Trade Liberalization, Firm Performance and Labour Market Outcomes in the Developing World: What Can We Learn from Micro-LevelData?

trade measures have a positive impact on the elasticity of demand for production labor and are
generally statistically significant. The results turn insignificant, however, when time dummies or
a time trend are included in the regressions.²³ One possible explanation for the lack of robustness
of trade measures to the inclusion of time controls may be the high collinearity between time and
these trade measures. However, the high statistical significance and robustness of the coefficient
of the time trend suggests that time is picking up some force constantly making production labor
more elastic over time. In this respect, it is likely that it is not actual trade that matters, but
rather potential trade. That is, what might matter for labor demand is just the ability to transact
internationally regardless of whether such transactions actually occur. Thus, trade might be playing
an important role independent of changes in observables such as trade and foreign direct investment
flows.

Finally, as far as the effect of trade on non-production labor is concerned, Slaughter finds that
many of his trade measures have a negative and significant effect on the elasticity of demand
for non-production labor, and that, contrary to the case of production labor, these measures are
generally robust to the inclusion of time controls.

6.1.2 Plant-level evidence

Krishna, Mitra and Chinoy (2001) use Turkish plant-level data spanning the course of a dramatic
trade liberalization to test whether greater openness led to an increase in labor demand elasticities.
Until the early 1980s, the manufacturing sector in Turkey received an extraordinarily high level
of protection: the average tariff in 1981 was estimated to be 49%. Further, for over half of
the products, tariff equivalent of non-tariff barriers were estimated to be over 100%. An import
liberalization program was announced in December 1983 and implemented soon after, leading to
a dramatic fall of both tariff and non-tariff barriers.

Krishna et al. use annual data from the Turkish manufacturing census for 10 three-digit ISIC

²³Similarly, using data from a broad sample of OECD countries, Bruno, Falzoni and Helg (2001) find little impact
of various trade measures on labor demand elasticities in most of these countries.

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