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Trade Liberalization and Wage Inequality: Evidence from India

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Author Info
Prachi Mishra
Utsav Kumar

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Abstract

We evaluate empirically the impact of the dramatic 1991 trade liberalization in India on the industry wage structure. The empirical strategy uses variation in industry wage premiums and trade policy across industries and over time. In contrast to earlier studies on developing countries, we find a strong, negative, and robust relationship between changes in trade policy and changes in industry wage premiums over time. The results are consistent with liberalization-induced productivity increases at the firm level, which get passed on to industry wages. Since tariff reductions were proportionately larger in sectors that employ a larger share of unskilled workers, the increase in wage premiums in these sectors implies that unskilled workers experienced an increase in their relative incomes. Thus, our findings suggest that trade liberalization has led to decreased wage inequality in India.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/20.

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Length: 42 pages
Date of creation: 04 Feb 2005
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Handle: RePEc:imf:imfwpa:05/20

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Keywords: Trade liberalization ; India ; Wages ; Economic models ;

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  1. Petia Topalova, 2004. "Trade Liberalization and Firm Productivity: The Case of India," IMF Working Papers 04/28, International Monetary Fund. [Downloadable!]
  2. Zadia M. Feliciano, 2001. "Workers and trade liberalization: The impact of trade reforms in Mexico on wages and employment," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 55(1), pages 95-115, October.
  3. Attanasio, Orazio & Goldberg, Pinelopi K. & Pavcnik, Nina, 2004. "Trade reforms and wage inequality in Colombia," Journal of Development Economics, Elsevier, vol. 74(2), pages 331-366, August. [Downloadable!] (restricted)
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  4. Revenga, Ana, 1997. "Employment and Wage Effects of Trade Liberalization: The Case of Mexican Manufacturing," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S20-43, July. [Downloadable!] (restricted)
  5. Pravin Krishna & Devashish Mitra, . "Trade Liberalization, Market Discipline and Productivity Growth: New Evidence From India," Working Papers 96-8, Brown University, Department of Economics. [Downloadable!]
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  6. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March. [Downloadable!] (restricted)
  7. F. Zilibotti & P. Aghion & R. Burgess, 2004. "The Unequal Effects of Trade Liberalization: Theory and Evidence from India," 2004 Meeting Papers 40, Society for Economic Dynamics.
  8. Gene M. Grossman, 1984. "International Competition and the Unionized Sector," Canadian Journal of Economics, Canadian Economics Association, vol. 17(3), pages 541-56, August. [Downloadable!] (restricted)
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  9. Nina Pavcnik & Andreas Blom & Pinelopi Goldberg & Norbert Schady, 2004. "Trade Liberalization and Industry Wage Structure: Evidence from Brazil," World Bank Economic Review, Oxford University Press, vol. 18(3), pages 319-344.
  10. Pavcnik, Nina, 2002. "Trade Liberalization, Exit, and Productivity Improvement: Evidence from Chilean Plants," Review of Economic Studies, Blackwell Publishing, vol. 69(1), pages 245-76, January.
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  11. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mehtabul Azam, 2007. "India’s Increasing Skill Premium: Role of Demand and Supply," Departmental Working Papers 0710, Southern Methodist University, Department of Economics. [Downloadable!]
    Other versions:
  2. Poonam Gupta, 2008. "What Constrains Indian Manufacturing," Working Papers id:1597, esocialsciences.com. [Downloadable!]
    Other versions:
  3. Arslan Razmi, 2009. "Can the HOSS framework help shed light on the simultaneous growth of inequality and informalization in developing countries?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 145(2), pages 361-372, July. [Downloadable!] (restricted)
  4. Hoekman & Bernard & Winters, L. Alan, 2005. "Trade and employment : stylized facts and research findings," Policy Research Working Paper Series 3676, The World Bank. [Downloadable!]
    Other versions:
  5. Fatma El-Hamidi, 2007. "The Effect of Trade Liberalization on Industrial Segregation and Wage Determination: Evidence from Egypt," Working Papers 341, University of Pittsburgh, Department of Economics, revised Feb 2008.
  6. Pinelopi Koujianou Goldberg & Nina Pavcnik, 2007. "Distributional Effects of Globalization in Developing Countries," NBER Working Papers 12885, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Munshi, Farzana, 2006. "Does openness reduce wage inequality in developing countries? A panel data analysis," Working Papers in Economics 241, Göteborg University, Department of Economics, revised 06 Feb 2008. [Downloadable!]
  8. Akhter, Naseem & Ali, Amanat, 2007. "Does Trade Liberalization Increase the Labor Demand Elasticities? Evidence from Pakistan," MPRA Paper 3881, University Library of Munich, Germany. [Downloadable!]
  9. Arslan Razmi, 2007. "Integration, Informalization, and Income Gaps in Developing Countries: Some General Equilibrium Explorations in Light of Accumulating Evidence," Working Papers 2007-06, University of Massachusetts Amherst, Department of Economics. [Downloadable!]
  10. Donald R. Davis & Prachi Mishra, 2007. "Stolper-Samuelson Is Dead: And Other Crimes of Both Theory and Data," NBER Chapters, in: Globalization and Poverty, pages 87-108 National Bureau of Economic Research, Inc. [Downloadable!]
  11. Rubiana Chamarbagwala & Gunjan Sharma, 2008. "Industrial Deregulation, Skill Upgrading, and Wage Inequality in India," Caepr Working Papers 2008-002, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington. [Downloadable!]
  12. Mehtabul Azam, 2008. "Changes in Wage Structure in Urban India, 1983-2004: A Quantile Regression Decomposition," Departmental Working Papers 0807, Southern Methodist University, Department of Economics. [Downloadable!]
    Other versions:
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