International Congress on Engineering, Sciences and Innovative Technologies (ICESIT 2020) - Kuala Lumpur - Malaysia (2020-02-13)

Impact of Trade Liberalisation on Labour market
When an economy is opening up its economy by integration with the rest of the world by liberalising trade, there must have its impact on its output and employment. There are two types of impact on employment – namely level of employment and quality of employment. This study will focus on impact of trade liberalisation on quality of employment. It has been observed that India’s trade-GDP ratio increased in the post-reform period. Therefore, it can be inferred that trade liberasation had taken place. On the basis of the coverage of social security, it is observed that number of workers with social security coverage declined in India. So, the trend of both of these indicators points out towards the informalization of workforce. In the beginning of 2000s, though total employment has increased marginally, organized sector witnessed an improvement in employment primarily driven by increment in informal employment in India. There is wide range of empirical literature found that trade liberalisation led to informalisation of employment, precisely increase the share of informal employment in total employment. After economic reforms in India, the export boom has taken place during the early years of twenty first century along with the positive and significant growth in the employment in those sectors. This could be attributed to buoyant global demand in this period. Despite the decline in formal employment, total employment grew with a sharp increase in low wage informal employment of women in the export sectors. Later global demand becomes bleak due to the global economic crisis since 2008. As a result the export sector boom came to an end and witnessed even contraction in output and employment. Most of the informal jobs created during export boom, are wither away in the post-crisis period. Couple of papers tried to provide theoretical explanation of the aforesaid, but those studies have some shortcomings. We attempt to provide another theoretical explanation of aforesaid by overcoming those shortcomings. Again, this study distinguishes between formal and informal worker by the labour institution such as labour laws whereas Rebitzer and Taylor (1991) distinguished by effort level and wage rate. When an economy is closed by protection of trade barrier, product demand is less uncertain. In other words, the domestic firms know the market demand and their share in the market demand because there is bar on entry of more competitive international firms and delinked from international market, but demand may increase/fall due to other reason in a closed economy. The demand uncertainty in a closed economy may arise due to political instability, war, natural calamity etc. When the trade opens up to the rest of the world, there is a possibility of losing the market share of domestic firms in the import competing sector due to entry of more competitive international firms. Thus, the product demand of the domestic firms becomes more uncertain (it may remain same or change). Again, it is observed international market is volatile. In case of export sector, it is exposed to volatile international market with the opening up of the economy. It may be arise in one’s mind that a country can export when it does not liberalize/open up its import competing sector to the rest of the world. But, other countries do not provide market access to that country which protects its import competing sector by imposing various trade barriers. After trade liberalization product demand for the domestic firms in the export sector emanates from domestic consumers and demand from rest of the world. Unlike demand uncertainty in domestic market, demand in rest of the world is also uncertain. Thus, product demand becomes more uncertain with liberalizing trade. In an uncertain demand regime, firm will choose its input combination of formal and informal worker in a certain manner to maximize profit. In a highly uncertain demand regime, the firms will choose more informal labour and less formal labour to maximize its expected profit as compared to that in less uncertain demand situation. Thus, trade liberalization leads to the informalization of workforce. Keywords: Informal Employment, Trade Liberalisation. References [1] Ghose A K. Employment: The Fault Line in India’s Emerging Economy, Symposium Article, Comparative Economic Studies.2012;54:765–786. [2] Goldberg P, and Pavnick N. The response of the informal sector to trade liberalisation. Journal of Development Economics.2003 Dec;72( 2): 463–496. [3] Maiti D, Marjit, S. Trade liberalization, production organization and informal sector of the developing countries. The Journal of International Trade & Economic Development: An International and Comparative Review,2008; 17(3): 453-461. [4] Marjit et al. Informality, corruption and trade reform. European Journal of Political Economy.2007; 23 (3):777-789. [5] Mehrotra S, Gandhi A, Saha P, Sahoo BK. Joblessness and Informalization: Challenges to Inclusive Growth in India.Institute of Applied Manpower Research, Planning Commission, Government of India. Occasional Paper No. 9/2012. [6] Rakshit M. Global Downturn and Cross-Border Trade: Some Theoretical and Policy Perspectives.Economic & Political Weekly. 2010 May 1; XIV (18). [7] Rebitzer JB, Taylor LJ A. Model of Dual Labor Markets When Product Demand Is Uncertain, The Quarterly Journal of Economics.199;106 (4):1373-1383.
Assist. Prof. Debabrata Roy