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Industrial Deregulation, Skill Upgrading, and Wage Inequality in India

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  • Rubiana Chamarbagwala

    ()
    (Indiana University Bloomington)

  • Gunjan Sharma

    ()
    (University of Missouri)

Abstract

We investigate the relationship between economic deregulation (delicensing), skill upgrading, and wage inequality during the 1980s and 1990s in India. We use a unique dataset on India's industrial licensing regime to test whether industrial deregulation during the 1980s and 1990s played a role in generating demand for skilled workers, as measured by the employment and wagebill shares of white-collar workers, and in raising the returns to skilled labor, as measured by the skill premium. Our analysis focuses not only on the difference between licensed and delicensed industries but also on the comparison of these differences during the 1980s, when India's external sector remained relatively closed to the world economy, and the 1990s, when India underwent massive liberalization reforms and became increasingly integrated with the global economy. We identify two main channels through which industrial delicensing affects the demand for skills and wage inequality: capital- and output-skill complementarities. Our analysis finds two important results. First, capital- and output-skill complementarities existed for firms in both licensed and delicensed industries but were stronger in delicensed industries both before and after 1991. The exception is output-skill complementarities with respect to the skill premium, where delicensed industries experienced lower output-skill complementarities compared to licensed ones both before and after 1991. Second, the contribution of industrial delicensing to both types of complementarities was considerably higher during the 1980s and much smaller after 1991. These results suggest that industrial delicensing benefited skilled labor via capital- and output-skill complementarities during the 1980s, the decade before India liberalized it's trade and investment regime. Thus, much of the increase in the demand for and returns to skill as a result of capital- and output-skill complementarities can be attributed to domestic reforms during the pre-1991 period in India.

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Bibliographic Info

Paper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2008-002.

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Length: 30 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:inu:caeprp:2008-002

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Keywords: Capital-skill complementarities; industrial delicensing; trade liberalization; India;

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  1. Prachi Mishra & Utsav Kumar, 2005. "Trade Liberalization and Wage Inequality: Evidence from India," IMF Working Papers 05/20, International Monetary Fund.
  2. Orazio Attanasio & Pinelopi Goldberg & Nina Pavcnik, 2003. "Trade Reforms and Wage Inequiality in Colombia," NBER Working Papers 9830, National Bureau of Economic Research, Inc.
  3. Eric Verhoogen, 2007. "Trade, quality upgrading and wage inequality in the Mexican manufacturing sector," Discussion Papers 0607-08, Columbia University, Department of Economics.
  4. Gordon H. Hanson, 2003. "What Has Happened to Wages in Mexico since NAFTA?," NBER Working Papers 9563, National Bureau of Economic Research, Inc.
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  7. Adrian Wood, 1995. "How Trade Hurt Unskilled Workers," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 57-80, Summer.
  8. Berman, Eli & Bound, John & Griliches, Zvi, 1994. "Changes in the Demand for Skilled Labor within U.S. Manufacturing: Evidence from the Annual Survey of Manufactures," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 367-97, May.
  9. Puja Vasudeva Dutta, 2005. "Accounting for Wage Inequality in India," PRUS Working Papers 29, Poverty Research Unit at Sussex, University of Sussex.
  10. Feenstra, Robert C. & Hanson, Gordon H., 1997. "Foreign direct investment and relative wages: Evidence from Mexico's maquiladoras," Journal of International Economics, Elsevier, vol. 42(3-4), pages 371-393, May.
  11. Nina Pavcnik, 2000. "What Explains Skill Upgrading in Less Developed Countries?," NBER Working Papers 7846, National Bureau of Economic Research, Inc.
  12. Robert Feenstra & Gordon Hanson, 2001. "Global Production Sharing and Rising Inequality: A Survey of Trade and Wages," NBER Working Papers 8372, National Bureau of Economic Research, Inc.
  13. Ann Harrison & Gordon Hanson, 1999. "Who Gains from Trade Reform? Some Remaining Puzzles," NBER Working Papers 6915, National Bureau of Economic Research, Inc.
  14. Gunjan Sharma, 2006. "Competing or Collaborating Siblings? Industrial and Trade Policies in India," Working Papers 0610, Department of Economics, University of Missouri.
  15. Cragg, Michael Ian & Epelbaum, Mario, 1996. "Why has wage dispersion grown in Mexico? Is it the incidence of reforms or the growing demand for skills?," Journal of Development Economics, Elsevier, vol. 51(1), pages 99-116, October.
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