IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

Trade Liberalisation and Labour Demand Elasticities: Empirical Evidence for Pakistan

  • Bushra Yasmin

    (Department of Economics, Quaid-i-Azam University, Islamabad.)

  • Aliya H. Khan

    (Department of Economics, Quaid-i-Azam University, Islamabad.)

In this era of trade liberalisation, when most developing countries are following export-oriented policies, the impact of trade liberalisation on labour markets has become an important area to explore. The experience of trade liberalisation in developing countries is quite varied, but understanding the effects of openness on their labour markets is a complex and demanding task as these countries have undergone significant structural changes and adjustments from 1980s onward. In accordance with standard trade theory, developing countries should specialise in the production of labour-intensive goods, thus increasing the relative demand for this factor. Pakistan’s trade policy has also declared exports as an important and leading sector for employment generation. However, so far, little evidence is available on the issue of trade liberalisation and labour markets which can help work out the trade-labour linkages for Pakistan. In that context, the present study is an attempt to investigate these linkages. Among various paths through which trade liberalisation is channelled to the labour market, one is that of labour demand elasticity. It is expected that trade openness might induce an increase in elasticity via a scale effect due to the increased competition in the output market, and via a substitution effect generated by expanding a firm’s production possibility set to include additional input. The main hypothesis of this study is that trade liberalisation might lead to an increase in labour demand elasticity and is expected to have a favourable impact on the employment generation in Pakistan. The study is carried out for labour engaged in the manufacturing sector in Pakistan, using panel data approach for the years 1970-1995. A labour demand equation is obtained from the solution of a firm’s cost minimisation problem. The impact of trade liberalisation on employment is not restricted to a wage elasticity effect; it also allows for a direct effect with globalisation acting as a demand shifter. Overall, we find a positive significant effect of trade liberalisation on labour demand elasticities. As Pakistan has adopted a stance in favor of trade liberalisation over time, and the effective rate of protection has reduced very sharply since the early 1990s, it is thus revealed from the results that there has been a consequential shift from capital-intensive production to more labour-intensive production that is in keeping with the perceived static comparative advantage, and, in turn, is expected to lead to increased employment generation because of the greater incentives afforded to labour-intensive

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 44 (2005)
Issue (Month): 4 ()
Pages: 1067-1089

in new window

Handle: RePEc:pid:journl:v:44:y:2005:i:4:p:1067-1089
Contact details of provider: Postal: P.O.Box 1091, Islamabad-44000
Phone: (92)(51)9248051
Fax: (92)(51)9248065
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Wood, Adrian, 1997. "Openness and Wage Inequality in Developing Countries: The Latin American Challenge to East Asian Conventional Wisdom," World Bank Economic Review, World Bank Group, vol. 11(1), pages 33-57, January.
  2. Uma Karmbhampati & Pravin Krishna & Devashish Mitra, 1997. "The effect of trade policy reforms on labour markets: evidence from India," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 6(2), pages 287-297.
  3. Ashfaque H. Khan, 1998. "The Experience of Trade Liberalisation in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 37(4), pages 661-685.
  4. Krishna, Pravin & Mitra, Devashish & Chinoy, Sajjid, 2001. "Trade liberalization and labor demand elasticities: evidence from Turkey," Journal of International Economics, Elsevier, vol. 55(2), pages 391-409, December.
  5. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  6. Krueger, Anne O, 1998. "Why Trade Liberalisation Is Good for Growth," Economic Journal, Royal Economic Society, vol. 108(450), pages 1513-22, September.
  7. Rodolfo Helg & Riccardo Faini & Anna M. Falzoni & Marzio Galeotti & Alessandro Turrini, 2001. "Importing Jobs And Exporting Firms? On The Wage And Employment Implications Of Italy’S Trade And Foreign Direct Investment Flows," International Trade 0103001, EconWPA.
  8. Ahn, Seung C. & Schmidt, Peter, 1995. "Efficient estimation of models for dynamic panel data," Journal of Econometrics, Elsevier, vol. 68(1), pages 5-27, July.
  9. J. Behrman & T.N. Srinivasan (ed.), 1995. "Handbook of Development Economics," Handbook of Development Economics, Elsevier, edition 1, volume 3, number 3, January.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pid:journl:v:44:y:2005:i:4:p:1067-1089. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Khurram Iqbal)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.