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Adjustment to trade opening: The case of labor share in India's manufacturing industry

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  • Prachi Gupta
  • Matthias Helble

Abstract

While trade opening is generally welfare enhancing, it requires a reallocation of capital and labor across sectors and firms. The empirical evidence on how this reallocation works is still relatively thin. Our paper contributes to this literature by studying how the labor’s share of income adjusted due to trade liberalization in India’s formal manufacturing sector during the period 1998–99 to 2007–08. Our baseline model suggests that a fall in output tariffs led to an increase in the labor share while a fall in input tariffs brought about a decrease in labor share. However, once we control for factor and technology intensity of production, we find that this differential impact of tariff reduction on labor share aligns with these classifications. Tariff liberalization led to a decline in labor share in technology and capital-intensive sectors while in labor-intensive and low-tech sectors it brought about an increase. This suggests that following trade opening, demand for labor improved in labor-intensive and low-tech sectors but deteriorated in capital-intensive and high-tech sectors. India’s manufacturing bias towards the latter explains the overall decline in labor share in the post-reform period. Furthermore, we find that labor adjustment occurred more efficiently in states with flexible labor laws.

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  • Prachi Gupta & Matthias Helble, 2022. "Adjustment to trade opening: The case of labor share in India's manufacturing industry," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 31(1), pages 109-135, January.
    • Handle: RePEc:taf:jitecd:v:31:y:2022:i:1:p:109-135
    DOI: 10.1080/09638199.2021.1949379
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    Cited by:

    1. Weilin Liu, 2022. "Did Trade Liberalization Boost Total Factor Productivity Growth in Manufacturing in India in the 1990s?," International Productivity Monitor, Centre for the Study of Living Standards, vol. 43, pages 110-139, Fall.
    2. Dibyendu Maiti, 2019. "Trade, Labor Share, and Productivity in India’s Industries," ADB Institute Series on Development Economics, in: Gary Fields & Saumik Paul (ed.), Labor Income Share in Asia, chapter 0, pages 179-205, Springer.
    3. Leblebicioğlu, Asli & Weinberger, Ariel, 2021. "Openness and factor shares: Is globalization always bad for labor?," Journal of International Economics, Elsevier, vol. 128(C).
    4. Mertens, Matthias, 2019. "Micro-mechanisms behind declining labour shares: Market power, production processes, and global competition," IWH-CompNet Discussion Papers 3/2019, Halle Institute for Economic Research (IWH).

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    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F66 - International Economics - - Economic Impacts of Globalization - - - Labor
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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