The Impact of Foreign Trade on the Labor Market: Evidence from Turkish Economy

This paper analyzes the impact of foreign trade on labor market by using the random coefficient panel data analysis and the quarterly data of 17 sectors in manufacturing industry of Turkey according to 2 digit level of NACE Rev. 1.1 and ISIC Rev.3 classification between 1994 and 2010. Data are seasonally adjusted by TRAMO/SEATS method before data evaluation, since the data used are quarterly. The results showed that production had positive impact on labor whereas it had negative impact on wages. Furthermore it was shown that imports and exports have a significant and positive impact on labor. Thus the results of the study point out that foreign trade positively affect the economy. Sector specific estimations, which is the one of distinctive aspects of this study, derived from the random coefficient panel data analysis, are also discussed in detailed.(ProQuest: ... denotes formulae omitted.)IntroductionImportance of trade in the world economy has been increasing during the past decades, which can be seen at the figures of the world trade. The ratio of world exports of goods and services to GDP increased from 13.5% to 32% per cent between 1970 and 2005 (Jansen and Lee, 2007)The impact of trade on labor market gained importance in the literature due to the structural changes in production brought by the increase in trade. The classical international trade theory based on Heckscher-Ohlin approach suggests that goods with different factor endowment intensity will be subject to trade due to the fact that countries have different factor endowment and technology capacity. Relatively labor abundant countries in factor endowment specialize, and thus, export labor intensive goods and import capital intensive goods from relatively capital abundant countries in factor endowment. Thus, employment in industries manufacturing labor-intensive goods will increase in countries exporting labor-intensive goods and employment in industries manufacturing capital-intensive goods will decrease in result of importing capital-intensive goods, and vice versa. Since developing countries have labor-intensive production structure and developed countries have capital-intensive production structure, these theories explain the impact of trade between developed and developing countries on employment structure in these countries.Most of the studies analyzing impact of trade on employment focused on manufacturing industries of various countries, because of lack availability of data in other sectors for empirical researches (Jansen and Lee, 2007). In most countries, surveys applied to manufacturing sector by national statistical offices are more detailed and has more frequency by comparison with other sectors.Milner and Wright (1998) investigated labor market effects of trade liberalization in Mauritius. The short and long run responses of employment and wages were examined by conducting a specific factor trade model for importable and exportable sectors for a period covering both the pre- and post-liberalization regimes. Empirical tests showed that trade liberalization had sector specific impacts on employment. The results showed that employment and wages were increased in the long run, but wages were pressured downward in the very short run. Decrease in output caused reduction in employment and wages in the importable sector.Erlat (2000) used an accounting-identity based approach which decomposed employment change into impact of trade, domestic consumption and productivity change. The results of this decomposition method indicated that trade had a more significant role to play in employment change in the post-1980 period in Turkey, but export-based employment were not dominant in employment changesPolat and Uslu (2010) found that exports and imports had positive and significant impact on employment in the short run, but not in the longrun, between 1988 and 2007 by conducting Autoregressive Distributed Lag approach with quarterly data of manufacturing industry. …