Does Trade liberalization widen Residual Wage Gap in Pakistan? A Sectoral Perspective

Abstract

Between 1988 and 2005, Pakistan's trade policy saw significant transformations. This study examines the impact of trade liberalization (TL) on the residual wage gap (RWG) across manufacturing sectors, utilising micro-level datasets of Pakistan from 1990 to 2005. Neoclassical theory posits that TL enhances external competitiveness in developing nations, resulting in a reduction of the gender pay gap. The advantageous impact of TL on the RWG is illustrated using a two-step estimation method. Initially, we employ the methodologies of Oaxaca (1973) and Blinder (1973) to ascertain the RWG at sectoral levels. Subsequently, we utilise Fixed Effect (FE) and Random Effect (RE) models. The overall findings indicate a correlation between TL (measured by the fall in import tariffs) and RWG. TL is closely associated with the widening residual pay disparities across various sectors in Pakistan. The government should consider that new long-term plans must positively respect the TL.