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Is trade liberalization a solution to the unemployment problem?

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Abstract

This paper examines how trade liberalization affects the growth rate of sectoral employment in developed and developing countries. The estimation results imply that trade openness in the form of higher trade volumes has not been successful in generating jobs in developing countries. The overall weak, negative employment response to trade volumes may be explained by the negative output response to trade openness in these countries. Our estimates also indicate that higher trade volumes have adverse effect on industrial employment in developed countries. Moreover, while they have positive effect on employment in industry and services in developing countries, trade barriers have adverse effect on employment growth in services for developed countries. Our overall results imply that while trade barriers have relatively little adverse effects and/or in some case a positive effect on employment both in developing and developed countries, higher trade volumes have an adverse effect on industrial employment in developed economies. Thus, trade openness is not in itself a solution to the unemployment problems of developing countries and yet it has not been the prime factor to blame for the lower employment levels in developed countries.

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Notes

  1. Yanikkaya (2003) discussess the overall weakness and strength of most trade policy variables used commonly in the empirical growth literature and concludes that there is no reason to favor one group variables over another group to assess the effects of trade openness on certain macroeconomic variables.

  2. Countries used in estimates are listed in Appendix C.

  3. See Greene (1997) for a detailed discussion of this technique.

  4. Estimates of these models for six ‘five-year’ intervals obtain similar results, available from the author.

  5. Fixed effects estimates for three sectors are available from the author.

  6. There are two strands of literature that offer explanations for the falling demand for unskilled labor in developed countries. The first line of research suggests that skill-biased technological change has reduced the demand for unskilled labor (Krugman 2000). The other line of research emphasizes trade-related developments that affect the demand for different types of labor (Wood 1994; Leamer 2000). Some authors (Slaughter 1998, 1999; Krugman 1995; Sachs and Shatz 1994) have argued that increased trade with developing countries cannot account for all of the adverse labor market outcomes in industrialized nations. Ghose (2000) claimed that trade among industrialized countries could plausibly be blamed for this phenomenon. A large number of studies using a variety of techniques for different countries have attempted to assess the relative importance of technology and trade as alternative explanations for the reduction in the demand for unskilled labor.

  7. A number of studies (Jacobson et al. 1993a, b; Levinsohn 1999; Matusz and Tarr 1999; Rama 2003; Winters 2000; WorldBank 1997) discuss the fact that the weak employment effects of trade liberalization may mask substantial job churning in developing countries, which imposes substantial private costs for replacing workers because the longevity of unemployment or underemployment and the identity of the replaced workers are the most important adjustment problems occurring in labor markets.

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Authors and Affiliations

  1. Department of Economics, Gebze Institute of Technology, Gebze, Kocaeli, 41400, Turkey

    Halit Yanikkaya

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  1. Halit Yanikkaya
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Correspondence to Halit Yanikkaya.

Additional information

The author acknowledges the support of Turkish Academy of Sciences, in the framework of ‘Distinguished Young Scientist Award Program’ (TUBA-GEBIP).

Appendices

Appendix A

Data summarystatistics: 1980–2009 averages

Variables

All countries

Developed countries

Developing countries

Growth of gross domestic fixed investment (% of GDP)

4.57

3.30

4.98

Employment growth in industry (%)

0.82

0.06

1.14

Growth of output per worker in industry (%)

0.56

0.98

0.39

Employment growth in services (%)

1.39

1.08

1.53

Growth of output per worker in services (%)

0.20

0.36

0.15

Employment growth in agriculture (%)

−0.28

−0.92

0.001

Growth of output per worker in agriculture (%)

0.79

1.23

0.62

GDP (log, constant 2000 USD)

10.09

10.94

9.85

Output Volatility

4.12

2.85

4.49

Urban population growth

2.61

1.43

2.96

Rural population growth

0.41

−1.37

0.87

Growth of agricultural machinery (%)

1.85

0.53

2.27

Trade shares (% of GDP)

83.30

104.16

77.19

Import duties (% of imports)

13.05

5.52

15.61

Appendix B

1.1 Data sources

The following data are from the World Bank, World Development Indicators 2012:

   Employment growth in industry (GEMPIND) Employment growth in agriculture (GEMPAGR)

   Employment growth in services (GEMPSER) Growth of output per worker (LABPROD)

   Growth of gross domestic fixed investment (INV)

   Growth of agricultural machinery, tractors per 100 hectares of arable land (INV)

   Total Population 15–64 (POPT)

   Output Volatility (VOLATILITY)

   Population growth (urban or rural) (POPG)

   GDP at constant US dollars (GDP)

   Trade openness (OPEN): the ratio of exports plus imports to GDP

   Import penetration ratios (MGDP): the ratio imports to GDP

   Exports shares in GDP (XGDP): the ratio exports to GDP

   Merchandise exports to rich countries as a percentage of merchandise exports (MEREXPRICH)

   Merchandise imports from rich countries as a percentage of merchandise imports (MERIMPRICH)

   Merchandise trade (MERTRD): the trade in goods as a share of GDP

   Merchandise exports (MEREXP): the exports in goods as a share of GDP

   Merchandise imports (MERIMP): the imports in goods as a share of GDP

   Manufactured exports as a percentage of merchandise exports (MANEXP)

   Manufactured imports as a percentage of merchandise imports (MANIMP)

   Manufactures comprise commodities in SITC sections 5 (chemicals), 6 (basic manufactures), 7 (machinery and transport equipment), and 8 (miscellaneous manufactured goods), excluding division 68 (non-ferrous metals).

   Commodity exports as a percentage of merchandise exports (COMDEXP)

   Commodity imports as a percentage of merchandise imports (COMDIMP)

   Commodity trade includes in SITC sections 0, 1, 4 (food), 2 (agricultural raw materials), 3 (mineral, fuels), 27, 28, and 68 (ores and metals).

   Agricultural raw material and food exports as a percentage of merchandise exports (AGREXP),

   Agricultural raw material and food imports as a percentage of merchandise imports (AGRIMP).

   Services exports as a percentage of services in GDP (SERVEXP)

   Services imports as a percentage of services in GDP (SERVIMP)

   Import duties (TARIFF): Import duties as a percentage of the value of imports are the sum of all levies collected on goods at the point of entry into the country and are used as a measure of the average import tariff rate.

   Export taxes (XTAX): Export duties as a percentage of the value of exports are comprised of all levies collected on goods at the point of export.

   Taxes on international trade (TAXTRD): taxes on trade as a percentage of cur rent revenues include import duties, export duties, profits of export or import monopolies, exchange profits, and exchange taxes.

The following data are from the IMF’s Annual Reports on Exchange Restrictions.

   Bilateral payments arrangements of IMF members with non-IMF members (BPA): BPA is an agreement that determines the general method of settlement of trade balances between two countries.

   Current Account Restrictions (CURRENT): restrictions that exist on payments with respect to current transactions in the form of quantitative limits or undue delay on other than restrictions imposed for security reasons and official action directly affecting the availability or cost of exchange.

The following data are from Easterly and Sewadeh (2002)

   Trade with OECD countries (TOECD)

   Trade with non-OECD countries (TNOECD)

US bilateral trade (USBTRD): the ratio of each country’s total bilateral trade with the U.S. to its GDP—the IMF’s Direction of Trade Statistics (2013b).

Appendix C

List of countries

Algeria

France*

New Zealand*

Argentina

Gabon

Nicaragua

Australia*

Gambia, The

Norway*

Austria*

Germany*

Oman

Bangladesh

Ghana

Pakistan

Barbados

Greece*

Panama

Belgium*

Guatemala

Papua New Guinea

Belize

Guinea-Bissau

Paraguay

Benin

Honduras

Peru

Bolivia

Hong Kong, China*

Philippines

Botswana

Iceland*

Portugal*

Brazil

India

Romania

Burkina Faso

Indonesia

Rwanda

Cambodia

Iran, Islamic Rep.

Saudi Arabia

Cameroon

Ireland*

Senegal

Canada*

Italy*

Sierra Leone

Central African Rep

Jamaica

Spain

Chad

Japan*

Sri Lanka

Chile

Kenya

Sweden*

China

Korea, Rep.

Switzerland*

Colombia

Lesotho

Thailand

Congo, Rep.

Madagascar

Togo

Costa Rica

Malaysia

Trinidad & Tobago

Cote d’Ivoire

Mali

Turkey

Cyprus*

Mauritania

Uganda

Denmark*

Mauritius

United Kingdom*

Dominican Rep

Mexico

United States*

Ecuador

Mongolia

Uruguay

Egypt, Arab Rep.

Morocco

Venezuela, RB

El Salvador

Mozambique

Vietnam

Ethiopia

Namibia

Yemen, Rep.

Fiji

Nepal

Zambia

Finland*

Netherlands*

 
  1. *Developed countries

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Yanikkaya, H. Is trade liberalization a solution to the unemployment problem?. Port Econ J 12, 57–85 (2013). https://doi.org/10.1007/s10258-013-0088-9

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