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Wage–productivity differentials and Indian economic efficiency


  • Sahoo, Amarendra
  • ten Raa, Thijs


A frontier-general equilibrium analysis with skill transformation evaluates the productivities of skilled and unskilled labor and potential of the Indian economy. We compare the wages of skilled and unskilled labor between 1994 and 2002 with their respective productivities over this period. Education is considered to be responsible for the skill formation over this period: the change in skilled labor supply is endogenous in the model. Compared to its productivity, skilled labor is underpaid in the initial period and overpaid in the second period. Unskilled labor is underpaid in both periods. A decomposition exercise shows that skilled labor gains from free trade, and stands to lose due to education and domestic competition in the second period. The annualized rate of return to education is between 7 and 10%. The economy operates below its potential in both periods, particularly in the second—due to trade limitations and the failure to capture the return to education. Service sectors are found to have potential to grow significantly.

Suggested Citation

  • Sahoo, Amarendra & ten Raa, Thijs, 2012. "Wage–productivity differentials and Indian economic efficiency," Economic Modelling, Elsevier, vol. 29(2), pages 341-348.
  • Handle: RePEc:eee:ecmode:v:29:y:2012:i:2:p:341-348 DOI: 10.1016/j.econmod.2011.11.002

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    References listed on IDEAS

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    Cited by:

    1. Mishra, Vinod & Smyth, Russell, 2015. "Estimating returns to schooling in urban China using conventional and heteroskedasticity-based instruments," Economic Modelling, Elsevier, vol. 47(C), pages 166-173.

    More about this item


    Competitive pressure; Wage and productivity inequality; Efficiency; Returns to education; Frontier-general equilibrium analysis; Multiplicative decomposition; Skill formation; Trade efficiency;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • I20 - Health, Education, and Welfare - - Education - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East


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