Trade, wages and the specific factors model with an empirical application to African manufacturing industries

This dissertation analyzes the impact of trade on wages in the context of the specific factors model by focusing on the link between trade and average real wage. The theoretical framework that is used is the specific factors model in which labor is considered to be the only factor that is completely mobile between industries, with all other factors lumped in as specific to the industry in question. A recent paper by Ronald Jones and Roy Ruffin (2004) shows how one can use the specific factors model to predict how labor should fare from an improvement in the terms of trade, that is, an increase in the price of an exportable or a reduction in the price of importable. It may be recalled that in the Heckscher-Ohlin model, labor either gains or loses depending on whether the imported good competes with a capital intensive or labor intensive industry. However in the specific factor model, labor may gain even if, a capital-intensive good is exported depending on the size of the favorable terms of trade effect compared with the production biases in the economy.; The specific factors spills out a decomposition of the theoretical gains to workers if the price of traded good rises by confronting the terms of trade effect of the price change with estimates of the production biases for or against the good. If the product of the relative elasticity of demand for labor and the relative labor intensity of good exceeds the unity, the good will be biased in favor of labor for any price increase. The relative elasticity of demand for labor depends on the elasticity of substitution in the industry in question compared to the elasticity of substitution in the rest of the economy.; I have applied theoretical model to real-world, firm-level data collected from African manufacturing industries during the different period of time for each country, thus providing evidence of how changing the price of exportable commodities affects the average real wage.; This has led to two important conclusions. First, exports operating through product price changes positively impact labor in food sector for Cameroon, Kenya and Tanzania. However, the impact is positive in the wood-furniture sector for Cameroon, Ghana, Kenya, Tanzania and Zimbabwe. For Ghana, Kenya, Zambia and Zimbabwe, exports operating through product price changes positively impact labor in metal sector. For the textile-garment, the value of the gain to workers is positive for Tanzania, Zambia and Zimbabwe. Second, the terms of trade effect in the specific factor model turned out to be an important issue in some industries since the negative production bias effect for this sector was outweighed by a positive terms of trade effect. The Tanzanian food-beverage and the Kenyan food industries are a relatively capital-intensive industry. Although this industry's relative elasticity of demand for labor exceeds unity, the production bias effect is negative. However, because the positive terms of trade effect outweighs the negative production bias effect, increases in the relative prices of exportable goods still benefit workers in the industry. Interestingly, the specific factors model predicts that exporting in the food-beverage industry Tanzania and metal industry in Kenya and furniture-wood industries in Zimbabwe will help workers, whereas the Stolper-Samuelson theorem of the H-O model predicts the reverse.