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WP 02/060 - Trade, Technology and Wage Inequality in South Africa

Author: 
Tahir Abdi and Lawrence Edwards

Date of Publication: 
January 2002

Abstract: 
Significant declines in employment have coincided with trade liberalisation in South Africa stimulating many debates on possible causal relationships between the two. Existing research has, however, focussed on explaining employment trends rather than changes in the relative wage of less skilled to skilled labour. Further, the role of technology in influencing relative wages has been neglected. This paper draws upon standard international trade theory and analyses the relationship between trade, technology, factor supplies and the relative wage of less skilled workers in South Africa since 1970. The econometric results are in general weak. Nevertheless, a number of conclusions can be reached. Firstly, the rise in relative wage of less skilled workers since the early 1970s and into the 1990s is inconsistent with the view that trade liberalisation and skill biased technological change lie behind the dramatic decline in less skilled employment since the early 1980s. Secondly, there is weak evidence that tariff reductions and improvements in the real effective exchange rate have improved the relative wage of less skilled labour. Although the rise in relative wage of less skilled labour is consistent with these changes, the decline in employment of less skilled labour is not. These results suggest that the reason for the decline in employment of less skilled labour lie in other areas such as the labour market. This research paper is sponsored by USAID and administered by the Joint Centre for Political and Economic Studies Inc. under a subcontract agreement from Nathan Associates Inc.

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