Manufacturing tariff liberalisation and the sectoral reallocation of employment in local labour markets: evidence from South Africa

This paper examines the impact of trade liberalisation on the sectoral reallocation of workers, particularly from manufacturing to services. It empirically assesses this relationship using local labour market level data for South Africa, a country that experienced significant reductions in manufacturing tariff protection and declining shares of manufacturing in employment from 1996 to 2011. The empirical analysis draws on population census data covering 234 municipalities fors 1996, 2001 and 2011. Contrary to expectations, employment in both the services and manufacturing sectors grew more slowly in municipalities where manufacturing workers faced large reductions in tariffs. We demonstrate that the relative decline in services employment was, in part, driven by negative spillover effects arising from lower derived demand for services inputs, income and infrastructure investment linked to the weaker growth in manufacturing from tariff reductions. These spillover effects diminished the absorption of labour by the services sector and contributed towards declining participation in the labour force in municipalities where manufacturing workers were exposed to large reductions in tariff protection relative to other municipalities. Tariff reductions have a stronger effect on the employment of women in manufacturing, while the adverse spillover effects on service employment are stronger for men.