Trade, Technology and the Labour Market: The Case of South Africa*
| Author | Prabhat Vaze,Yongcheol Shin,Johannes Fedderke |
| Published date | 01 December 2012 |
| Date | 01 December 2012 |
| DOI | http://doi.org/10.1111/j.1468-0084.2011.00685.x |
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©Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2011. Published by Blackwell Publishing Ltd,
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OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 74, 6 (2012) 0305-9049
doi: 10.1111/j.1468-0084.2011.00685.x
Trade, Technology and the Labour Market: The Case
of South Africa*
Johannes Fedderke†, Yongcheol Shin‡ and Prabhat Vaze§
†Pennsylvania State University, Economic Research Southern Africa,
and University of the Witwatersrand (e-mail: jwf15@psu.edu)
‡Leeds University Business School, UK (e-mail: y.shin@leeds.ac.uk)
§Ministry of Defence, UK (e-mail: prabhat.vaze@dasa.mod.uk)
Abstract
This study advances previous work on the effects of trade and technological change
on labour markets within the framework of Heckscher–Ohlin trade theory. We provide
evidence for an unskilled labour abundant developing country by employing dynamic
heterogeneous panel estimation techniques. For South African manufacturing, trade-
mandated increases in earnings are positive for labour and negative for capital whilst
technology-mandated increases are negative for both factors. We also find it impor-
tant to take account of endogeneity issues in analysing the impact of technology and
price changes on factor returns and in isolating factor- and sector-bias of technological
changes.
I. Introduction
In industrialized countries, employment levels have been falling among unskilled labour
while rising among skilled labour. Wages for skilled workers have risen in relation to those
of the unskilled. This has resulted in rising income inequality. Explanations of this include
skill-biased technological improvement and increased international competition. Specifi-
cally, trade with less, developed countries endowed with an abundance of unskilled labour
is advanced as one possible explanation for rising wage inequality, that is consistent with
the Stolper–Samuelson (SS) theorem.
ÅWe would like to thank theTrade & Industry Policy Strategies for making available the data. The South African
National Treasury and USAID provided financial assistance for the project.The first author gratefully acknowledges
the intellectual and financial support of Nuffield College, Oxford, and Economic Research Southern Africa (ERSA).
The second author gratefully acknowledges partial financial support from the ESRC (Grant No. RES-000-22-3161).
We are grateful to the editor and two anonymous referees, Matthew Greenwood-Nimmo, Stephen Hall, David
Hendry, Merle Holden, Ravi Kanbur, Richard Ketley, Chris Loewald, David Loughran, Chris Milner, Christophe
Muller, Marc Nerlove, Kevin Reilly, Adrian Wood and Robert Wright for helpful comments on an earlier version of
this article. Viewsexpressed in the article should not be taken to reflect the views of the above institutions. The usual
disclaimer applies.
JEL Classification numbers: C23, C33, F16.
Trade, technology and the labour market 809
One concern is that the SS theorem is less conclusive about the effect of increased trade
openness on middle income countries. The composition of trade between developed and
developing countries is likely to be crucial in determining how increased trade openness
affects middle income countries. This is precisely the problem encountered in Hanson
and Harrison (1999), where for the middle income context of Mexico, trade liberalization
appears to have spurred growing wage inequality through promoting imports from less,
developed countries. However, this is not universally true. For instance Gonzaga, Filho
and Terra (2006) report SS consistent results for Brazil whilst Chiquiar (2008) finds that
regions most exposed to globalization experience wage gains and declining skills premia
relative to other regions for Mexico, consistent with SS.
To date, examinations of the impact of trade on labour markets in terms of
Heckscher–Ohlin (HO) theory have mainly focused on developed countries, with few
studies examining developing countries. The developing country evidence uses an empir-
ical methodology that does not advance techniques used for developed countries. The
developing country studies take the form of factor content studies or labour usage equa-
tions (Milner and Wright, 1998; Moreira and Najberg, 2000). This study examines how
trade impacts labour markets in a developing country, by focusing on evidence from South
Africa over the period 1972–97, by applying panel time series methods.
South Africa relative to its trading partners has developing country characteristics. Due
to her international isolation, there has been a heavy reliance on trading with developed
countries. Therefore, in the case of SouthAfrica, we have an opportunity to consider a natu-
ral experiment that allows us to establish the effect of trade liberalization on a country with
an abundance of unskilled labour, relative to its trading partners.1In addition, Krugman’s
(1995) critique that the US studies rely on an inappropriate assumption that it is a small
open economy, does not apply here. The South African economy is certainly small, and the
manufacturing sector in particular is very open. Finally, for many developing countries a
substantial proportion of labour market activity is simply not reflected in official data. This
problem does not pertain to South Africa’s official data, because informal sector activity
does not constitute a large proportion of labour market activity.
We aim to make three contributions to the empirical literature. SS effects explicitly
hold in long-run equilibrium but real world processes seldom reflect equilibrium states.
So any empirical application of the HO framework has to account not only for an equi-
librium relationship, but also for the fact that dynamic adjustments to equilibrium may be
an equally important feature of modelling the impact of globalization on labour markets.
While theoretical contributions have examined the dynamics of adjustment (Neary, 1978;
Thierfelder and Shiells, 1997), empirical contributions have not yet reflected the distinc-
tion between the long-run equilibrium and the associated adjustment to equilibrium. The
first contribution of this study is to explicitly examine this distinction.
A second contribution relates to the presumption in HO theory that the impact of trade
liberalization is uniform across all sectors in an economy. Many of the factors that result
1Edwards and Sch¨oer (2002) report that 85% (57%) of South African imports (exports) in 1990 were sourced
from the 25 OECD countries, declining to 72% (53%) in 1999. South African trade is thus heavily biased towards
developed countries over the sample period of this study, though middle income and developing countries have begun
to feature more prominently in South African trade during the 1990s. However, Jonsson and Subramanian (2001)
report that South Africa remains unskilled labour abundant even with respect to middle income countries and less
developed countries have played a relatively small role in South African trade.
©Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2011
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