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Adjustment to Trade Opening: The Case of Labor Share in India's Manufacturing Industry

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  • Gupta, Prachi

    (Asian Development Bank Institute)

  • Helble, Matthias

    (Asian Development Bank Institute)

Abstract

We study how manufacturing plants in India adjusted to trade liberalization during the period 1998–1999 to 2007–2008. We estimate how the labor share changed due to tariff reduction. Our results indicate that a decline in output tariffs led to an increase in the labor share of income. In contrast, a fall in input tariffs led to a decrease in the labor share. Controlling for factor intensity, we find that in technology-intensive and human capital resource-intensive sectors, both a decline in input and output tariff rates led to a decline in labor share. A fall in tariffs only led to an increase in labor share for labor-intensive and low-technology plants. Hence, India’s bias toward capital- and technology-intensive production explains the overall decline in labor share in the post reform period. Furthermore, the empirical results show that labor adjustment occurred more efficiently in Indian states with flexible labor laws.

Suggested Citation

  • Gupta, Prachi & Helble, Matthias, 2018. "Adjustment to Trade Opening: The Case of Labor Share in India's Manufacturing Industry," ADBI Working Papers 845, Asian Development Bank Institute.
    • Handle: RePEc:ris:adbiwp:0845
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    Cited by:

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    3. 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).
    4. 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.

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    More about this item

    Keywords

    trade reforms; labor share; India; manufacturing;
    All these keywords.

    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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