n South African Journal of Labour Relations - Free trade and labour demand elasticities : theory and international evidence




In the debate between "free traders" and those who plead for protectionist policies one of the areas of contention is the impact that free trade has on the labour market of an economy. South Africa is no exception in this regard. One area of concern among policymakers is whether the country's recent trade liberalisation has contributed to its weak employment performance over the last few years. Traditionally, trade economists have attempted to analyse this relationship by utilising factor endowments models that operate directly through product prices. More recently, researchers have identified yet another pathway through which the impact of trade openness could be transmitted to the labour market: the impact of trade 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. This article explores the theoretical underpinnings for this linkage and highlights its implications for workers, and then reviews studies undertaken in several countries to test empirically for this relationship. Finally, the article concludes with specific implications and recommendations for South African policy makers.


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