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International Trade and Labour Demand Elasticities: Is there Any Empirical Evidence from South Africa?

There are various pathways through which the impact of trade openness may be transmitted to the labour market. This study explores a relatively new linkage identified by the literature: the impact on labour demand elasticities via a substitution effect through increased factor substitutability and/or via a scale effect brought about by an increase in product market elasticities. More elastic factor demands have adverse implications for labourers vis-à-vis employers. Using an industry-level panel dataset covering the South African manufacturing sector spanning a period of over three decades, I empirically test for this relationship focusing primarily on the substitution effect. I am able to find, at best, only limited empirical support for my hypothesis of a positive and significant impact of trade liberalisation on labour demand elasticities. Whilst demand for labour appears to have become more elastic for manufacturing overall and in one of ten sectors within manufacturing, this result fails to hold for any of the other industries examined.

Working paper 348
1 May 2013
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