How do Wages and Employment Adjust to Trade Liberalization? A Case Study of Pakistan

Abstract

This paper examines the impact of trade liberalization on employment and
wages in Pakistan’s manufacturing industries using a panel data set for the
period 1970-71 to 2005-06. This research work is one of the pioneering
studies in Pakistan, in particular in the context of bringing in labor market
regulations and rigidities in the model for investigating the impact of trade
on employment and wages. In order to examine the impact of trade
liberalization on employment and wages, the empirical analysis is
accomplished in the context of two different labor markets (flexible as well as
rigid labor markets). The study uses two different measures of liberalization;
exports plus imports over value added and average tariff rate. Empirical
results show that if labor markets are flexible, trade liberalization (exports
plus imports over value added) tends to have negative effect on employment
but positive effect on real wages, however, if the alternative measure of
liberalization (average tariff rate) is used it has positive effect both on
employment and wages. On the other hand, when labor market regulations
and rigidities are incorporated in the employment and wage equations, both
measures of liberalization, exports plus imports over value added as well as
average tariff rate, have positive effect on employment and real wages.