Trade liberalisation, labour productivity and wage inequality: the case of the Thai manufacturing sector

Advocates of the market paradigm firmly support that ‘getting the price right’ would enhance industrial performance and thereby labour performance along the lines of comparative advantages. Development policy along this line was consistently pursued in Thailand from the early 1990s, following considerable inconsistencies after the initial attempt of trade liberalisation in the early 1970s. The average tariff rate in the manufacturing sector decreased substantially from 45.6 percent in 1993 to 18.5 percent in 2001. In view of this, it was hypothesised that the trade liberalisation in the early 1990s has had a positive impact on labour productivity, skilled workers and wage premiums. The research was initiated by testing for structural breaks using variables such as employment, output, export and intermediate-input import. The tests for employment indicate structural breaks in 1993 and 1999 which coincides the period of trade reforms. These results provide support for further research on the impact trade liberalisation on labour markets in Thailand. In this study, selected labour market performance variables - labour productivity, wage premium and skilled/unskilled ratio - were separately regressed on average tariff and other trade-related variables to test our hypothesis. Results from the study show that trade liberalisation had a positive impact on labour market performance. In addition, improvement in labour productivity has been reflected in wage premiums and skilled employment. The Thai experience unambiguously reflects a reallocation of resources towards high productivity and high skilled industrial sectors as a response to trade liberalisation.