Trade liberalization and gender inequality

Discrimination

Gender discrimination can be defined as a situation in which a woman receives a lower wage than a man for the same job and level of productivity. In theory, the trade-discrimination relationship stems from the assumption that some employers are for some reason more inclined toward discrimination. That is, some employers prefer to hire men for jobs for which women are equally qualified. Yet if women earn lower wages than men, on average, employers could actually reduce their costs by employing more women. This is why discrimination is costly. In a competitive market, non-discriminating firms have a competitive advantage and would be expected to drive discriminating firms out of business. Discrimination will therefore persist only in those markets in which firms have market power. To the extent that international trade exposes firms to increased competition, it will reduce discrimination, either by driving discriminating firms out of business or by inducing firms to discriminate less.

Empirical evidence for the US shows that during the 1980s, increased competition from international trade led to a reduction in gender wage inequality and an increasing share of women in employment [3]. The analysis uses employment, wages, and imports in US manufacturing industries in the period 1977–1994. The gender wage gap is measured among full-time workers aged 18–64 and is conditional upon education, age, and race. Industries that saw a greater increase in the ratio of imports to domestic output also showed a larger reduction in the gender wage gap. However, it was only amongst those industries within which domestic firms previously had market power (i.e. the so-called “concentrated” industries). In the group of industries that were already competitive prior to the increased import penetration, there was no relationship with changes in gender wage inequality. Their findings suggest, therefore, that the effect of import penetration on gender wage inequality was driven by increased competition in previously uncompetitive markets.

Similarly, an analysis of workers in Norwegian manufacturing firms for the period 1996–2010 shows that men earned on average 24% higher wages than women [4]. Yet the gender wage gap was one-fifth lower in exporting firms compared to non-exporting firms. Because the research uses detailed data on both the firm and the workers, it is able to demonstrate that this difference between exporters and non-exporters is not due to differences in firm size, profitability, or outward foreign investment. Nor is it due to differences in the workers’ ability or cultural background. Rather, among similar firms with similar workers the exporting firms have a lower gender pay gap than non-exporting firms. This again demonstrates that a more competitive environment reduces discrimination between men and women.

Importantly, however, the study then shows that exporting firms already have lower gender wage gaps up to three years before they start exporting, compared to firms that never engage in exporting. The authors conclude that less discriminating practices may be a source of competitive advantage for firms, allowing them to perform better. In other words, it appears that competitiveness increases the probability that a firm exports, rather than exporting increasing competitiveness.

Nevertheless, both studies suggest that firms use equal treatment of men and women as a practice to improve their competitiveness. It follows that policy measures that increase the pay-off to competitiveness can reduce discrimination. Trade liberalization can be precisely this type of policy, in that it can create new export opportunities for firms or force domestic firms to compete with foreign firms where competition was previously limited.

This suggests that analysis of trade liberalization reforms, rather than observed trade outcomes, can potentially shed more light on the causal effect of trade liberalization on gender inequality. This is what was done in a study of gender inequality in Colombia’s manufacturing industry [5]. Between 1985 and 1991, Colombia unilaterally reduced its import tariffs in order to align the country’s trade protection structure with that of other members of the World Trade Organization. Tariffs declined by 31.4 percentage points on average, but by much more in some industries than in others, so that competition from foreign producers increased more in some industries than in others. The study found that firms in industries that saw the greatest tariff reductions had the largest increase in the female share of employment. The effects were similar for the female share of blue-collar employment and the female share of white-collar employment in the firm. Surprisingly, however, the effect of tariff cuts was more pronounced in industries that were already more competitive prior to the import tariffs being reduced. These results suggest that discrimination was not the channel through which liberalization reduced gender inequality in Colombia.

Gender differences in worker characteristics

Even in the absence of employer discrimination against women, gender gaps in pay and employment can result from gender differences in worker characteristics. Recent labor market research has built on the notion that, whereas men and women have equal cognitive abilities, men have more physical strength than women. It could therefore be said that men are relatively better endowed with physical strength and women are relatively better endowed with cognitive ability, even if they have the same age and education level. This matters because strength and cognitive ability are not equally important across all production technologies. Generally speaking, in production processes that use advanced technology and equipment, workers with high cognitive ability can be highly productive, whereas in production processes that use more simple machinery and equipment, workers tend to require more physical strength in order to be highly productive.

What this implies is that men can be relatively more productive than women in certain industries. Furthermore, if technology is upgraded within a firm or industry, physically demanding jobs can be made easier so that the productivity of women in those jobs will increase relative to that of men. Effectively, the advantage of male workers’ greater physical strength is reduced.

The link between this observation and trade liberalization is twofold. First, international trade can induce technological change. Second, trade liberalization can lead to a reallocation of production factors across sectors of production. Both of these links are now considered separately.

Technological change

The notion that trade liberalization stimulates technology upgrading bears similarity to the idea that trade liberalization discourages discrimination. Increased competition from imports and improved opportunities for exporting can induce firms to invest in technology upgrading as a means of improving their competitiveness.

Research on the US labor market in the 1970s and 1980s shows that increases in computer use can explain more than half of the growth in demand for female workers [6]. Another study found that skill-biased technological change, especially the adoption of computers, could explain about 41% of the closing gender wage gap between 1979 and 1999 in the former West Germany [7].

One recent study analyzes the effect of trade liberalization on gender inequality through technological change, explicitly using the North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the US [8]. Tariffs on trade between the countries were reduced, which improved export opportunities for firms in Mexico. The study uses data for medium- and large-size Mexican manufacturing firms during the period 1991–2000. Firms in industries with larger US import tariff reductions were more likely to start exporting, compared to firms in industries with smaller US import tariff reductions. Further results show that exporting firms were more likely to upgrade their technology (by acquiring new automatic or computerized machinery and equipment from developed countries) than non-exporters, and that technology upgrading was more likely in industries with larger tariff reductions.

Finally, the results show that the female share of blue-collar employment increased more in industries with larger tariff reductions, while there was no effect on the female share of white-collar employment. In sum, the study provides compelling evidence that liberalization-induced technology upgrading benefitted women more than men, by reducing the physical strength required in blue-collar occupations.

Importantly, NAFTA not only improved Mexican firms’ access to the US market, but also increased competition from imports, since Mexico also reduced its tariffs on imports from Canada and the US. This could have driven technology upgrading as well. A third channel through which trade liberalization can stimulate technological change is by giving domestic firms access to cheaper, better, or new imported intermediate products. The researchers show, however, that the effect in Mexico was driven by improved access to the US market, rather than through increased competition from imports or reductions in import tariffs on intermediate inputs. Finally, it is important to note that in this study, firms’ investments in technology were only considered to be “upgrading” if the firms imported their new machinery and equipment from rich countries. This suggests that similar effects may be less pronounced in rich countries, where there is less scope for firms to upgrade their technology.

Sectoral reallocation of production

The second link between male–female differences in characteristics and trade liberalization relates to the sectoral reallocation of production factors. Standard trade theory predicts that trade liberalization induces an expansion of the particular sector in which a country has a comparative advantage. A consequence of this is that production factors are reallocated from import-competing sectors toward exporting sectors. What makes this reallocation across sectors relevant for gender inequality is the fact that a strong sectoral segregation of male and female workers can be observed in virtually all countries of the world. Female workers are more likely to work in the services sector than male workers, while men are more likely to work in the manufacturing sector. And within the manufacturing sector, the female intensity of production also differs widely across industries. For example, textiles and apparel production are, typically, relatively female-intensive, whereas the production of motor vehicles is very male-intensive.

As noted previously, men are physically stronger and can therefore be relatively more productive than women in activities that require physical strength. This can be a reason why male and female workers tend to be concentrated in different sectors of production, although there are certainly other explanations for sectoral segregation, such as gender differences in preferences and social norms that stigmatize female factory work. But to the extent that female intensity of production varies across sectors due to gender differences in productive characteristics, what matters for gender inequality is not so much the overall level of trade, but rather the sectoral pattern of trade. This is because the sectoral pattern of trade will determine whether trade increases the demand for female workers relative to male workers.

Unfortunately, there is little agreement on how exactly the sectoral pattern of trade matters for gender inequality, and the available empirical evidence is limited. One important consideration, however, is that the impact of sectoral reallocation will only be visible at the total-economy level, rather than within an individual sector.

Two recent studies have analyzed the impact empirically, but they arrive at somewhat different conclusions.

Comparative advantage and fertility

The first study analyzes the link between comparative advantage and fertility [9]. It starts from the idea that a country’s technology and resource endowments determine in which sectors it has a comparative advantage. Furthermore, each sector has a certain female share of workers, which is assumed to be the same across countries and is calculated as the average female share of labor in each sector across a large number of countries. In some countries, the comparative-advantage sectors are relatively female-intensive (for example, in countries with a comparative advantage in textiles and apparel), while in others they are relatively male-intensive. In the former countries, women are relatively more productive than men. This is, in part, because international trade increases demand for comparative advantage goods, thereby inducing a flow of capital from male-intensive to female-intensive sectors. Higher relative wages for women imply that women face a higher opportunity cost for raising children, and therefore fertility will be lower.

The empirical analysis uses industry-level export data for 61 manufacturing industries in 145 countries over the period 1980–2007. It shows that countries with a comparative advantage in more female-intensive goods do indeed have a lower fertility rate. This suggests that the effect of trade liberalization on gender inequality in the labor market varies across countries. Liberalization will reduce gender inequality only in those countries that have a comparative advantage in female-intensive goods.

Capital intensity within sectors

The second study argues that what matters is the capital-intensity of different sectors [10]. It builds on the idea that capital-abundant countries will have a comparative advantage in capital-intensive sectors. Furthermore, because women have less physical strength, women’s labor productivity is more closely tied to the capital-intensity of production than men’s labor productivity. If capital-rich countries liberalize trade with poorer countries, production factors will reallocate toward the capital-intensive export sector. Because the contracting sectors are more labor intensive, capital per worker in the export sector will be diluted. This reduces women’s productivity more than men’s, which results in increased gender inequality in wages and employment. The empirical analysis shows that gender gaps in employment and wages in the US increased due to growing trade with Mexico. States closer to Mexico had greater growth of trade with Mexico between 1990/1991 and 2006/2007 and experienced a decline in the female share of employment and a rising gender wage gap, relative to states further away from Mexico.

Neither study investigates whether the reallocation of capital and workers is in line with their theoretical model, although this appears to be crucial for the predicted impact of trade on gender inequality. From other research we do know that trade liberalization does not always lead to a shift of production factors toward comparative advantage sectors or exporting firms. One study of 25 liberalization episodes in developing and transition economies found only a small and statistically weak increase in labor movements across manufacturing industries after liberalization [11]. It is not well understood what exactly limits labor movements, but potential explanations include restrictive labor regulation and domestic policies that counteract trade liberalization policies.

Brazil is an example of a country where trade liberalization did not lead to a reallocation of workers toward comparative advantage sectors or exporting firms. In Brazil, unilateral trade reforms that reduced import tariffs in the early 1990s reduced total employment in the tradable sector, with workers moving into unemployment, inactivity, and the non-tradable sector [12]. Even though tariff reductions were not systematically larger for more male-intensive industries, the employment effects on men were stronger than on women, which can be explained by the fact that the tradable sector as a whole is relatively male-intensive in Brazil [13].

In summary, it is clear that the sectoral pattern of trade matters for gender inequality effects of liberalization. But it is not clear to what extent production factors move into comparative advantage sectors, as we might expect based on the theory. This may vary across countries, depending on other domestic policies. Equally important, the impact of sectoral reallocation on gender inequality will depend on the substitutability of male and female workers, and the complementarity between male and female workers and capital.