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Trade policy and wage gradients: evidence from a protectionist turn

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Abstract

In the spirit of Hanson (Econ J 107:113–133, 1997), we analyse, first, the existence of a relationship between the wage level and the market potential of Spanish regions; second, we explore the relative importance of domestic and foreign markets in this relationship; and finally, we examine the existence of a regional nominal wage gradient in Spain during the interwar period (1914–1930) centred on the main industrial cluster, Barcelona, and its transformation following the increase in protectionism in the Spanish economy as well as in the international economy. As suggested by NEG literature, our results support the hypothesis of a relationship between wages and regional market access and show the change in the regional wage structure following the gradual closing of the Spanish economy and of Spain’s trade partners, as a result of the increasing importance of the domestic market. We find evidence of the existence of a regional wage gradient centred on Barcelona which weakened during these years. Therefore, in Spain, during the interwar period, protectionist policies appear to have favoured the loss of centrality of a border region (Barcelona) and the relative rise of other locations.

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Notes

  1. A’Hearn and Venables (2011) raise a similar point on analysing the geographical distribution of industrial production in Italy.

  2. See Fujita et al. (1999) for a formalization of the different possible agglomeration forces that give rise to industrial centres, and Head and Mayer (2004) and Redding (2011) for a survey of the empirics of economic geography.

  3. His well-known study analysed the Mexican case, where the protectionist policies implemented during the years of the ISI strategy favoured the agglomeration of industrial activity around the capital city. Then, the transition to an open economy in the 1980s witnessed a relocation of industrial activities to the north of the country close to US border. See also Krugman and Livas Elizondo (1996).

  4. Departing from the theoretically derived Krugman wage equation, it is possible to obtain the ad hoc market potential indicator developed by Harris (see Combes et al. 2008). To do this, three assumptions have to be made: (a) there is no variation in the price indices from one region to another; (b) the share of each good within total consumption does not vary between regions; and (c) the coefficient associated with distance in gravity equations has to be close to one.

  5. It also yields very acceptable results in the NEG empirical exercises (Head and Mayer 2004).

  6. See Hanson (2001) for a good survey of sources of regional wage differentials.

  7. For the labour market integration, Silvestre (2005). A more detailed description of the process of integration in goods and factors can be found in Rosés et al. (2010).

  8. Prados de la Escosura (2010) recently offered new series of trade for the Spanish economy. The information on imports and exports has been used here to calculate the openness ratio which appears in Fig. 2. With these data, the evolution at the turn of the century is smoothed and the tendency of an increasing openness is reversed with some lag when compared to the original series provided by Tena (2005).

  9. As has been noted by a referee, mention should also be made to the effect on protection of the surcharges Spain imposed on some foreign currencies.

  10. An additional update of the Salvador Tariff of 1906 to correct the effect of prices was carried out in 1911. In this case, the update left 543 duties unchanged, increased only 24 and reduced up to 130. Sabaté (1992).

  11. The Cambó Tariff was divided into two columns. The first one, aimed at the countries with no trade agreements, was highly protectionist. The second column presented lower values of protection, becoming an incentive for other countries to sign trade agreements that may favour Spanish agricultural exports. The application of the so-called Ley de Actualizaciones of 1922 included more flexibility for the second column of the tariff for those countries with bilateral trade agreements.

  12. A detailed description of the methodology, data and sources used can be consulted in Tirado and Martinez-Galarraga (2008).

  13. Data from Tirado and Martinez-Galarraga (2008). In this case, unlike the regional case of Catalonia (Carreras 1990), we lack an annual series of industrial production indices at a provincial level to measure the share and evolution of Barcelona compared to Spain.

  14. The aggregate Gini index of geographical concentration of industries increased from a value of 0.68 in 1913 to 0.78 in 1929. This tendency was also verified at a higher level of disaggregation: six out of seven sectors increased their levels of concentration during those years. See Table 2.

  15. We show non-skilled wages due to the greater geographical coverage of the source for these wages. However, it is important to note that the analysis in Sect. 4 will mainly be conducted on the basis of skilled wages. This choice is motivated by the fact that the information regarding skilled wages allows up to 8 sectors of industrial activity to be considered and, therefore, the necessary degrees of freedom to perform the empirical exercise to be increased.

  16. In this source, when an average manufacturing wage per province is needed, the coverage for non-skilled manufacturing wages is higher than for skilled manufacturing wages.

  17. The insular territories (the Balearic Islands and the two provinces within the Canary Islands) are excluded from the analysis throughout.

  18. Hence, differences in sectoral wages are linked to the differences in the average wage of skilled manufacturing workers. The direct data available represent around 35% of the sample of wages for skilled workers.

  19. See Martinez-Galarraga (2010) for more details.

  20. This result is influenced by the general increase in tariffs in the Western economies after the First World War in a period of Globalization backlash (O’Rourke and Williamson 1999). Nevertheless, the effect of an exogenous shock like the First World War is not present in our first date and its impact could be considered as low more than one decade later in 1930 when, in turn, the Great Depression was still at an early stage.

  21. Results available from the authors upon request.

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Authors and Affiliations

  1. Departament d’Anàlisi Econòmica, Universitat de València, València, Spain

    Daniel A. Tirado & Julio Martínez-Galarraga

  2. Departament d’Econometria, Estadística i Economia Espanyola and CAEPS, Universitat de Barcelona, Barcelona, Spain

    Jordi Pons

  3. Departament de Teoria Econòmica and CAEPS, Universitat de Barcelona, Av Diagonal 690, 08034, Barcelona, Catalonia, Spain

    Elisenda Paluzie

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  1. Daniel A. Tirado
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  2. Jordi Pons
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  3. Elisenda Paluzie
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  4. Julio Martínez-Galarraga
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Correspondence to Elisenda Paluzie.

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Tirado, D.A., Pons, J., Paluzie, E. et al. Trade policy and wage gradients: evidence from a protectionist turn. Cliometrica 7, 295–318 (2013). https://doi.org/10.1007/s11698-012-0090-y

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