Trade liberalization, technology, relative factor supplies and the relative wage: evidence from the South

Abstract

There is much controversy about the role that trade liberalization, technological change and relative factor supplies have played in bringing about changes in the relative wage of the unskilled workers. Much of the empirical work on this issue has focused on the industrial countries and paid little attention to developing countries. To fill this gap, this study develops a special data set to examine the relative wage behaviour of a large number of developing countries. An empirical model based on the theory is used to test different explanations of the relative wage change. As predicted by the technology explanation, the empirical analysis in the study finds a significant negative link between the relative wage of unskilled workers and the technology index. The analysis, however, does not find a significant role for labour supplies or trade liberalization in determining the relative wage of unskilled–skilled workers.

Acknowledgements

The author is currently working as an economist at Finance Canada. However, this article is extracted from his PhD thesis when he was a graduate student at the Department of Economics, Carleton University, Ottawa, Canada. The author is greatly thankful to Professor Ehsan Choudhri for valuable comments. The article reflects the views of the author and no responsibility for them should be attributed to the Department of Finance.

Notes

¹ North is relatively more skill abundant than the South. Thus in the presence of trade restrictions, the price of the skill-intensive good relative to the unskilled-intensive good is lower in the North. Trade liberalization in the North will bring an increase in the real return of the skilled labour through a decrease (increase) in the relative price of the unskilled (skill) intensive good.

² Lawrence and Slaughter (1993) found a higher growth rate of Total Factor Productivity for the skilled labour-intensive sector for the US, but at the same time they found the skilled–unskilled labour ratio increasing for both the sectors.

³ It is normally believed that the technological changes are global. If in the North the technological improvement occurs in the skill-intensive sector, then it should be similar for the South.

⁴ Using time-series data set, Abdi and Edwards (2002) find similar results for South Africa.

⁵ In the presence of trade restrictions in the North and the South, and , therefore, with .

⁶ These include Bangladesh, Egypt, Honduras, India, Barbados, Bolivia, Thailand, South Korea, Singapore, Venezuela and Uruguay.

⁷ For example, these occupations include clerical, sales workers, service workers other than administrative or professional workers, animal husbandry, agriculture, forestry, hunting, transport equipment operators and all other unskilled workers engaged in processing, assembling, inspecting, storing, handling, packing and repair activities.

⁸ Wages are not reported for occupations with small numbers.

⁹ These include average tariffs, average quantitative restriction coverage, average collected tariff ratios, the World bank index of outward orientation, average black market premia, Wolf's index of outward orientation and the trade dependency ratio-index. See Edwards (1997) for a detailed survey of these possible proxies.

¹⁰ Robbins, for example, used this measure for explaining trade liberalization in his study.

¹¹ The Sachs–Warner index of openness is positively related to the trade dependency ratio (which varies within the range of 0.14–3.08). For example, regressing the trade dependency ratio (TR) on a constant (C) and the Sachs–Warner openness index (G1) we obtain TR = 0.405569C + 0.462307G1. Both coefficients are significant at 1% level (SEs of these coefficients are 0.164374 and 0.070089, respectively).

¹² The steps involved in the construction of technology index and its limitations are discussed in the appendix.

¹³ Average wage in an industry i can be defined as , let α = S/(S + U) then we can define average wage as or . This implies that higher average wage in an industry is due to higher value of α.

¹⁴ In the US, average earnings of workers in beverages and tobacco industries are higher mainly due to sophisticated production process. However, this is not the case in developing countries.

¹⁵ Group 1 includes those countries that were open in 1985–1986 and remained open till 1994 (Barbados, Bolivia, South Korea, Singapore and Thailand). Group 2 includes the remaining countries. The following equation is estimated: , where G1 is a dummy variable that equals 1 if a country is in group 1 and 0 otherwise.

¹⁶ The data for this proxy are available only for nine developing countries. The following equation is then estimated as:.

¹⁷ These graphs are not reported.

¹⁸ Since sample countries are only eleven, we regress each and every explanatory variable separately.

¹⁹ For a given relative price, and depend on relative technology, and the relative wage, . An increase in the Hicks-neutral technology, biased in favour of the skilled labour-intensive sector, for example, would decrease in both sectors and could change ϵ and hence RT. Similarly an increase in will increase in both sectors and could also affect the proxy for the relative technology. Another limitation of this measure is related with changes in trade liberalization. A decrease in τ, (i.e. increase in trade liberalization) would decrease the relative price in the South and could influence RT without a change in relative technology.