Real Wage Heterogeneity and Sectoral Coexistence in Small Open Economies: The Case of Argentina (2003–2019)

Modern contributions examining trade patterns in small open economies argue that, under a homogeneous wage structure, only one sector, the one affording the highest profit rate, will remain competitive internationally. Yet, empirical evidence shows the persistent coexistence of tradable industries. We contend that wage dispersion influences sectoral profitability and sustains multi-sectoral economies. Using panel data for Argentina’s private sector (2003–2019), we find that sectoral wage heterogeneity operates as a profit-rate equalizing mechanism: increases in sectoral profitability are followed by wage growth, which in turn compresses profit rates in subsequent periods. This dynamic implies that profit-rate differentials are smaller than they would be under a counterfactual of homogeneous wages, providing a mechanism for sustained sectoral coexistence.