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Trade liberalization and labor's slice of the pie: Evidence from Indian firms

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  • Ahsan, Reshad N.
  • Mitra, Devashish

Abstract

We examine the impact of trade reforms initiated in 1991 on labor's share in revenue among a sample of Indian firms. Theoretically, trade reforms will affect this share by reducing firm-level price–cost markups as well as the bargaining power of workers. A simple model suggests that these changes can have ambiguous effects on firm-level labor share and that the net effect of trade reforms will depend on the labor intensity of production. Using firm-level data from India, our empirical results suggest that trade liberalization led to an increase in labor's share in revenue for small, labor-intensive firms but a reduction in this share in the case of larger, less labor-intensive firms. These results are robust to controlling for alternative sources of heterogeneity and to the use of long-lagged tariffs as instruments. We also find that trade liberalization, on average, led to a decline in the bargaining power of workers.

Suggested Citation

  • Ahsan, Reshad N. & Mitra, Devashish, 2014. "Trade liberalization and labor's slice of the pie: Evidence from Indian firms," Journal of Development Economics, Elsevier, vol. 108(C), pages 1-16.
  • Handle: RePEc:eee:deveco:v:108:y:2014:i:c:p:1-16
    DOI: 10.1016/j.jdeveco.2013.12.011
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    3. Devashish Mitra, 2019. "Responses to Trade Opening: Evidence and Lessons from Asia," Working Papers id:12977, eSocialSciences.
    4. 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.
    5. Mertens, Matthias, 2020. "Labor market power and the distorting effects of international trade," International Journal of Industrial Organization, Elsevier, vol. 68(C).
    6. Mertens, Matthias, 2018. "Labour market power and the distorting effects of international trade," IWH Discussion Papers 18/2018, Halle Institute for Economic Research (IWH).
    7. Chakraborty, Pavel & Raveh, Ohad, 2018. "Input-trade liberalization and the demand for managers: Evidence from India," Journal of International Economics, Elsevier, vol. 111(C), pages 159-176.
    8. Fariha Kamal & Mary E. Lovely & Devashish Mitra, 2019. "Trade liberalisation and labour shares in China," The World Economy, Wiley Blackwell, vol. 42(12), pages 3588-3618, December.
    9. Leblebicioğlu, Asli & Weinberger, Ariel, 2021. "Openness and factor shares: Is globalization always bad for labor?," Journal of International Economics, Elsevier, vol. 128(C).
    10. Mertens, Matthias, 2019. "Labour market power and the distorting effects of international trade," IWH-CompNet Discussion Papers 2/2019, Halle Institute for Economic Research (IWH).
    11. Maiti, Dibyendu, 2019. "Trade, Labor Share, and Productivity in India's Industries," ADBI Working Papers 926, Asian Development Bank Institute.
    12. Pal, Rupayan & Rathore, Udayan, 2016. "Estimating workers’ bargaining power and firms’ markup in India: Implications of reforms and labour regulations," Journal of Policy Modeling, Elsevier, vol. 38(6), pages 1118-1135.
    13. Robert Z. Lawrence, 2015. "Recent Declines in Labor's Share in US Income: A Preliminary Neoclassical Account," NBER Working Papers 21296, National Bureau of Economic Research, Inc.
    14. Matthias Mertens, 2018. "Labor Market Power and the Distorting Effects of International Trade," Working Papers 2018.05, International Network for Economic Research - INFER.
    15. Jagannath Mallick, 2020. "Does Global Economic Integration affect Labour Income Share in India?," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 63(2), pages 291-309, June.
    16. Lawrence Robert Z., 2015. "Recent Declines in Labor's Share in U.S. Income: A Preliminary Neoclassical Account," Working Paper Series rwp15-034, Harvard University, John F. Kennedy School of Government.
    17. Bridgman, Benjamin, 2018. "Is Labor'S Loss Capital'S Gain? Gross Versus Net Labor Shares," Macroeconomic Dynamics, Cambridge University Press, vol. 22(8), pages 2070-2087, December.

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