Trade Openness: New Evidence for Labor-Demand Elasticity in Pakistan’s Manufacturing Sector

Abstract

This study is an attempt to investigate trade–labor market linkages in Pakistan. Our main hypothesis that trade liberalization leads to an increase in labor-demand elasticity is empirically verified using a panel data approach for the period 1970/71–2000/01 for 22 selected manufacturing industries in Pakistan. We use ordinary least squares to estimate models in levels and first-differences, in addition to a fixed effects model. Overall, our findings suggest weak evidence of increased labor-demand elasticity as a result of trade liberalization in Pakistan’s manufacturing sector. Nor does the study find support for a positive labor market and trade linkage from an employment point of view—as otherwise suggested by standard trade theory. This may be due to increased capital intensity in the manufacturing sector by time, and the infusion of new technology. It could also be attributed to labor market imperfections preventing trade liberalization from favorably influencing employment conditions in Pakistan. Our policy recommendations based on the study’s results stress the need for skill enhancement measures to increase labor productivity, helping it become competitive according to the demands of globalization.

Trade Liberalization and Labor Demand Elasticities: A Firm-Level Analysis of Pakistan’s Manufacturing Sector

“…The author proved that where the skill of abundant factors was more, the demand showed a positive result comparatively where the skill was short or imperfect. Yasmin (2011) presented the nexus between trade liberalization and labor demand elasticity in Pakistan. The results pointed out insignificant effects of trade liberalization on labor demand elasticity.…”

“…As these countries are labor abundant countries, so through trade liberalization, these countries can take benefits from capital-abundant countries. According to the H.O theory, when labor-abundant countries enter the foreign trade market, they gain through labor-intensive commodities and labor demand also increases due to which wages and employment levels also go up (Yasmin, 2011).…”

“…Rodrik (1997) was the first who introduced the benefit of labor demand by increasing trade liberalization. Owing to this, the employment level and wages also increase, and consequently the output or GDP rises of a nation (Yasmin, 2011). Rodrik also emphasized that labor demand elasticity goes up by opening trade and it also increases the output level and made the domestic market more competitive.…”

“…Many researchers have investigated the impact of trade liberalization on different variables like growth, output and wage rate. Still, only one study has estimated the linkage of trade liberalization and labor demand elasticity in Pakistan except for Akhter and Ali (2007) and (Yasmin, 2011) in which they examined the relationship of trade liberalization and labor demand elasticity by taking a few industries. But we have taken thirteen industries of the manufacturing sector of Pakistan.…”