Economic Globalization and Labor Productivity: An Application of Autoregressive Distributed Lag (ARDL) Bounds Testing Approach

Abstract

This paper has implemented the Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration to explore the long-run and short-run relationships amongst the variables: labor productivity, economic globalization, and capital intensity in Jordan as a case study over the period 1980 to 2010. The empirical evidence suggests that capital intensity is beneficial to labor productivity in the short-run and long-run. Whereas economic globalization is found to have a positive and a highly significant influence on labor productivity in the long-run, but this influence is found to be negative in the short-run. The contradiction between these two effects of economic globalization may be due to the fact that globalization may bring about the upgrading of skills through the importation or adoption of superior production technology and innovation, which usually needs a longer time. The equilibrium correction coefficient (ECM (-1)) estimated (-0.25900) is highly significant (1% level) and has the correct sign. It shows that the system corrects its last period disequilibrium (the speed of adjustment to restore equilibrium in the dynamic model) by approximately 26% a year; i.e. about 26% of disequilibria from the previous year's shock converge back to the long-run equilibrium in the current year, which may be considered a fairly high speed of adjustment to equilibrium after a shock. The highly significant error correction term confirms the existence of long-run relationship. Since economic globalization is found to play a supporting role in enhancing the Jordanian labor productivity in the long-run, a policy suggestion for enhancing labor productivity in Jordan will be through encouraging and enhancing inflow of foreign direct investment, transfer of technology, and economic openness.