Trade Liberalization and the Lead Role of Human Capital and Job Attributes in Wage Determination: The Case of Pakistan's Labor Market

By Yasmin, Bushra | The Lahore Journal of Economics, Summer 2009 | Go to article overview

Trade Liberalization and the Lead Role of Human Capital and Job Attributes in Wage Determination: The Case of Pakistan's Labor Market


Yasmin, Bushra, The Lahore Journal of Economics


Abstract

This study analyzes the role of human capital and job attributes, i.e., supply-side determinants, in determining wages in a period of trade liberalization. Using the Mincerian earning function and based on data from the Labor Force Surveys, we construct a model to estimate various wage determinants and compute the rates of return to different educational qualifications and relative occupational wage shares for the years 2005/06 and 1990/91. The estimated earning functions for 1990/91 and 2005/06 are compared to investigate whether individual characteristics-such as gender, job location, nature of job, educational qualifications, and different occupations-cause the wage gap to widen or contract under conditions of trade liberalization. The mean and quantile regression approach is used for estimation purposes. Our key findings postulate (i) an increasing gender pay gap, (ii) a higher wage premium to the highest educational qualification, and (iii) more or less stable relative wages for different occupations over time. In addition, wage dispersion across occupational groups appears more pronounced in 1990/91 than in 2005/06, implying a declining trend in the difference in wage distribution across occupations. Our findings suggest that trade liberalization cannot be presumed to pose a threat to the labor market in the wage context. However, exposing labor to an open market has not increased the productivity and skills of labor or helped reap the potential benefits of trade liberalization.

JEL Classification: F16, J31.

Keywords: Trade liberalization, wage determination, human capital, Pakistan.

(ProQuest: ... denotes formulae omitted.)

I. Introduction

Trade openness has been regarded as a key element of any development policy at the global level since the late 1970s. Openness, better explained as "trade liberalization" in this context, connotes a reduction in barriers to the movement of goods and services in international trade. Edwards (1993) describes a liberal trade regime as one in which all trade distortions, including import tariffs and export subsidies, are completely eliminated. The benefits of trade liberalization, if done collectively with other countries, multiply significantly, but the profitability of liberalization can only be confirmed by the proliferation of its positive effects on the economy. In this regard, the argument is generally in favor of trade liberalization in its role of leading the economy to a higher growth rate at the national and international level.

Trade liberalization is generally favored on the grounds of (i) facilitating economic growth-given its dynamic advantages of higher capacity utilization and more efficient investment-and (ii) promoting the performance of export growth and increasing productivity. As liberalization policies remove restrictions on trade between countries, producers have access to the inputs required to produce more efficiently, while new overseas markets are opened to exporters and opportunities are broadened for existing export industries. This liberalization is expected to reallocate resources according to comparative advantage while large-scale operations flourish, given greater economies of scale.

However, there are certain costs associated with trade liberalization, such as loss in tariff revenue, which accounts for 10 to 20% of government revenue in developing countries. A larger burden of domestic taxes-such as sales tax-to compensate for this loss and heavy reliance on borrowing to finance the fiscal deficit collectively raises the country's overall debt. This exacerbates the problem and has distortionary effects on the economy. Moreover, tariff reductions deprive a country's domestic industry of protection, leading to adverse effects on existing industries and the services sector. It is also commonly held that the gains from trade liberalization are not distributed uniformly among economies generally and within a country specifically. …

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