Trade liberalization impacts on labor market in Iran

For more than three decades Iran's labor market faced high unemployment rates and wage system problems. Economic inefficiency, social crisis, and wide income gaps are highly related to unemployment and labor wages. Giving export-led sectors an opportunity to enter the world markets can be an effective way to increase labor demand and labor wage in various export oriented sectors, which are generally quite labor intensive. In the recent decades, Iran's labor market has faced many challenges such as high unemployment and problems in wage system. The problems can lead to other problems such as crime, violence, and other social and political crises. This study is aimed at looking at the relationship between trade liberalization and labor market components i.e. the impact of free international trade (reduction in import tariffs and export subsidies) on export-led sectors, unemployment and wages in Iran. A large number of economists believe that trade liberalization could increase the demand for labor in developing countries. The Hechscher-Ohlin and Stopler-Samuelson theorems are the fundamentals for debates on the impacts of free trade on labor market components. There is a broad consensus that trade liberalization contributes to increase in labor wages compared to other production factor prices (Hill et al (2008); Green et al. (2002); Carneiro (2003); and Krueger (1983). A useful branch of CGE models namely GTAP, was used to simulate free trade policies with different scenarios to embody the gradual trade liberalization process in order to clarify the impacts of Iran joining the world's economy on its labor market. The post-simulation (percentages reduction in import tariffs and export subsidies) data showed that free trade increased the demand for labor in most of production sectors, and decreased in some sectors for all simulations. In short, study finds that the import tariff and export subsidy cuts simulation could lead higher employment rate in Iran in the long run. Furthermore, trade liberalization could lead to lower prices of overall goods and services and finally, trade liberalization seems to have positive impacts on the income distribution.

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