Economic liberalisation, gender wage inequality and welfare

Abstract

The article develops a 3-sector general equilibrium model appropriate for economies with female labour oriented export sector to examine the effects of economic liberalisation policies on gender based wage inequality. It is assumed that there exist disparities in efficiencies between male and female labour due to skewed access to education and health, and differences in their spending patterns leading to differential effects of respective wages on their nutrition. The results indicate that tariff cut may reduce gender wage inequality, but may have detrimental effects on welfare; while foreign capital inflow may accentuate the inequality, despite improving the welfare of the economy. However, government policies to increase the provision of education and health have favourable effects on gender wage inequality but may be welfare deteriorating. Thus, the article provides a theoretical explanation to empirical evidences of diverse effects of liberalisation on gender wage inequality and explains the possibility of a trade-off between gender inequality and social welfare.

Keywords:

• gender
• wage inequality
• foreign capital inflow
• tariff cut

JEL Classifications:

• D50
• J16
• F21

Acknowledgements

The article has been substantially revised in the light of comments of two anonymous referees of this journal to whom we are thankful. The usual disclaimer, however, applies.

Notes

 1. UNICEF. State of the World's Children2007, pp. 18. Also see www.unicef.org/sowc07/docs/sowc07_tacro.pdf

 2. On average 70% of the labour force in EPZs is female (Joekes and Weston 1994), and in some countries, such as Sri Lanka, women constitute 85% of the workforce in EPZs (See United Nations 1999; Benería 2003).

 3. The widening wage gap in some countries mainly due to fall in female wage is often attributed to the informalisation of labour and lowering of women's bargaining power (Seguino 2002; Carr, Chen, and Tate 2000; Balakrishnan 2002). Since women concentrate in labour-intensive manufacturing firms and services, their relative bargaining power does not rise even as labour demand increases due to globalisation, due to the potential threat of relocation of firms to lower wage sites. In contrast, men working mainly in non-tradables and capital-intensive industries have more bargaining power to demand higher wages. Secondly, there has been a shift of a large number of formal sector jobs in female dominated labour-intensive industries, to informal employment arrangements, like subcontracting or home worker arrangements, where women earn much less than in formal sector jobs.

 4. Studies by Oostendorp (2009); Siegmann (2006); Braunstein and Brenner (2007) have emphasised on the impact of FDI.

 5. Liberalised trade policies are designed to remove all the impediments to free trade, which is the optimal policy for a small open economy. The liberalised investment policy in the form of an FDI into the export sector(s) may be an instrument that can lead to export-led growth and raise the output of the export sector. On the other hand, contrary to the famous Brecher and Alejandro (1977) proposition that suggests an inflow of foreign capital into the import-competing sector under certain conditions might lead to import substitution and lower the country's welfare, there are works like Marjit and Beladi (1996), Chaudhuri (2005, 2007), Marjit, Broll, and Mitra (1997), Chaudhuri, Yabuuchi, and Mukhopadhyay (2006) which have shown that welfare may improve also in this case. In the present article also we get the same result. Finally, a tariff cut leads to increase in import competition. We are thankful to one of the two anonymous referees for suggesting to highlight these points.

 6. Although many of the export-led countries like the East Asian Newly Industrialized Countries (NICs) maintained substantial tariff protections, countries like India (Reilly and Dutta 2005), Bangladesh (Hoque 2009), Pakistan (Khan 1999) with female oriented export industries have undertaken substantial tariff reduction.

 7. It may be noted that although India has improved tremendously in terms of international trade and foreign capital inflow over the past few years, its share in the world trade is still not significant. Therefore, alongwith Bangladesh and Pakistan, India also confirms to the small country assumption.

 8. Some examples of industries intensive in female labour are: garments, tea, tobacco and food-processing.

 9. Here K ₁ requires less skill than K ₂, and therefore, can fairly be assumed to be used simultaneously in the agricultural and export manufacturing sectors.

10. In reality, a developing economy is plagued by the existence of involuntary unemployment of both male and female labour due to the presence of factor market distortions. As our focus in this article is on gender wage inequality and not on unemployment, we have ignored factor market distortions and unemployment of labour. The production structure of our economy is a three-sector analogue (or a 3 × 4 specific factor extension) of the classic 2 × 3 specific factor full-employment general equilibrium model as developed by Jones (1971). As the return to each mobile factor is the same in the two sectors in which it is employed, there occurs full-employment of all the mobile factors in the different sectors of the economy.

11. The male female wage gap exists in agriculture as well. For example, in India, the wage rates paid to women workers in the agricultural sector are at least 20–30% lower than those paid to men for the same activity. In non-agricultural activities, the difference is even more pronounced, with women being paid less than half the wages given to their male counterparts (Ramachandran 2006).

12. Although this is a simplifying assumption it is not completely without any basis. Agriculture requires inputs like fertilisers, pesticides, weedicides etc., which are to be used in recommended doses. Now if capital of type 1 is used to purchase those inputs, the capital (of type 1)-output ratio, a_{K 1}becomes constant technologically. However, male labour and female labour are substitutes and the production function displays the property of constant returns to scale in these two inputs. However, even if the capital (of type 1)-output ratio is not given technologically the results of the article still hold under alternative sufficient conditions incorporating the partial elasticities of substitution between capital of type 1 and the two types of labour used in sector 1.

13. It may be noted that in accordance with the ‘consumption efficiency hypothesis’ as outlined earlier, nutritional efficiencies of the workers actually depend on quantities of commodities consumed by them, which is represented by their wages. However, quantities of consumption must depend on commodity prices, which in turn suggest that commodity prices should figure in the efficiency functions. But since we consider a small open economy where the prices of all traded commodities are internationally given, the inclusion or exclusion of commodity prices into the efficiency functions does not, in fact, make any difference.

14. The model implicitly considers both the cases of male/female households and extended households, which are quite common in developing countries. In case of the latter, empirical results show that household consumption is strongly correlated with their own income, even after extended households' pooled income is controlled for (Altonji, Hayashi, and Kotlikoff 1992; Park 2001). However, we do not consider the single-parent household case.

15. It is empirically observed that men also contribute to the family although their contribution is far less than that of the women. There can be two extreme cases: (i) men do not contribute at all to family income and (ii) they contribute their whole income to family income. For the sake of analytical simplicity, we have considered the first extreme case. The algebra of the model becomes extremely complicated if we consider the intermediate case. It may, however, be checked intuitively that even if we assume that men do contribute to family income but at a significantly lower rate than women, the qualitative results of our article are retained.

16. Here, is the tariff-inclusive domestic price of X ₃.

17. The comparative static results have been derived in Appendix 1.

18. Labour productivity improvements (via increased social spending) result only in declines in wages since the country is a price taker. We are thankful to one of the anonymous referees for pointing this out.

19. A Stolper–Samuelson effect is followed by a Rybczynski type effect if the production functions are of variable coefficient type.

20. See Appendix 2 for mathematical derivations of welfare changes.

21. The tariff revenue goes up unless the import demand function is price inelastic.