A dynamic general equilibrium model for Malaysia: labour market and trade

This thesis investigates the effects of trade on the labour market in Malaysia. Specifically, we study the impact of a tariff cut in the motor vehicle industry on the different occupational wages and employment. Tariffs played an important role in Malaysia’s economic development; from an import-competing economy to an export-oriented economy. The literature on trade, wages and employment for Malaysia is limited because of inadequate occupational data to carry out econometric analysis. To fill this gap, we use a dynamic computable general equilibrium (CGE) model for the Malaysian labour market, MyAGE_LM to analyze the effects of a reduction in motor vehicle tariffs. CGE models have theoretical rigour and extensive analytical capabilities for carrying out policy analysis. This thesis contributes to the literature by (i) Introducing labour supply with nine different occupational groups into the dynamic CGE model for Malaysia and (ii) Analyzing a reduction in the motor vehicle tariff rate in Malaysia. The policy simulation is a 5 per cent cut in the motor vehicle tariff rate. To facilitate the analysis of the tariff cut, the MyAGE_LM model incorporates the labour market mechanism similar to that of Dixon and Rimmer (2003; 2008). The simulation results for the impact of the tariff cut on macroeconomic indicators, sectoral outputs and nine categories of occupational wages and employment are presented. The results are analyzed in terms of major model mechanisms. The macroeconomic results of the tariff cut indicate that in the short run, with the government aiming for revenue neutrality through increased labour taxes, there would be a small welfare gain. We also found that in the short run, exports fell despite real devaluation. So, the export sectors do not benefit in the short run. In the long run, aggregate real wages increase, and there is an economy-wide gain in GDP and aggregate consumption. The sectoral results revealed that most export-oriented industries would experience an increase in output. There are some evident effects on occupational wages and employment. The occupational group that stands out is the semi-skilled occupational group, SklAgriFish. This occupational group experienced the biggest decrease in vacancies. SklAgriFish occupations do well because no workers in this occupation are employed in the motor vehicle industry. Also, a significant proportion of SklAgriFish workers are hired in the export-oriented Agriculture industry, and the Agriculture industry sells to FoodBevTob (which does well in the long run because of real devaluation). The PlantMachOpr occupation does relatively well because a high proportion of these workers is employed in OthMachEquip industry (export-oriented and a winner from tariff cut in the long run). In general, from the MyAGE_LM policy simulation, we find that the tariff cut did not have a significant impact on the labour market. There are only small changes in average real wages and employment. We find damped labour supply effects in both the short and the long run. Semi-skilled occupations gain relative to skilled and unskilled workers. Skilled workers do not do well. They are mainly hired in non-traded industries that scarcely use imported motor vehicles