THE IMPACT OF TRADE LIBERALIZATION ON EMPLOYMENT AND WAGES: PANEL EVIDENCE FROM DEVELOPING COUNTRIES

Abstract

Since the 1990s, developing countries shifted their trade policy from inward-oriented strategy to outward-oriented strategy because of the conditions imposed by international lending institutions for granting loans to developing countries. This span of trade liberalization in the developing countries is also marked with rising wage dispersion and dismal employment growth in these economies. So, the current study aims to investigate the impact of trade liberalization on employment and wages within the 30 developing countries over the period 2000 to 2019. To investigate empirical connections between trade, employment and wages, reduced form equations of labor demand and wages have been devised. The study has applied Generalized Method of Moments estimation techniques to estimate labor demand and wage equations to tackle the problem of endogeneity. The empirical findings of the study predict that trade liberalization has significant adverse effect on both labor demand and wages. However, the magnitude of the influence of trade on both one is small. Similarly, wages, employment level, output and real exchange rate are affecting employment and wages significantly. While ILO ratifications are significant only when KOF trade globalization is used as measure of liberalization, and time trend is significant only when weighted tariff rate is used as a measure of liberalization. To craft a multilateral and effective policy development, both real output and workers’ skill should be the focus of economic managers of the developing economies to reap the benefits of trade liberalization.