The Effects of Trade on Changes in Relative Demand for Labour in Malaysia ( )

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1 International Applied Economics and Management Letters 1(1): (2008) The Effects of Trade on Changes in Relative Demand for Labour in Malaysia ( ) Rusmawati Said a and Asmaddy Haris b a Faculty Economics and Management, University Putra Malaysia. b Faculty Economics and Muamalat, Islamic Science University of Malaysia Abstract: This paper is concerned with the expansion of the trade has explained a little effects on relative labour demand for female workers in Malaysia during the period Using set of data comprises micro-level data from the Household Income Survey (HIS) for several years during the period 1984 to 1997 this paper finds a some support for the prediction of the basic Heckscher Ohlin and Samuelson (HOS) model in that trade can explain the changes in industry skill wage premia at higher levels of education. Interestingly, and not unexpectedly, further investigation under production allocation, trade is also found to have increased the relative demand for educated male and female production workers in the mid 1990s, but seems to have decreased the relative demand for this group during the mid 1980s and late 1990s. Keywords: Labor Demand, Wage Differentials, Trade and Labor Market Interaction, Technological Change. Introduction Over the past two decades, there has been continuous increase in the wage gap and the increasing employment share between skilled and unskilled workers in several developed and developing countries (Katz and Murphy, (1992);Lawrence and Slaughter, (1993)). There has been a heated debate about the underlying causes of such a trend. In developed countries particularly in the US and the UK rising in wage inequality are due to the factors underlying shifts in the relative demand for skills, namely, trade and technology. As regards technology, the argument is based on the hypothesis of skilled biased technological change (SBTC). According to Haskel and Slaughter (2001), increasing information technology (IT) is fostering the relative productivity of more educated workers and the employment shares of skilled workers). However, even amongst those economists who favour SBTC as an explanation of the changing nature of wage and employment structures, there are still disagreements about whether this originates from trade-related factors (and is sector biased) or whether its impact is factor-biased affecting particular groups of workers. Alternatively, there is the argument that the changes observed arise because of changes in the pattern of trade and are not skill-biased (Wood, (1994); Lawrence and Slaughter (1993)). Traditional trade models and policy makers often promote trade liberalization and openness as a way to increase living standards and welfare in developing countries. In this case, Mexico is a good candidate for a county where a reduction in wage inequality was resulted from having higher volumes of international trade. In Brazil, trade reforms not only reduce the average tariff and changes the structure of protection across the industries but also contributed to the growing wage inequality (Pavcnik et al. 2004). In fact, Arbache (2001) has documented growing to return to education in Brazil coincide with the timing of trade liberalization. Using a theoretical framework based on the Heckscher Ohlin Samuelson (HOS) model this paper aims to provide empirical evidence of the impact of trade in wage inequality in the context of a developing country, Malaysia. It thus attempts to address a significant gap in the previous literature regarding the causes of wage differentials in developing countries, generally, and more specifically in Malaysia. The rest of paper is organized as follows. Section II describes the data used. Section III presents the empirical results and Section VI then concludes the discussion. DATA The present paper uses the HIS for the years 1984, 1989, 1982, 1995 and 1997, from which information on employment, wages, age, activity, location, status of employment, 3-digit occupation and 5-digit industry data are obtained. There are a Corresponding author. Tel: rus@econ.upm.edu.my Any remaining errors or omissions rest solely with the author(s) of this paper.

2 48 Rusmawati Said & Asmaddy Haris several restrictions on this data. Firstly, all workers who are employed in the agricultural sector are excluded from the study 1. This is because the wages in this sector are unreliable as a result of the largely informal nature of employment in Malaysian agriculture. Secondly, the analysis is restricted to employees of working age (15 to 64). Thirdly, we focus on employees; thus, the self-employed are excluded from the study. To investigate the impact of trade, information from HIS is supplemented by information on imports and exports taken from the Ministry of Trade. EMPIRICAL RESULT In this section we considered the direct impact of international trade on employment in the manufacturing sector in Malaysia. These analyses consider the arguments put forward in Katz and Murphy (1992) that changes in the pattern of exports and imports may have different impacts on employment, especially for production workers. They suggest that whilst production for export markets and for domestic consumption may affect employment patterns in a similar fashion this may not be the case for imports. Specifically, they suggest that an increase in imports will be more likely to displace the local employment of production workers but not necessarily of non-production workers employed in activities such as sales. For this reason, Section Equal Allocation deals with the effects of trade on all workers (production and non-production) and assumes that the employment effects of export levels and import penetration are the same as those that arise from changes in domestic demand. This approach is called the equal allocation approach. In Section Production Allocation the analysis assumes that exports have the same impact as domestic demand but imports only affect production workers. This approach is known as production allocation. Equal Allocation Following Katz and Murphy (1992), we begin by defining the implicit labour supply of demographic group k, embodied in trade as where k represents the demographic groups by different levels of education. i denotes 29 manufacturing industries and E k is the average share of total employment of group k for the period. The average proportion of employment in industry i is denoted by e k i. E it is the share of total employment in industry i in the year t. I it and Y it are net imports and domestic output in industry i in year t respectively. The effect of trade on relative demand for demographic group k in year t can then be computed as follows: (1) The first term of Equation 1 denotes the supply of the labour of group k contained in trade, normalized by the base year employment of k, with the negative sign indicating that the supply shift measure is converted into a demand shift measure. The second term adjusts the demand shift measure so that trade affects only relative demand for labour and not wage inequality. The changes in relative labour demand predicted by the changes in international trade in manufacturing from 1984 to 1997 are presented in Table 1. Table 1 presents the shifts in relative labour demand in manufacturing the sector due to changes in international trade for the periods , , and Table 1 shows that the direct impact of trade on the manufacturing sector suggests that international trade has increased the relative demand for workers at higher levels of education. Second, even though the overall demand for males with no schooling increased during the sample period, international trade reduced the relative demand for these workers. Third, trade has increased the relative demand for female workers with a secondary level of education and decreased the relative demand for females with a primary education. 1 Agriculture is excluded from the analysis due to the fact that the data is unreliable (due to measurement error) and because there are significant numbers of unpaid family workers. Furthermore, the sector is very sensitive to economic fluctuations and high rates of turnover. As a result, wage inequality varies significantly over time. The decision to exclude agriculture also reflects the fact that what is happening to the sector in the process of economic development is a separate (though obviously linked) story to what is happening in the rest of the economy. The exclusion of the self-employed is again based on the fact that income data for this group is subject to significant measurement error due mainly to under-reporting. There is also definitional problems, again relating to family members working (often unpaid) in family businesses who may be classed as self-employed.

3 The Effects of Trade on Changes in Relative Demand for Labour in Malaysia ( ) 49 Throughout the sub-periods, in the period , the increase in the relative demand for female workers with a secondary level of education was largest when compared to what was happening to male workers. As clearly seen in Table 1, the relative demand for female and male workers at all levels of education increased during the period , whilst trade reduced the relative demand for both groups during the period This result implies that trade has decreased the relative demand for female workers for all category of education level during the early and mid 1990s. Focusing on the relative demand for male workers, Table 1 also shows that during the period , trade also had a negative impact on the relative demand for male production workers with primary and secondary levels of education. However, the relative demand for those with secondary and tertiary level increased. The trend changed drastically, however, during the period when the demand for male workers fell at all levels of education. During the period , trade had a similar, though smaller, impact on the relative demand for both male and female workers to that during the period of The one exception is that at the tertiary level of education trade decreased the relative demand for males. In contrast, the relative demand for the female workers with a tertiary level of education again increased. In contrast to earlier periods the relative demand favoured to those male workers rather than female workers. During these years, it can also seen that the increase in relative demand for female workers with secondary and tertiary education is less than that found in the other sub-periods. Production Allocation The second approach considered is known as production allocation. This approach assumes that the effects of changes in imports impacts on production workers only and exports are assumed to affect all workers. It can be computed by modifying the first term in the Equation 1 as follows; the effects of changes in exports are captured by and those of imports are calculated by as shown in Equation 2. Under the second approach, this paper considers 17 groups of production workers: production super visor y workers, miners, wood workers, chemical workers, spinners, food workers, tobacco workers, tailors, machine workers, electrical workers, plumbers, glass makers, rubber workers, photo and paper workers, construction workers, transportation workers and unknown workers. The production allocation equation can therefore be written as follows: (2) Where X measures exports, M measures imports and p k i represents group k's average share of production worker employment in industry i over the period. Again, T k i measures the effect of trade on relative demand for demographic group k in year t. Male No schooling Primary Secondary Tertiary Female Table 1: Changes in Relative Labour Demand Predicted by Changes in International Trade In Manufacturing Industries, , under the Equal Allocation Approach No schooling Primary Secondary Tertiary

4 50 Rusmawati Said & Asmaddy Haris To begin with this discussion will focus on the changes in the overall period from Generally, Table 2 shows that the changes in relative demand for both male and female workers are similar and that they favour those with no schooling and those with primary level of education. Overall, Table 2 suggests that female workers, who have traditionally been employed most intensively as production workers, especially in the tailoring and electrical industries were the groups most adversely affected by trade; the adverse effects on relative labour demand were concentrated on female workers especially those with secondary and tertiary levels of education. Similarly, the adverse effects of trade on the relative demand for male production workers also impacted most on those with tertiary and secondary levels of education. Trade reduced the relative demand for male production workers with higher levels of education, but increased the demand for males with no schooling and those with a primary level of education. It is interesting to note that there are differences in the trends during the sub-periods, especially for female production workers. Between 1984 and 1989, the adverse effects of trade on relative demand were concentrated on female workers at higher levels of education (especially those with secondary and tertiary levels of education). For male production workers, however, reductions were concentrated on those with primary and tertiary educations, and trade increased the relative demand for those with a secondary education level. During the periods , changes in the pattern of trade increased the relative demand for both male and female production workers across all types of education. A slightly different pattern occurred during the period , when trade reduced the relative demand for both male and female production workers across all types of education except those male with no schooling education. There is an interesting pattern shown by the changes in the relative demand for male and female production workers. Trade seems to have increased the relative demand for educated male and female production workers in the mid 1990s, but seems to have decreased the relative demand for this group during the mid 1980s and late 1990s. These results imply that economic recessions have a strong relationship with the impact of trade. When economic growth is strong, for example during the period , trade seems to increase the relative demand for workers across all types of education. However, during recessions, trade decreased the relative demand for workers especially at higher levels of education. CONCLUSION In conclusion, the investigation involving the direct impact of trade on the relative demand/wages for males shows that the impact of net trade on employment under the equal allocation approach has brought an increase in the relative demand for males workers with high levels of education. Further investigation, using the production allocation approach, shows that trade (allowing for the different impacts of exports and imports) explains the fall in the relative demand for males production workers with higher levels of education and increased the relative demand for production workers for both males and females at low levels of education. This result is consistent with the findings Male No schooling Primary Secondary Tertiary Female Table 2: Changes in Relative Labour Demand Predicted by Changes in International Trade in Manufacturing, , under the Production Allocation Approach No schooling Primary Secondary Tertiary

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