Labour Demand and Trade in South Africa: A Dynamic Panel Analysis

This paper contributes to the debate over the effect of trade on the demand for labour in the manufacturing sector in South Africa. Previous work in the area has decomposed employment to find the likely contribution of trade effects, has investigated the correlation between employment and trade, and has used fixed effects panel data models. This paper develops the earlier work, by estimating a labour demand equation using dynamic panel data method of Arellano and Bond (1991). This leads to results that are consistent with the findings of decomposition analysis that trade has had a positive effect on employment 1972-93, but that there has been a negative effect since 1993, the period of trade liberalisation. There is no evidence that the effects of trade are distributed unevenly between skills, when proxied by racial groups. Overall, the results show the importance of trying to model the dynamics of the processes at work and suggest that further work at the level of the company as well as the industry is likely to be important.