stronger forces of competition to the labor market. An important consequence of this process is that education ceases to serve as a device for rationing (screening) workers’ access to economic rents. Rather education, if it reflects the acquisition of internationally marketable skills, begins to be associated with inherent productive potential. Whether the benefits of this process accrue more to those with lower or higher levels of education is a matter for empirical investigation. In common with other Latin American cases, such as Mexico, there is evidence that tariff protection was highest in sectors where employment of the least skilled was dominant (Mollick, 2002; Arbache and Corseuil, 2001). Overall there appears to have been little or no assessment of whether apparently high rates of return to formal education represent a genuine return to valuable skills acquired at school, or simply reflect the ability of the more educated to signal innately higher productivity to the labor market.

This paper undertakes an empirical examination of these questions through the estimation of simultaneous quintile human capital equations. This is in order to gain a picture of the impact of human capital on earnings across different point of the distribution of earnings in Brazil. This exercise is performed a sample of male workers drawn from 1 See discussion and further references in Green et al., 2001.