Trade liberalisation and employment: Literature review

There is a growing body of literature investigating the relationship between trade liberalisation and employment. This literature can be subdivided into the following two primary strands: studies supporting theoretical predictions which expect a positive impact of trade liberalisation on employment and studies contesting this optimistic view and indicating an ambiguous nexus between trade openness and employment. In fact, recent empirical studies suggest that trade liberalisation either has no effect on employment or that this causality can be negative for some countries.

Theoretical literature predicting a positive effect of international openness on employment suggests a number of transmission channels, namely, technological diffusion, export promotion, efficient allocation of resources, local value-added stimulation and enhancement of domestic industries competitiveness. However, the empirical evidence on the impact of trade liberalisation on employment is mixed. This relationship is more developed than what is expected by standard trade theories, such as the Reference Heckscher, Ohlin, Flam and FlandersHeckscher–Ohlin model (1991) and the Reference Stolper and SamuelsonStolper–Samuelson theorem (1941). Reference Milner and WrightMilner and Wright (1998) study labour market responses to trade policy reform in Mauritius during the pre- and post-liberalisation regimes using dynamic panel techniques on sectoral data. Their empirical findings provide partial support to theoretical predictions, where the estimated responses of employment are increasing in exportable sectors and decreasing in importable sectors. Reference Christev, Kupets and LehmannChristev et al. (2008) examine the effects of trade liberalisation on job creation in Ukraine using disaggregated data on manufacturing industries. This study finds that trade openness has a positive effect on sectoral employment, but through varying transmission channels depending on trading areas. Reference Kien and HeoKien and Heo (2009) investigate the same issue in Vietnam from 1999 to 2004 using a system generalised method of moments model. These authors confirm a positive impact of trade liberalisation on sectoral employment levels through export expansion and show that even import expansion did not necessarily have a negative effect on employment in Vietnam.

Surveying the effects of trade liberalisation on employment in Organisation for Economic Cooperation and Development (OECD) countries, Reference BaldwinBaldwin (1995) concludes that trade openness has no significant effect on employment and that this effect is negative in low-technology sectors such as textiles and agricultural and food industries. Reference Lee and VivarelliLee and Vivarelli (2006) examine the effect of trade liberalisation on employment using five countries from different developing areas: Ghana, Kazakhstan, Morocco, Nepal and Vietnam. This investigation reveals that Vietnam is the only country where the employment is positively affected after trade openness. They conclude that the effect is quite heterogeneous among countries and depends on the path of the liberalisation process and country specificity, mainly economic development, factor endowments and sector specialisation. In a study of Indian manufacturing using ordinary least squares (OLS) regression model, Reference KakarlapudiKakarlapudi (2010) compares employment trends during the post-liberalisation period and the pre-liberalisation period and provides evidence of a deceleration of employment growth after trade liberalisation for the overall economy and for manufacturing sectors.

Reference Malik, Chaudhry and JavedMalik et al. (2011) study the impact of globalisation on employment in Pakistan using time series techniques. They find that trade openness negatively affects employment in both the short run and the long run. Reference PeluffoPeluffo (2013) uses a difference-in-differences estimation methodology to assess the labour market impacts of trade opening in Uruguay for the period from 1988 to 1996, providing robust findings that trade liberalisation decreases employment generation, by increasing unemployment rates among unskilled workers and increasing the probability of unemployment among qualified workers.

Against these mixed but largely negative results based on a range of approaches, we outline the methodology of this Tunisian study before proceeding to the findings.

The measurement of employment intensity of growth

The employment intensity of growth or the output–employment elasticity can be defined as the ability of economies to generate sufficient employment opportunities for their populations. It is measured as the proportional change in employment divided by the proportional change in GDP during a given period. This indicator describes how the economic growth and the employment growth evolve together over time. The employment intensity of growth can be measured arithmetically as given below

(1) ${\epsilon }_{it}=\frac{\left(E_{it}-E_{it-1}\right)/E_{it-1}}{\left(Y_{it}-Y_{it-1}\right)/Y_{it-1}}$

where $E_{it}$ and $Y_{it}$ are employment and economic output in country $i$ at period $t$ , respectively.

Reference KapsosKapsos (2005) provides evidence of an inverse relationship between employment intensity and labour productivity. This so-called fundamental identity is expressed as follows

(2) $\mathrm{output}=\mathrm{employment}\times \mathrm{productivity}$

For small changes, equation (2) can be written as

(3) $\mathrm{output}\mathrm{growth}\cong \mathrm{employment}\mathrm{growth}+\mathrm{productivity}\mathrm{growth}$

If we divide equation (3) by $\mathrm{output\; growth}$ , we derive the following

(4) $\mathrm{employment}\mathrm{elasticity}=\frac{\mathrm{employment}\mathrm{growth}}{\mathrm{output}\mathrm{growth}}=1-\frac{\mathrm{productivity}\mathrm{growth}}{\mathrm{output}\mathrm{growth}}$

Using equation (4), Reference KapsosKapsos (2005) provides a range of scenarios for the relationship between employment elasticity, employment growth and productivity growth. He concludes that employment elasticity varying between 0 and 1 corresponds to the ideal scenario for economies with positive GDP growth. In this situation, employment growth and productivity growth are positive, and an increase in employment elasticity within this range leads to more employment-intensive growth.

Reference Islam and NazaraIslam and Nazara (2000) and Reference IslamIslam (2004) provide evidence that use of an arithmetic method to calculate the employment intensity of growth is not appropriate for the purpose of cross-country comparison because of the difficulty in obtaining reliable estimates of GDP in the presence of a large informal sector. Instead, they argue the importance of using econometric methods and focusing on specific sectors to estimate the employment intensity of growth. We therefore provide an overview of studies using a range of econometric methods at varying levels of disaggregation.

Reference Padalino and VivarelliPadalino and Vivarelli (1997) investigate empirically the employment intensity of growth in G7 economies over the period 1960–1994. They provide evidence of null employment intensity of growth for Japan, France, Germany, Italy and the United Kingdom. Only the United States and Canada record positive figures close to 0.5. This study does not detect any downward trend when they subdivide the sample into two sub-periods: the Fordist era (1960–1973) and post-Fordism (1974–1994). However, when they focus on manufacturing employment, Reference Padalino and VivarelliPadalino and Vivarelli (1997) find negative intensities for all G7 countries except for Japan. The authors conclude the existence of structural differences between North America, Europe and Japan, and recommend strengthening overall economic growth as a means to achieving moderate employment creation in Europe. Empirical studies focusing on regional differences in employment intensity include Reference Boltho and GlynBoltho and Glyn (1995) who estimate employment intensity of around 0.5 for a set of OECD countries and Reference WalterskirchenWalterskirchen (1999) who, using cross-country analysis on a sample of European countries over the period 1988–1998, find an employment intensity of 0.65 for EU countries overall, with a range from 0.24 for Austria to 0.76 for Spain.

To provide a measure of the employment intensity of growth, Reference Crivelli, Furceri and Toujas-BernateCrivelli et al. (2012) use a weighted least squares estimator on a panel of 167 countries over the period 1991–2009. Their empirical results show a robust heterogeneity across countries and across regions with the majority of elasticities ranging between 0.3 and 0.8. In an effort to identify sources of employment growth, Reference Crivelli, Furceri and Toujas-BernateCrivelli et al. (2012) provide comparisons of three main economic sectors (agriculture, industry and services) for the 167 countries in their sample. Their conclusions suggest that the industry and service sectors provide more employment-intensive growth than the agriculture sector in upper- and middle-income countries.

Reference MourreMourre (2006) demonstrates that the cross-country heterogeneity of employment intensity of economic growth in EU countries is linked to differences in sectoral composition. This study finds higher employment intensity in economies with a high share of job-intensive sectors, such as those where service sector employment is a high proportion of total employment.

To explore these sectoral composition effects, it is necessary to look at country-specific studies. Reference PeruginiPerugini (2009) investigates sectoral differences of employment intensity in Italy, using a static panel approach on data over the period 1970–2004. This study provides evidence that, following a period of so-called jobless growth, job-rich growth took place in Italy from the mid-1990s. Reference El-Ehwany and El-MegharbelEl-Ehwany and El-Megharbel (2008) examine the sectoral employment intensity of six major sectors ^{Footnote 2} in Egypt during the period 1980–2005. Results show that the Manufacturing and Mining sector had the highest employment intensity with a value of 0.61, while Agriculture, Petroleum and Electricity exhibited a lower intensity value of 0.32. The authors conclude that investment must be oriented to sectors with high employment elasticity in order to reduce the high level of unemployment in Egypt. Exploring sectoral employment intensity in Botswana, Reference Ajilore and YinusaAjilore and Yinusa (2011) show jobless growth in an economy characterised by very low sectoral employment intensity except for the Mining sector. They recommend that the mineral-led economy of Botswana diversify into sectors and activities with high labour-absorptive capacity.

Two examples drill down further into single industry sectors. Reference Aydiner-Avsar and OnaranAydiner-Avsar and Onaran (2010) focus on private manufacturing industry in Turkey, using a panel approach based on a microeconomic perspective. They identify intra-sectoral heterogeneity by using a skill taxonomy to classify manufacturing sectors into two groups: high and medium skilled, and low skilled. Their empirical results indicate that the low-skilled group includes the more labour-intensive sectors with higher output elasticity. Reference Aydiner-Avsar and OnaranAydiner-Avsar and Onaran (2010) conclude that increased vertical fragmentation of production in Turkey does not seem to be generating a higher demand for employment in high-skilled sectors. Reference Pattanaik and NayakPattanaik and Nayak (2013) adopt a time series approach, using data from 1960 to 2005 to explore the employment intensity of the Service sector in India. They demonstrate that employment elasticity in the Service sector has dropped significantly over the years. This finding suggests that the tertiarisation process in the Indian economy is driving jobless growth.

Finally, Reference Mouelhi and GhazaliMouelhi and Ghazali (2014) focus on the Tunisian case, measuring sectoral employment intensity and assessing its major determinants. The study uses both the arithmetic method and OLS estimates on dataset of 10 sectors over the period 1980–2012. Conclusions suggest that Agriculture and Fishing and Trade and Tourism represented the most labour-intensive sectors and exhibited an upswing pattern. However, sectors that exhibited relatively low and decreasing employment–output intensities are Manufacturing, Public Service, Transport, Telecommunication and Finance.