Parallel Session 4: Empirical trade analysis (2)

Transcription

1 ASIA-PACIFIC RESEARCH AND TRAINING NETWORK ON TRADE ARTNeT CONFERENCE ARTNeT Trade Economists Conference Trade in the Asian century - delivering on the promise of economic prosperity rd September 2014 Parallel Session 4: Empirical trade analysis (2)

2 TRADE LIBERALIZATION AND WAGE SKILL PREMIUM: PHILIPPINE MANUFACTURING EXPERIENCE Rafaelita M. Aldaba 22 September 2014

3 Objective & Presentation Outline Objective Examine the effect of trade liberalization on wage skill premium within manufacturing firms in the Philippines Outline Empirical literature on trade & wage skill premium Trade Policy, Performance & Structure of Philippine Manufacturing Framework & Results Policy Implications

4 Part 1: Trade liberalization & skill premium H-O model: decline in skill premium & wage inequality Export & specialize in goods that use intensively abundant factor Trade liberalization increases demand for & returns to abundant factor Many of the simplifying assumptions of the model do not hold in the real world (technology, transport costs, NTBs, imperfect competition, constant returns to scale) Studies show robust stylized fact in both developed & developing countries: large increases in skill premiums driven by increase in demand for skilled workers (Hoekman & Winters 05, Goldberg & Pavcnik 04)

5 Factors: increased demand for skilled workers Increase in returns to particular occupations associated with higher educational level Shift of skill intensive intermediate goods production from developed to developing countries: global production sharing & outsourcing Skill-biased technological change (SBTC ): Wood 95, Thoenig & Verdier 03, Acemoglu 03) trade has little explanatory effect on changes in labor demand & relative wages across industries, SBTC explains a large part of rising skill premium trade openness has contributed/induced SBTC (Wood 95, Thoenig & Verdier 03, Acemoglu 03) SBTC endogenous response to trade liberalization Compositional changes & quality upgrading of firms & products produced by developing countries: trade openness induces quality upgrading, reallocation of labor & capital to higher quality firms (firm productivity or product quality)

6 Studies on Indonesia s Manufacturing Industry Assuming firm heterogeneity, Amiti & Davis (2011): impact of tariff on wages depends on globalization mode wages decline if firm is domestic-oriented increase if export oriented increase wage if firm imports inputs reduce wages if firm does not import inputs Amiti & Cameron (2011): impact of tariff on wage premium tariff reduction on inputs will reduce wage premium within firm no significant effect on final goods Indonesia: very low skill economy rather than middle-income country (focus of previous studies) <4% of population has attained tertiary education, comparative advantage is in low-skill labor intensive activities

7 2. Manufacturing Trade Reforms & Performance Period Policy Reform tariff reform programs (TRP) 1 &2 removed tariff & non-tariff barriers 1995 TRP 3 first step towards uniform 5% tariff by tariffication of quantitative restrictions on agriculture & creation of tariff quotas 1998 mini tariff reform packages not implemented, tariffs frozen at 2000 levels 2001 TRP 4 never implemented 2003 selective protection through Executive Orders 241 & 264 that raised tariffs on domestically produced goods & lowered those on goods not domestically available

8 trade liberalization & reduction in protection ,000 3,000 2,000 1,000-0 to 3 5 to to to to All Sectors Agriculture Manufacturing Food Processing Bulk of tariffs already in the 0-3% tariff range Overall decline in effective protection: 73% in 85, 28% in 93, 10% in 04

9 Sluggish manufacturing performance Growth rate 1980s 1990s 2000s GDP Agriculture, Fishery, Forestry Industry Sector Manufacturing Service Sector % share to GDP 1980s 1990s 2000s Agriculture, Fishery, Forestry Industry Sector Manufacturing Service Sector Manufacturing growth sluggish from 80s-90s, modest gains 2000s Manufacturing share declined from the 80s to the 90s; stagnant in the 2000s Manufacturing contribution to employment remained stagnant: 9.9% in the 80s, 10% in 90s, 9.24% in 20s

10 Manufacturing value added structure Manufacturing Sub-sector 1980s 1990s 2000s Consumer Goods Food manufactures Beverage industries Footwear & wearing apparel Intermediate Goods Chemical & chemical products Products of petroleum & coal Capital Goods Basic metal industries Electrical machinery Consumer products dominated, intermediate products declined substantially, capital goods Capital goods: mostly electronics, semiconductor assembly, processing & testing (back-end of the global value chain)

11 Skill wage premium in manufacturing Secondary & above vs. less than secondary Tertiary & above vs less than tertiary Share of workforce with higher education increased between 1988 & 2006; share with some secondary education also went up With increasing skill shares, wage premium for employed with tertiary & above declined

12 Wage Premiums in Manufacturing Sub-sectors

13 Declining Relative Wages of Skilled & Unskilled Workers Manufacturing Sector Food Products & Beverages Textiles Wearing Apparel Tanning and Dressing of Leather; Luggage, Handbags & Footwear Wood, Wood Products ex. Furniture Paper & Paper Products Publishing & Printing Coke, Refined Petroleum & Other Fuel 2.2 Chemicals & Chemical Products Average Furniture Skilled: production supervisors, general foremen, engineers, quality inspectors, accounting & bookkeeping Unskilled: other workers excluding janitors, messengers Manufacturing Sector Rubber Products Plastic Products Other Non-Metallic Mineral Products Basic Metals Fabricated Metal Products, ex Machinery & Equipment Machinery & Equipment, n.e.c Electrical Machinery and Apparatus, n.e.c. Radio, Television & Communication Equipment and Apparatus Motor Vehicles, Trailers & Semi- Trailers Building & Repairing of Ships and Boats

14 Vehicle manufacturing Steel Sheet u Stamping shop Press u Body shop Closure Panel Body Body Parts Pain ng u Paint shop Engine & Suspension u Powertrain shop Transmission Figure 6: Production Process in Manufacturing u Parts supplier Lot carrying Part warehouse Arranging & carrying Chassis ASSY u Trim & Final Shop u Parts supplier Vehicle assembly Sequence Delivery Order production & Supply of parts u Shipment u Inspec on Source: Auto Alliance Thailand Stamping, powertrain, trim & final, body, paint, assembly, shipment, inspection Assembly: welding, painting, trimming, inspection Import CKD parts few small parts sourced domestically 80-75% of parts imported

15 Electronics and garments % Value Added globally Value added activity Production equipment 7 none Philippine participation Semiconductors 35 5% (assembly, packaging & testing) Passive components 5.5 minimal Printed circuit board 7.5 minimal Displays 11 minimal Connectors/cable s 6 minimal Batteries 11 none Enclosures 7 6% Assembly services 6.5 6% Others: design services 3.5 minimal Total 100% <15% Electronics Semiconductor: labor intensive assembly, packaging, testing Phil. Participation is in segments accounting for <15% of GVC Exports highly import dependent, few linkages with domestic economy Wiring harnesses: import wires, only value added is labor Auto transmission: vital parts imported from Japan & assembled in PH Garments Garments: assembly dominates, few provide full package or original equipment manufacturers (value added is higher) No integrated textile industry, textile millers import 80% of inputs

16 3. Analytical Framework & Empirical Results Trade Liberalization and the Wage Skill Premium: Evidence from Indonesia Wage skill premium equation (Amiti & Cameron 2011) LnWS it =β 0 X it +β 1 Trade jt +β 2 Industry+β 3 Time WS: log of wage skill premium for firm i at time t (ratio of the average wage of skilled or nonproduction workers to the average wage of unskilled or production workers) i indexes firms, j industry, t year Trade policy proxies effective protection rate: net protection received by domestic producers from protection of outputs & penalty from protection of inputs output tariff rates & input tariff rates based on MFN & ASEAN CEPT rate X: a vector of firm-level controls covering firm size, export share, skill intensity, capital intensity Industry and time dummies

17 Summary Statistics Variable N Mean Std. Dev. EPR MFN output tariff ASEAN tariff MFN input tariff KL Export share Skillint Ratio Skilled-unskilled workers Ratio Skilled-unskilled wages Employment LnWorkers LnWS Firm-level panel data 1996, 1997, 1998, 2000; unbalanced panel dataset Skilled workers: managers & other office & administrative workers Unskilled are production & other workers

18 MFN, ASEAN, EPR LnWS MFN ASEAN EPR Output *** tariff (0.2) (0.002) (0.02) Input tariff (0.19) (0.17) Export share (0.02) (0.02) (0.02) Skill 2.212*** 2.207*** 2.210*** intensity (0.137) (0.137) (0.137) LnWorkers 0.143*** 0.143*** 0.14*** (0.03) (0.03) (0.03) KL 1.36e-08*** 1.37e-08*** 1.36e-08*** (3.58E-09) (3.60E-09) (3.58E-09) Year Y Y Y Industry Y Y Y Obs Within the firm, globalization affects wage skill premium via reduction in protection Due to import competition, relative demand for skilled workers declined, with relatively skill-intensive goods replaced by imports

19 Interact skill intensity with trade lndiff MFN ASEAN EPR Output tariff ** 0.117** (0.3) (0.004) (0.06) Input tariff (0.3) (0.242) Export share (0.029) (0.029) (0.029) Skill intensity 2.236*** 2.455*** 2.2*** (0.2) (0.22) (0.146) Output tariff*skill intensity *** (1.55) (0.017) (0.159) Input tariff*skill intensity (0.082) (1.4) (1.058) Export*Skill intensity 0.266* 0.277** 0.55*** (0.145) (0.14) (0.119) Ln workers KL 0.143*** 0.143*** 0.075*** (0.029) (0.03) (0.007) 1.36e-08*** 1.31e-08** -2.61E-09 (3.57E-09) (3.53E-09) (6.99E-09)

20 Summary Literature indicates large increases in skill premiums driven by increased demand for skilled workers PH: with caveat of endogeneity, trade liberalization is correlated with a reduction in skill premium Trade liberalization imports low skill intensity production wage skill premium: +EPR, +ASEAN output tariff Tariff reduction on skill intensive products is associated with rising wage premium: -ASEAN output tariff*skill intensity Greater openness is associated with SBTC with exports & technology intensive activities as channels Exports of skill intensive products is associated with increasing wage premium: +Export*skill intensity (MFN, ASEAN, EPR models) Firm characteristics matter in assessing the impact of trade reform on the wage premium Skill intensity, firm size, capital labor ratio: + association with wage premium at the firm level

21 Policy Implications Transform & upgrade manufacturing firms toward more diversified & sophisticated export products Technological upgrading: important channel to drive demand for skilled labor & skill intensive manufacturing production Upgrading education levels, promote productivity growth, increase technological capability Strengthen our position to deepen participation in production networks & take advantage of opportunities arising from globalization, greater openness, & liberalized markets