LATIN AMERICA'S DECLINING SKILL PREMIUM: A MACROECONOMIC ANALYSIS

The decline in Latin America's skill premium and income inequality during the 2000s was partly driven by an economic expansion that favored low‐skill‐intensive service sectors. Evidence shows inequality becomes countercyclical in the 2000s, and unlike previous expansions, the boom was concentrated on services while manufacturing lagged behind. I build an open economy general equilibrium model that features a low‐skill‐intensive nontradable sector. The model suggests that favorable shocks to commodity prices and international interest rate spreads, such as those that buffeted Latin America in the 2000s, account for about a fifth of the observed decline in the skill premium. (JEL D31, E32, F41, O15, O54)