Transcript wage and employment effects of trade policy reform

WAGE AND EMPLOYMENT EFFECTS OF
TRADE POLICY REFORM: EMPIRICAL
EVIDENCE FROM NIGERIA’S
MANUFACTURING SECTOR
Presented By
A.O. Adewuyi
Trade Policy Research & Training Programme
(TPRTP), Department of Economic
University of Ibadan,
Nigeria
I.1
Introduction
 The role of Trade in promoting industrialization and
development
 Nigeria’s trade policy experience in promoting the
Manufacturing Sector and the entire economy
(a) Unilateral initiatives:
ISI facilitated by trade control regime(1970- 85), plus tax
holidays, preference in credit & forex allocations, etc
SAP – trade liberalisation regime(1986 – 93)
Scrapping of CMB, dereg. Forex Mkt.& exch rate,
Export tax elimination, reduction of import tariffs and
items in import prohibition list, etc
Tariff policy reform (1995 – 2001).
Recent TP regime is relatively protective
(b) Bilateral, Regional and Multilateral Initiatives (ECOWAS,
LOME convention, Cotonou Agmt., EPA, AGOA, WTO):
I.2 Problem Statement/Research issues
 Despite various trade policy reforms introduced by the
government over the years, Nigeria’s Manufacturing
sector experienced:
Fall in real output and wage as well as unstable rate of
growth of employment
The rate of import dependency increased
While the contribution of the sector to exports and
output of the economy was less than 10.0 per cent.
The research issues and rationale are:
What is the impact of trade policy reforms on wage and
employment in Nig.’s manufacturing sector?;
In Nig., few studies exist in this area and have applied a
single equation model which may be confronted with the
endogeneity problem; and
Controversies generated by the debates in the literature
on the impact of trade policy reforms on wage, output and
employment are yet to be resolved.
I.4 Objectives of the Study
 The primary objective of the study is
to investigate the impact of trade policy reform on wage
and employment in Nigeria’s manufacturing sector.
Specifically, this study intends to:
examine the wage effects of trade policy reform in
Nigeria’s manufacturing sector;
investigate the employment effect of trade policy
reform; and
 Scope and analytical approach
This study covers 1970 to 2005 (Pre-SAP reform (1970-85):
SAP reform (1986-93) and Post-SAP (1994-05)
The analytical approach adopted in this study is the
specific factor model with two major inputs-labour and
capital and two goods or sectors- Exportable and
importable.
The trade model has been linked with constrained profit
maximisation conditions and imperfect labour market
xteristics to arrive at estimated model to be presented
later.
Contd.
 Ten Sub-sectors were covered which include:
Food & others (FBT); Textiles & others (TWCL);
Wood & others (WWPF); Paper and others
(4Ps); Chemical and others (CHEMPHA);
Plastic, rubber and others (DIPR); Non-metallic
mineral products (NMMP); Metal and Iron
products ( BMIS); Electrical and Electronic
appliances
(EEA);
Motor
Vehicle
and
Miscellaneous Assembly (MVMA)
 The sub-sectors were regrouped into two main
sectorsExportable and importable sectors based on the
 relative share of exports and imports in the total output and
 The degree of market orientation.
Simultaneous Equations Estimated .
In wit = z0 + z1InQit + z2InLit + z3Inrit + z4
In RERit + z5 ln MASit + z6 lnIMSit + z7
lnEXSit + z8 lnPCMit + z9WA it +z10 WR it +
uit …………………………………………...(a)
In Lit = m0 + m1InQit + m2Inrit + m3 ln
MASit + m4 lnIMSit + m5 lnEXSit + m6
lnPCMit + m7WA it +m8 WR it + uit
……………………………………………...…(b)
In Qit = n0 + n1InLit + n2InKit + n3InOP +
n4Tit + n5 ln MASit + n6 lnIMSit + n7
lnEXSit + n8 lnPCMit +
n9wit + uit
Definition of variables
 wit =
Average real wage in manufacturing
sub-sector i in time t;
 Qit
=
Real value added in manuf. subsector i in time t;
 Lit =
Number of labour employed in manuf.
sub-sector i in time t;
 rit =
rental cost of capital proxied by bank
lending rate.
 WA & WR =
Alternative wage and wage rent
respectively.
 Ait =
Efficiency and total factor productivity
growth parameter which is linearly related to
trade and commercial policy (measured by
average tariff rate or export-, import- output ratios).
contd.
 MAS
=
 Kit
=
 Tit
=
 OP
 ATR
=
=
Oil price;
Average tariff rate
 IMS
=
Import share;
 EXS
=
Export share;
 PCM
=
Price -cost Margin;
 RER
=
Real exchange rate.
Macroeconomic instability variable
(Inflation rate);
Capital employed in manuf. sub-sector i
in time t;
Time trend to measure technological
progress;
Data Sources & Measurement
 Sources of data include:
The annual abstract and digest of statistics as well as
annual industrial survey conducted by the National
Bureau of Statistics; Nigeria Trade summary
Publications of the Central Bank of Nigeria (CBN)Statistical Bulletin; and annual report and statement of
accounts.
 Measurement
Manufacturing output:- Value added: gross output net
of intermediate inputs;
Employment:- Labour input as total number of people
employed in the establishment.
Wages and salaries:- Gross cash payment to
employees before any deductions as well as other
labour benefits such as, bonuses, gratuities, etc;
Estimation Techniques
Since a simultaneous relationship exists
between the equations, we have adopted the
Generalised method of moment (GMM)
techniques.
Other reasons for using GMM are:
The need to transform out the fixed effect time –
invariant sectoral effects
The need to solve the problem of endogeneity
in the model.
This is done by using differences rather than
levels of variables as instruments and by
including lag values of the endogenous
variables.
Summary of Findings & Conclusions
Results for the pre-reform period suggest that
protectionism
is unfavourable to the exportable sector in terms of:
labour wage and employment
but favourable to the importable sector.
the effects of trade policy on wage and
employment differ by sector during this period.
The results for the reform period suggest that:
trade policy reform did not impact positively on
wage, and employment of the manufacturing
sector.
Summary of Findings & Conclusions
 However, the impact of trade policy reforms are more
pronounced in the post reform period
especially in the importable sectors of the
manufacturing sector.
 Generally, the trade policy variables have no significant
effect on the manufacturing wage and employment
during the reform period.
 In Nig. the need to capture the economic wide effects of
trade policy reforms necessitates more studies using
CGE model.
 Simulations should be conducted to examine the
potential effects of CET on sectoral wage and
employment
 The impact for other sectors need to be estimated.
 Studies should be funded for LDCs and other developing
countries.