Rising wage inequality has been observed in developing countries that reduced industry
tariffs and liberalized their economies, contradicting traditional trade theory. Using labor force
survey data from Sri Lanka — a small open developing economy — this paper documents rising
wage polarization since the early 1990s; that is, wage inequality has increased in the upper half
of the distribution but decreased in the lower half. Moreover, these changes occurred at the level
of occupations rather than industries. Decomposing these wage changes reveals that the returns
to occupational tasks associated with technology spillovers and outsourcing have played a key
role in wage polarization. In particular, returns have increased to routine mechanized tasks
linked to low-wage occupations, and to information and communication tasks linked to highwage
occupations. Both sets of tasks are found to be highly conducive to technology growth and
outsourcing. These results highlight the importance of considering occupation-specific skills, in
addition to schooling and work experience, when assessing the labor market impacts of greater
international competition.