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Does Trade liberalization widen Residual Wage Gap in Pakistan? A Sectoral Perspective

Introduction

Does trade liberalization widen residual wage gap in pakistan? a sectoral perspective. Study trade liberalization's impact on residual wage gaps in Pakistan's manufacturing sectors (1990-2005). Discover TL widens pay disparities, offering crucial policy insights for the government.

Abstract

Between 1988 and 2005, Pakistan's trade policy saw significant transformations. This study examines the impact of trade liberalization (TL) on the residual wage gap (RWG) across manufacturing sectors, utilising micro-level datasets of Pakistan from 1990 to 2005. Neoclassical theory posits that TL enhances external competitiveness in developing nations, resulting in a reduction of the gender pay gap. The advantageous impact of TL on the RWG is illustrated using a two-step estimation method. Initially, we employ the methodologies of Oaxaca (1973) and Blinder (1973) to ascertain the RWG at sectoral levels. Subsequently, we utilise Fixed Effect (FE) and Random Effect (RE) models. The overall findings indicate a correlation between TL (measured by the fall in import tariffs) and RWG. TL is closely associated with the widening residual pay disparities across various sectors in Pakistan. The government should consider that new long-term plans must positively respect the TL.

Review

This study presents a compelling and timely examination of the distributional impacts of trade liberalization (TL) in Pakistan, specifically focusing on its effects on the residual wage gap (RWG) within the manufacturing sector between 1990 and 2005. Utilizing micro-level datasets, the paper directly challenges a common neoclassical tenet that TL in developing nations would reduce pay disparities, such as the gender pay gap, by enhancing external competitiveness. The authors employ a robust two-step econometric approach: first, applying the established Oaxaca-Blinder decomposition to estimate sectoral RWGs, followed by panel data analysis using Fixed Effect (FE) and Random Effect (RE) models to identify the causal relationship. The primary finding indicates a strong correlation between falling import tariffs, as a proxy for TL, and a widening of these unexplained pay disparities across various sectors. While the chosen methodology is sound and appropriate for the research question, certain aspects from the abstract warrant further clarification for a comprehensive understanding. The abstract initially mentions the neoclassical expectation regarding the "gender pay gap," yet the study's focus is broadly on the "residual wage gap." Clarifying whether the RWG examined specifically pertains to gender or other unexplained wage differences (e.g., based on unobserved skills or discrimination across general worker categories) would enhance precision. Furthermore, while the measurement of TL via import tariffs is clear, a brief discussion of potential omitted variables or alternative measures of liberalization, and how the models account for them, could strengthen the argument. The abstract's concluding policy recommendation, stating that "new long-term plans must positively respect the TL," appears somewhat ambiguous given the paper's finding that TL *widens* the RWG; this phrasing could benefit from refinement to suggest, for instance, a need for complementary policies to mitigate adverse distributional consequences of continued liberalization. Despite these minor points for clarification, the study makes a significant contribution to the literature on trade and inequality, particularly from a sectoral perspective in a developing country context. The findings provide crucial empirical evidence that policymakers in Pakistan, and potentially other similar economies, must consider the potential for trade liberalization to exacerbate wage inequalities, even if it brings overall economic growth. Future iterations of this work could delve deeper into the specific mechanisms through which TL contributes to widening the RWG—for example, by analyzing changes in skill premiums, labor market institutions, or the informal sector's response. This research underscores the importance of integrating social impact assessments into trade policy formulation to ensure equitable outcomes alongside economic competitiveness.

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