The impact of Trade Liberalisation on Formal Sector Employment in Ghana

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This research paper derives a simple econometric model of employment determination and employs the technique of Ordinary Least Squares (OLS) linear regression to empirically investigate the principal factors affecting formal sector employment in Ghana for the period 1970-2002 before and after the introduction of the trade liberalization programme in Ghana under the Economic Recovery Programme (ERP)., Theoretical foundations were established to ensure that results obtained could be interpreted within conventional research requirements. Following an empirical analysis of trade liberalization and employment, the paper attempts to validate the findings for the survey periods. A basic model of non-trade variables are first used to determine their individual and joint effect on formal sector employment. Subsequently, trade variables are introduced to augment the basic model. The empirical results corroborate the model, with the effect that trade policy variables play an important role in the determination of formal sector employment in Ghana. All trade variables namely average tariff, exchange rate and openness (except liberalization dummy) show the expected signs in the regressions and are all statistically significant at the conventional levels in all the trials. Contrary to arguments in some quarters, the study reveals that trade liberalization is not responsible for the low level of formal sector employment in the country, as this argument could not be supported by the data available and the results of our empirical study. The study has shown that the net impact of trade liberalization on formal sector employment in Ghana has been positive in spite of adjustment costs associated with it and reduction in employment in the import substitution industries. The main conclusion that can be drawn from our empirical analysis is that, the poor performance in formal sector employment cannot be attributed to trade liberalization policy but could be due to some macroeconomic fundamentals and other policy shifts. These other factors among other things may include the retrenchment and redeployment of workers from the public sector and parastatal organizations; the divestiture of state-owned enterprises; the slow response of the private sector and new investment to the new policy changes; the low labour absorptive capacity of the new firms despite the policy changes.
A thesis submitted to the Department of Economics, Kwame Nkrumah University of Science and Technology, Kumasi, in partial fulfillment of the requirements for the award of Master of Arts (Economics) degree, 2008