New Zealand trade liberalisation, unemployment and real wages

Abstract

New Zealand embarked on major unilateral trade policy changes as part of the economic reform packages from 1984. Since that time there has been some evidence that unskilled wages have fallen relative to skilled workers wages. Popular criticism links the two causally by arguing that increased trade liberalisation has lead to this widening margin and affected the distribution of income. This study examines this hypothesis from two perspectives: the contribution that trade liberalisation after 1984 had on the appreciation of the real exchange rate reducing tradable sector profitability and employment and secondly, the effect trade liberalisation had on real wages of various skill groups given the factor intensities that prevail in the New Zealand economy. The results do not support the hypothesis. Trade liberalisation appears to have caused a depreciation of the real exchange rate as theory predicts, increasing employment in the tradeable sector. Furthermore, given that the exportable sector is more intensive in its use of unskilled labour, trade liberalisation appears to have increased the real wages of unskilled workers relative to skilled workers in New Zealand.