Trade liberalisation and the wage premium: evidence from Thai manufacturing

Abstract

This paper examines the impact of trade liberalisation on the wage premium using firm level data for Thai manufacturing as the case study. Tariff protection is applied here to represent trade liberalisation, in terms of both nominal and effective tariffs. Output and input tariffs are separately examined to assess nominal protection, while for effective rates of protection (ERP), both a traditional ERP measure and a measure incorporating possible water in tariffs and the effect of FTAs are applied. In addition to tariff protection, the impact of GVCs, considered through trade in parts and components (P&Cs), on the wage premium is investigated in the study. Our results show that firm‐specific factors are more crucial in affecting the wage premium than trade liberalisation and participation in global production networks. With trade liberalisation, only input tariffs matter in determining the wage premium while an insignificant relationship is observed when either output tariffs or ERPs are employed to reflect trade liberalisation. Participation in GVCs also has an insignificant impact on the wage premium. Wage‐skilled employment decoupling is evident in the study, that is, trade liberalisation and GVCs have a negligible influence on the wage premium but have a significant influence in the case of relatively skilled workers. Trade liberalisation tends to lower demand for skilled workers in response to cheaper imported products, while participation in global production networks encourages more skilled workers.