Labour Demand Effects of Internationalization in the Colombian Manufacturing Industry, 1974-2015

Abstract

Colombia experienced a major structural change in the early nineties. This structural change is related to major trade and labour market reforms undertaken around 1992, which is considered the inflection year. This paper focuses on evaluating whether the structural change in international trade exposure significantly altered the employment response to wage changes in the manufacturing industry. Hamermesh’s (1993) framework is used to explain the total employment effect, which is made of the substitution and scale effects. This total effect is empirically quantified, and its two components disentangled. We find that the employment elasticity of a wage change rose from -1.05 in 1974-1991 to -1.56 in 1992-2015. By components, the substitution effect rose from -0.68 to -1.19, and the scale effect remained stable at -0.38. These findings suggest that trade liberalization has had negative consequences on workers’ welfare. A larger sensitivity of labour demand has been associated with a larger workers’ tax burden and a greater instability in labour market outcomes (Rodrik, 1997). Therefore, the increases in payroll taxation experienced during the nineties may have led to job destruction and an amplified workers’ tax burden, while capital-labour substitution processes may have accelerated on account of the larger employment sensitivity.