Do Trading Partners Matter for Labour Market Inequality? The Malaysian Case

This study examines the differential impact of major bilateral trade flows on labour market inequality for the period 1983 to 2000. The focus is on the key trading partners of Malaysia, which are the Association of the Southeast Asian Nations (ASEAN), the United States of America and Japan. The paper finds that the direction of trade or rather the “whom” aspects of trade matter for inequality trends. There are striking differences on the labour market when export destinations are considered relative to import sources. The results suggest that an expansion in exports to countries that are relatively skilled labour abundant causes greater product market competition, thereby increasing the demand for skilled labour vis-a-vis unskilled labour in the domestic market. Inequality outcomes however do not differ with import source, as there is a general dampening effect of import expansion on the former in the short- and long run. The results clearly do not lend support to the widespread belief that imports from countries that are relatively skilled labour abundant reduce labour market inequality