Trade Liberalisation, Exit, and Output and Employment Adjustments of Australian Manufacturing Establishments

22 Pages Posted: 24 Jan 2011

See all articles by Alfons Palangkaraya

Alfons Palangkaraya

Centre for Transformative Innovation, Faculty of Business and Law, Swinburne University of Technology

Jongsay Yong

University of Melbourne - Melbourne Institute: Applied Economic & Social Research

Date Written: January 15, 2011

Abstract

This paper investigates three potential sources of Australia's manufacturing productivity gains from trade liberalisation in the mid-1990s: the exit of inefficient establishments, economies of scale, and the reduction in x-inefficiency via employment reduction. We use manufacturing establishment level data and exploit the intersectoral variation in the effective rates of assistance (ERA) to see how businesses adjusted to trade liberalisation during the period. We find the documented productivity gains to be mostly accounted for by the reduction in x-inefficiency through employment shedding in industries experiencing a high degree of trade liberalisation. We find little evidence that the exit of inefficient establishments in highly liberalised industries contributes to productivity gains. In fact, we find that the more productive establishments are more likely to exit, perhaps reflecting product switching by these businesses to make more profitable use of inputs. Similarly, there does not appear to be a strong relationship between the extent of trade liberalisation and output adjustments. However, we do find indicative evidence of an overall productivity-enhancing effect through economies of scale. These findings suggest that, at least for the case of Australia, the ease of making employment adjustments can be crucial for policies such as trade liberalisation to have the desired effect. In addition, trade liberalisation may provide incentives for domestic producers to seek more profitable use of their inputs and to move further downward along their cost curves. We think further studies assessing the productivity gains from product switching and economies of scale effects in both liberalised and non-liberalised industries and focusing on the interplay between labour market policy and firm adjustments would be valuable.

Suggested Citation

Palangkaraya, Alfons and Yong, Jongsay, Trade Liberalisation, Exit, and Output and Employment Adjustments of Australian Manufacturing Establishments (January 15, 2011). The World Economy, Vol. 34, No. 1, pp. 1-22, 2011, Available at SSRN: https://ssrn.com/abstract=1745805 or http://dx.doi.org/10.1111/j.1467-9701.2010.01274.x

Alfons Palangkaraya

Centre for Transformative Innovation, Faculty of Business and Law, Swinburne University of Technology ( email )

AGSE Building
Room 117
Hawthorne, Victoria 3121
Australia
+61392145826 (Phone)

Jongsay Yong

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia
+613-83445354 (Phone)
+613-83445630 (Fax)

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