Bolivariana de Venezuela and Brazil showed a positive correlation between the cyclical RTS and the unemployment rate.<sup>16</sup> Thus, when the cyclical components of RTS are (jointly) statistically different from zero, it seems that an inverse relationship between RTS and the unemployment rate exists. When the unemployment rate increases, there is thus a decrease in the wage gap between skilled and unskilled workers. Consequentially, when there is a boom in economic activity, the wage difference between more qualified and less qualified workers tends to widen while in recessions, the wage difference seems to narrow.

We argue that this result is driven by external shocks to the economy. In order to observe the impact of external shocks, we look at the relationship between RTS and four types of shocks instead of using a broad measure of business cycles. They represent external real shocks, external nominal shocks, domestic real shocks and domestic nominal shocks. Partitioning in this way, we found that RTS fluctuate when a country experiences an external (real) shock. To present some preliminary evidence on this relationship, we first define our measurement of an external (real) shock.

We applied a gravity model for each bilateral country pair to estimate the effect of changes in trading partners’ GDP on each country’s merchandise exports to capture fluctuations of foreign demand for domestically produced goods, after controlling for bilateral distance and the country’s own GDP.<sup>17</sup> In turn, we computed the effect of deviations from trends in trading partners’ GDP on a country’s exports as the product of the estimated coefficient on the importers’ GDP times the change of the average annual GDP of each country’s trading partners. The deviation from the trend (or cyclical component) was used as the external shock.

Figure 2 shows the relationship between the (cyclical component of) RTS and our external demand shock for the twelve countries in our sample.<sup>18</sup> Six economies present a positive correlation between these two variables (Argentina, Chile, Costa Rica, Colombia, Peru and Uruguay). Moreover, there is a positive association between this correlation and the variance of the external shock (Figure 3).<sup>19</sup> Generally speaking, countries that experience greater external volatility seem to present a positive correlation between the external shock and RTS. Thus, a large external shock seems to be accompanied 16 Given that for some countries the cyclical component is not (jointly) significant, in the second stage we weight by the (inverse of the) standard error of the component 17 Other variables included in the gravity specification include: import tariffs, (the log of) the distance between country _i_ and country _j_ , a dummy variable that takes a value of 1 if the two countries are contiguous, a dummy variable that indicates if the two countries share their official language, a dummy variable that indicates if the two countries have a preferential trade agreement, a dummy variable if country _j_ is landlocked, and a set of year dummy variables. To construct the preferential trade agreement variable, we used data from the WTO-Regional Trade Agreements Information System. This database contains information on the regional trade agreements of the WTO members, but only covered those agreements that have been notified to the WTO and are in force.

18 Aggregate unemployment rates come from the International Labour Organization (ILO), so that the definition of unemployment is consistent across countries.

> 19 An important exception might be Venezuela, which presents a higher variance of the external shock and a low (negative) correlation between the external shock and RTS.

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