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Trade Liberalization and Wage Inequality

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  • Prachi Mishra
  • Utsav Kumar

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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Bibliographic Info

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

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Length: 42
Date of creation: 01 Jan 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/20

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Keywords: Economic models; wage; wages; trade liberalization; unskilled workers; wage differentials; tariff reductions; nontariff barriers; trade reforms; tariff rates; impact of trade; average tariff; import penetration; tariff rate; tariff reduction; fixed capital formation; tariff changes; trade reform; average tariff rates; impact of trade liberalization; skilled workers; reduction in tariffs; changes in trade; political economy; trade protection; tariff barriers; trade barriers; wage structure; metal products; tariff data; factor markets; impact of trade reforms; average tariffs; trade data; tariff structure; effects of trade liberalization; international trade; imperfect competition; global competitiveness; balance of payments; quantitative restrictions; measure of trade; non-tariff barriers; balance of payments crisis; tariff formation; dispute settlement; bargaining power; trade union; trade shocks; trade liberalizations; intermediate goods; perfect competition; wage bargaining; nontariff barrier; freer trade; wage level; trade liberalization process; wage discrimination; wage levels; trade regime; average tariff rate; import-substitution industrialization; import substitution; reducing trade barriers; competitive product; dispute settlement mechanisms;

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References

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  1. Harrison, Ann & Hanson, Gordon, 1999. "Who gains from trade reform? Some remaining puzzles," Journal of Development Economics, Elsevier, vol. 59(1), pages 125-154, June.
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  3. Orazio Attanasio & Pinelopi Goldberg & Nina Pavcnik, 2003. "Trade Reforms and Wage Inequiality in Colombia," NBER Working Papers 9830, National Bureau of Economic Research, Inc.
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  6. Petia Topalova, 2004. "Trade Liberalization and Firm Productivity," IMF Working Papers 04/28, International Monetary Fund.
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  8. 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.
  9. Gene M. Grossman, 1982. "International Competition and the Unionized Sector," NBER Working Papers 0899, National Bureau of Economic Research, Inc.
  10. 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.
  11. Krishna, Pravin & Mitra, Devashish, 1998. "Trade liberalization, market discipline and productivity growth: new evidence from India," Journal of Development Economics, Elsevier, vol. 56(2), pages 447-462, August.
  12. Nina Pavcnik & Andreas Blom & Pinelopi Goldberg & Norbert Schady, 2004. "Trade Liberalization and Industry Wage Structure: Evidence from Brazil," World Bank Economic Review, World Bank Group, vol. 18(3), pages 319-344.
  13. Noel Gaston & Daniel Trefler, 1994. "Protection, trade, and wages: Evidence from U.S. manufacturing," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 47(4), pages 574-593, July.
  14. 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.
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Citations

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Cited by:
  1. Bernard Hoekman & Alan L. Winters, 2005. "Trade and Employment: Stylized Facts and Research Findings," Working Papers 7, United Nations, Department of Economics and Social Affairs.
  2. 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.
  3. Mehtabul Azam, 2007. "India’s Increasing Skill Premium: Role of Demand and Supply," Departmental Working Papers 0710, Southern Methodist University, Department of Economics.
  4. Azam, Mehtabul, 2009. "Changes in Wage Structure in Urban India 1983-2004: A Quantile Regression Decomposition," IZA Discussion Papers 3963, Institute for the Study of Labor (IZA).
  5. 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.
  6. Harris, Richard G. & Robertson, Peter E., 2013. "Trade, wages and skill accumulation in the emerging giants," Journal of International Economics, Elsevier, vol. 89(2), pages 407-421.
  7. Pinelopi Koujianou Goldberg & Nina Pavcnik, 2007. "Distributional Effects of Globalization in Developing Countries," NBER Working Papers 12885, National Bureau of Economic Research, Inc.
  8. Chamarbagwala, Rubiana, 2006. "Economic Liberalization and Wage Inequality in India," World Development, Elsevier, vol. 34(12), pages 1997-2015, December.
  9. Akhter, Naseem & Ali, Amanat, 2007. "Does Trade Liberalization Increase the Labor Demand Elasticities? Evidence from Pakistan," MPRA Paper 3881, University Library of Munich, Germany.
  10. repec:onb:oenbwp:y:2009:i:1:b:1 is not listed on IDEAS
  11. Munshi, Farzana, 2006. "Does openness reduce wage inequality in developing countries? A panel data analysis," Working Papers in Economics 241, University of Gothenburg, Department of Economics, revised 06 Feb 2008.
  12. Arslan Razmi, 2007. "Integration, Informalization, and Income Gaps in Developing Countries: Some General Equilibrium Explorations in Light of Accumulating Evidence," UMASS Amherst Economics Working Papers 2007-06, University of Massachusetts Amherst, Department of Economics.

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