Sergio Firpo and Alysson Portella. Decline in Wage Inequality in Brazil: A Survey Dix-Carneiro and Kovak (2015) investigates the impact of the tariff reductions on regional skill premia using the local labor markets approach. They assume that the Brazilian economy is made of a set of small economies with no labor mobility across regions. Each region is endowed with skilled and unskilled labor, together with a vector of industry-specific factors, which lead to differential participation of industries across regions. Moreover, industries differ by the intensity with which they use skilled and unskilled labor. In their framework, the impact of uniform tariff reductions on the regional skill premium will be mediated by the differential industry-composition of each region, weighted by the share of skilled workers employed by each of them. Therefore, the skill premium will fall more in regions where the tariff decline was more incident on industries employing a larger share of skilled workers. Contrasting the traditional local labor markets approach, in this setting the “differential tariff shock” will depend not only on industry composition, but also on the labor composition of these industries. Their results show that regions facing more negative tariff shocks experience larger reductions in regional skill premium. The effects are significant both in the 1991-2000 and 19912010 periods and are similar in magnitude, meaning that changes in tariffs can have long lasting effects on regional skill premia. Considering the longer period, they estimate that trade liberalization in the late 1980s and early 1990s was responsible for 11% to 14% of the observed decline in the skill premium.

Finally, following a new strand of literature on international commerce, Helpman et al. (2017) look for possible impacts of trade liberalization on interfirm wage differences and wage inequality. They observe an increasing importance of within sector-occupation wage variance in explaining overall wage inequality in the period, much in line with the findings of Alvarez et al. (2018). Their model relies on firm heterogeneity instead of neoclassical trade theory to link wage inequality and trade liberalization. Besides heterogeneity in productivity, their model also includes heterogeneity in firm’ screening costs and fixed exporting costs. The intuition behind it is that exporting firms tend to be larger in size and pay higher wages than non-exporting firms. Firms select into export or non-export activities based on their productivity and fixed costs of exporting, whereas different screening costs enable firms of the same size to pay different wages. Once tariffs are reduced, the share of workers in the exporting sector increases,<sup>11</sup> which in turn increases wage inequality. Focusing only on the formal manufacturing sector, they document that between 1986 and 1995 Brazil experienced a 10% increase in the

> 11This increase in the share of workers results from job displacement, since in principle tariff reductions should not directly increase the absolute size of the exporting sector. In line with this result, Menezes-Filho and Muendler (2011) showed that more protected firms displace more workers after trade liberalization, but these workers are not reabsorbed by more productive or exporting firms, resulting in idle resources in the economy.

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