A CGE analysis of the impact of foreign direct investment and tariff reform on female and male wages

This study analyzes the impact on male and female wages of tariff reform and the reduction of regulatory barriers faced by domestic and foreign firms operating in business services. We apply the model to Tanzania and develop a dataset that distinguishes labor and wages by gender for 52 sectors and four skill categories. Our model is the first incorporating modern trade theory to assess the gender implications of trade reform. In particular, we address foreign direct investment in services, with Dixit-Stiglitz endogenous productivity effects from additional varieties in imperfectly competitive sectors. Policies that lower regulatory barriers in services bring about the entry of new (domestic or multinational) services firms. Given that our Dixit-Stiglitz framework results in productivity gains from additional varieties of services, we find that real wages increase across all worker categories. However, the increase of wages is higher for males than for females. This is because business services use males more intensively than females in their production. The most skilled (female and male) workers, who are also most intensively used in the business services sectors, are those who benefit more from the real increases in wages. This model illustrates that as this development process continues and developing countries become more business service oriented, these sectors demand more educated workers and their wages will increase relative to those of unskilled workers. The policy conclusion from this model is that it is crucial to invest in the education of females so their human capital increases and their skills are more marketable in business services and other more technologically modern occupations. Otherwise the wage gap between males and females would likely widen further.