Wage inequality in developing countries: South-South trade matters

The relationship between trade liberalization and inequality has received considerable attention in recent years. The major purpose of this study is to present new results on the sources of wage inequalities in manufacturing taking into account South-South (S-S) trade. Globalization has not only lead to increasing North-South (N-S) trade, but it has also changed the direction and composition of trade as more trade is carried out among developing countries. In this study, we find that increasing wage inequality is associated more with the South-South trade liberalization than with the classical trade liberalization with northern countries. A part of this increasing wage inequality due to S-S trade comes from the development of N-S trade relationship in S-S trade that increases wage inequality in middle-income developing countries. This study also seeks to shed some light on the link between the direction of trade and technological change. We explore the fact that S-S trade leads to a technological change biased toward skill-intensive sectors more than N-S trade. This indirect effect increases wage inequality for all developing countries, but it is more important in low-income countries. © 2011 Springer-Verlag.