The Impact of International Trade on Employment Generation : A Sri Lankan Experience

Unemployment is a common macroeconomic problem in developing countries. With lower per capita income and higher population growth, developing countries face a key issue of generating adequate employment opportunities to newly entered laborers to the labor force. The main objective of this study is to investigate the impact of trade openness on employment level of Sri Lanka. The study mainly used secondary data published by the Department of Census and Statistics and the Central Bank of Sri Lanka for the 1990-2012 time period and analyzed the behavior of key variables which impact on employment level quantitatively. The Ordinary Least Square method (OLS) in multiple regression is employed to achieve the research objective. Trade effect on employment is assessed by employing three independent variables, import penetration ratio, export intensity and weighted tariff rate, in the empirical model. In addition to that Gross domestic product, capital labor ratio, foreign direct investments and real wage rate are identified as the major control variables and included in the empirical model. The study found a positive association between export intensity and employment level indicating that higher export intensity increase the employment level of Sri Lanka. Import penetration ratio shows a significant negative effect on Sri Lankan's total employment during the study period