Trade Openness and Labor Force Participation in Africa: The Role of Political Institutions*

• Author: Nabamita Dutta,Arusha Cooray,Sushanta Mallick
• Date: 01 April 2017
• Published date: 01 April 2017
• DOI: http://doi.org/10.1111/irel.12175

Trade Openness and Labor Force Participation in

Africa: The Role of Political Institutions*

ARUSHA COORAY, NABAMITA DUTTA, and SUSHANTA

MALLICK

Trade liberalization is usually expected to lead to greater economic activity

including higher labor force participation rates. Using data from forty-eight Sub-

Saharan African countries over the period 1985–2012, we explore the impact of

trade openness on labor force participation rates (LFPR), and examine how politi-

cal institutions such as democracy, political rights, and civil liberties can play a

role in driving this relationship in the above group of low-income countries. The

estimated marginal impact of openness on LFPR shows that LFPR is increasing

with the level of institutional quality. In particular, political institutions are critical

in enhancing the benefit from openness. Our conclusions are similar for male and

female participation rates although the magnitudes of the former are higher, thus

confirming that improving institutions can generate greater labor market benefits

from trade in poor countries.

Introduction

Higher labor force participation rates (LFPR) of men and women can signif-

icantly boost a country’s economic development, as it increases labor supply

and a country’s production capability. While high LFPR can increase a

nation’s potential output and promote economic growth, changes in LFPR in

the short term indicate changes in job-market trends and movements in the

business cycle. Greater external openness can lead to an expansion of the

traded-goods sector, generating new employment opportunities, including

increase in female or youth participation in the labor market. Moreover, in the

recent decades, the importance of institutions and education has also altered

the landscape of labor supply, which needs to be considered while examining

*The authors’affiliations are, respectively, University of Nottingham Malaysia Campus, Jalan Broga,

43500 Semenyih, Malaysia. E-mail: Arusha.Cooray@nottingham.edu.my; University of Wisconsin, La

Crosse, La Crosse, Wisconsin. E-mail: ndutta@uwlax.edu; Queen Mary University of London, London, UK.

E-mail: s.k.mallick@qmul.ac.uk. The authors are grateful to the editor and the two anonymous reviewers for

their very helpful comments. The usual caveat applies.

JEL: F10, F40, O11.

INDUSTRIAL RELATIONS, Vol. 56, No. 2 (April 2017). ©2017 Regents of the University of California

Published by Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington

Road, Oxford, OX4 2DQ, UK.

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the effect of the degree of openness. The average LFPR for Sub-Saharan

Africa (SSA) over the period 1985 to 2012 varies significantly across nations

(see Figure 1). While countries such as Tanzania and Equatorial Guinea have

high LFPR, Mali and Mauritania suffer from low participation rates. Accord-

ingly, we see variation in male labor force participation rate (MLPR) and

female labor force participation rate (FLPR) across these nations. What

explains this variation in LFPR across different SSA countries?

While attempts have been made to investigate the reasons for slow growth

in SSA (Collier and Gunning [1999] and Easterly and Levine [1997], to men-

tion a few), there are very few studies, if any, investigating labor market con-

ditions in SSA. Among other factors that can contribute to slow growth,

including low human capital, political instability, inefficient government

expenditure, rigid labor markets, narrow financial systems, and high levels of

ethnic fractionalization, Collier and Gunning (1999) have blamed Africa’s con-

trolled regime characterized by restricted international trade, tariffs, and export

taxes and quota impositions as an important factor. When a nation participates

more in the world trade and becomes more competitive, can it experience a

rise in LFPR? This is a key question that the present paper aims to explore.

How can trade openness affect the LFPR? Evidence has shown that coun-

tries that are more open, experience higher growth rates compared to those that

are closed (Ben-David 1996; Grossman and Helpman 1990; Romer 1990).

Studies also show that the steady increase in the volume of international trade

due to globalization has affected local labor markets and consequently the

0

10

20

30

40

50

60

70

80

90

100

LFPR

MLP

R

FLPR

FIGURE 1

LABOR FORCE PARTICIPATION RATES FOR A SUBSAMPLE OF SUB-SAHARAN AFRICAN COUNTRIES

NOTES:We consider average figures. Twenty countries are depicted here. These twenty countries

are the top ten and bottom ten countries in our sample sorted by average LFPR.

320 / ARUSHA COORAY,NABAMITA DUTTA AND SUSHANTA MALLICK

LFPR of both males and females in a number of countries (Cagaty and Berik

1990; Gaddis and Klasen 2012; Jonsson and Subramanian 2001).

1

Further, the

literature has pointed to the differential impacts that openness can have on

male and female LFPR (Gaddis and Klasen 2012; Jonsson and Subramanian

2001). Where males and females have different skills, globalization may lead

to increases in wage differentials, increasing the demand for female labor as

opposed to male, because it is cheaper (Anderson 2005; Cagaty and Berik

1990). By increasing competition, trade openness can also reduce the bargain-

ing power of workers, in particular female workers, if they are employed dis-

proportionally in low-wage sectors (Oostendorp 2009) or have lower levels of

education (Bhorat and Hodge 1999). Thus, we explore the impact of openness

on total, male, and female labor force participation rates, considering the role

of trade openness and the importance of education.

The influence of trade openness on the LFPR, however, may not be that

straightforward. There are a number of other factors that may influence the

impact of openness on the LFPR. In this paper, we focus on one such factor—

political institutions. As we can see in Figure 2, countries such as Mauritania

and Gabon suffer from low LFPR despite having high trade openness. This is

due to poor political institutions as evident from the figure. But Botswana and

Senegal have stronger institutions and thus can benefit from trade openness

and higher LFPR. The studies of Rodrik (1998) and Asiedu (2006) highlighted

the limits to what trade policy can achieve unless accompanied by other fac-

tors, including strong institutions. Similarly, Bhattacharyya, Dowrick, and Gol-

ley (2009) emphasized the complementarity between trade openness and

political institutions. The ability to take advantage of trade-induced technologi-

cal skills and knowledge, and to benefit from the linkages created by trade in

the form of increased exports, employment, and income therefore requires

well-developed institutions (Bigsten et al. 2000; Janson and Nordas 2004). An

examination of the Polity2 trends in Africa, compared to those of North Amer-

ica and Europe, indicates that while the number of autocracies and anocracies

has fallen over time in North America and Europe, in Africa the number of

anocracies has increased, which could have negatively influenced the effect of

trade openness on the LFPR (see Figures 3, 4, and 5).

We argue therefore that the higher the quality of institutions in a country,

the greater the positive effects of openness on LPFR. To the best of our

knowledge, this is the first paper to explore the interactive effect of trade

1

The LFPR can go up due to incentives granted to export oriented industries (Kabeer and Mahmud

2004) or due to a fall in the gender wage gap as a result of liberalization-induced change in sectoral struc-

ture of production (Thurlow 2006). On the other hand, if greater openness favors imports rather than

exports, then the LFPR can go down (Edwards 1999).

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