Trade, technology and skills: Evidence from Turkish microdata
Highlights
► We analyse the impact of trade and technology on relative demand for skilled labour. ► Dynamic labour demand models are estimated using firm level data. ► Demand for skills raised by R&D, foreign technology, FDI, exports and machinery imports. ► Our results support the skill-enhancing trade hypothesis for Turkey. ► Complementary role of trade and technology in the skill upgrading within firms.
Introduction
This paper examines the relationship between trade openness, technology adoption and the relative demand for skilled labour1 in Turkish manufacturing firms. Turkey started a marked process of liberalisation in the early ’80s, and volumes of exports and imports have continued to grow since then, linking the Turkish economy increasingly to the world market. This increasing trade openness has particularly affected the manufacturing sector, where most of the growth in imports and exports has occurred. An important aspect of this process could be its impact on labour demand, and, more specifically, its impact on the relative demand for skilled labour. Indeed, over the same period, the relative demand for skilled labour increased substantially, leading to higher wage-gaps between skilled and unskilled workers. Whether these two simultaneous phenomena are linked has not yet been established.
The theoretical economic literature provides different predictions regarding the impact of trade liberalisation on labour demand in a developing country. On the one hand, according to the central tenet of traditional trade theory, as expressed in the Heckscher–Ohlin theorem and in its Stolper–Samuelson corollary (HOSS hereafter), we should expect a relative decrease in the demand for skilled labour. Openness should benefit a country's relatively abundant factor, because trade specialisation should favour sectors intensive in the abundant factor. Therefore, in the case of Turkey, which is abundant in unskilled labour compared to its main trading partner, the EU, trade openness should have increased the demand for unskilled workers and raised their relative wages. On the other hand, if the HOSS assumption of homogeneous production functions2 among countries is relaxed, then international openness may facilitate technology diffusion from more industrialised countries. Imports, exports and foreign direct investment (FDI) may act as a channel of technological upgrading, and shift the production function towards more skill-intensive technologies. In other words, trade and FDI may induce and foster skill-biased technological change (SBTC).
This paper contributes to the debate by presenting new empirical evidence at the firm level. We estimate the impact of trade openness on labour demand by using a unique detailed panel of Turkish manufacturing firms (Annual Manufacturing Industry Statistics by the Turkish Statistical Institute, TurkStat). The dataset, by covering all manufacturing firms employing 10 or more people and comprising data from 17,462 different firms, represents about 90% of Turkish (formal sector) manufacturing output and is therefore particularly well-suited to quantifying the possible impact of firms' international exposure on the labour demand for skilled workers.
Turkey is a particularly interesting context for studying the relationship between trade openness, technology adoption and the relative demand for skilled labour. Indeed, it is a middle-income country with sizeable trade flows with more advanced countries, especially the European Union.3 This makes it a net technology importer, and hence the ideal country for investigating the impact of potential imported SBTC. Indeed, trade openness is supposed to have a greater inequality-enhancing impact in middle-income countries, where “social capabilities” (Abramovitz, 1986) and “absorptive capacity” (Lall, 2004) are higher and where technology adoption from more advanced countries effectively acts as a channel for technological upgrading, thus leading to an increase in the relative demand for and wages of skilled workers (see Meschi and Vivarelli, 2009, Almeida, 2009). From a policy perspective, Turkey presents an illustrative example for investigating the social impact of international openness: during the ’80s, Turkey carried out a significant trade liberalisation programme, shifting from a protectionist model characterised by heavy state intervention to a more outward-looking one.
The remainder of this paper is organised as follows: the next section reviews the theoretical and empirical literature on the interaction between trade openness, technological change and the relative demand for skilled labour, focusing mainly on developing countries. Section 3 introduces and describes the data. In Section 4 we discuss historical trends in the Turkish economy and present some descriptive statistics. In Section 5 we present our econometric analysis and discuss the empirical results. Finally, the last section puts forward some concluding remarks.
Section snippets
The literature
The increase in the relative demand for skilled labour has been documented for many industrialised countries in the last three decades. This literature has been characterised by an ongoing debate about the relative importance of SBTC vs international trade in explaining the observed widened wage differential between skilled and unskilled labour.4
Data
The data used in this paper are drawn from the Annual Manufacturing Industry Statistics, provided by the Turkish Statistical Institute (TurkStat, formerly known as the State Institute of Statistics, SIS). The database covers the 1980–2001 period and includes all private firms employing at least ten employees and all public firms.8
Economic trends, descriptive evidence and decomposition analysis
This section provides some stylised facts on the recent process of trade liberalisation in Turkey (Section 4.1) and describes the simultaneous trends in the Turkish labour market (Section 4.2). In particular, we look at the evolution of skilled versus unskilled relative wages and employment, in order to determine whether the relative demand for skilled labour did in fact increase during the phase of rapid integration of Turkey's economy into international markets. Finally, in Section 4.3, we
Microeconometric analysis
The aim of this section is to analyse the determinants of the changes in SLCSH at the plant level. In particular, we are interested in understanding whether the changes in the skilled labour cost share are correlated to any measure of technology adoption and to exposure to international markets. We expect trade and technology to play a complementary role in shaping the demand for skills. The empirical strategy is explained in the next section, whilst Section 5.2 presents and discusses our
Concluding remarks
This paper has reported evidence on the relationship between trade openness, technology adoption and the relative demand for skilled labour in Turkish manufacturing firms. We first outlined the simultaneous increase in international openness and in the demand for skills at a descriptive level. In particular, we showed that in the aftermath of a rapid and thorough liberalisation process, the relative demand for skilled labour increased substantially. We then investigated the possible sources of
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Skill-biased technological change and wage inequality in developing countries
2018, International Review of Economics and Finance