The Impact of Trade Liberalization on the Employment Level in Sri Lanka

Abstract

This paper examines the relationship between trade liberalization and employment level of Sri Lanka. Accordingly, the main objective of the study is to investigate the degree of relationship between trade liberalization and employment level of Sri Lanka. The secondary data were used to analyze the study problem during the 1990 – 2012 time period. Data published by the Department of Census and Statistics and the Central Bank of Sri Lanka were used. The behavior of major variables which are directly related to trade liberalization and employment were analyzed quantitatively. The present study has employed Ordinary Least Square method (OLS) to assess the multiple regression model. In assessing the effects of trade liberalization, empirical model mainly employed three independent variables, import penetration ratio, export intensity and weighted tariff rate, to disentangle the trade effects on employment with several control variables. Gross domestic product, capital labor ratio, foreign direct investments and real wage rate are the major control variables included in the empirical model. As the major finding of the study, it is concluded that one percent increase of export intensity increases the employment by 0.614 percent. Also, import penetration ratio has a significant negative effect on Sri Lankan’s total employment; one percent increase of import penetration ratio leads to 0.523 per cent reduction of country’s total employment. The regressor which is included to the model, weighted tariff rate, is not statistically significant. Statistically significant coefficient for capital-labor ratio indicates that one percent increase results to decrease employment by 0.437 percent.