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Trade policy and wage inequality: evidence from Indian manufacturing

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  • Kunal Sen

Abstract

Purpose - There has been a period of slow but a steady increase in wage inequality in the Indian manufacturing sector since the mid-1980s, which has gone hand-in-hand with an increase in the relative employment of skilled workers across all industries in the same period. The purpose of this paper is to investigate whether the co-movement of relative employment and wages of skilled workers can be attributed to the changes in trade policy that has occurred in the Indian economy since the mid-1980s. Design/methodology/approach - The two dominant theoretical perspectives on why trade reforms lay lead to wage inequality are Heckscher–Ohlin theory and trade-induced skill-biased technological change (SBTC). The paper evaluates the applicability of these theoretical perspectives to the Indian case using disaggregated industry data from Findings - Evidence was found of the validity of both the two dominant theoretical perspectives on wage inequality to explain the co-movement in wage inequality and relative skill intensity in Indian manufacturing, with both variables increasing in the 1990s. Trade-induced technological progress has led to an increase in relative skill intensity and wage inequality within industries. At the same time, the decline in protection that seems to have occurred more in unskilled labour-intensive industries has led to a relative fall in the economy-wide return to unskilled labour relative to skilled labour. Therefore, trade reforms have led to a widening of wage gap between skilled and unskilled workers, and an increase in relative skill intensity in Indian manufacturing. Originality/value - The paper contributes to support of the trade-induced SBTC hypothesis which may provide a consistent explanation of why many countries in the south experienced increases in wage inequality with the onset of trade liberalisation.

Suggested Citation

  • Kunal Sen, 2008. "Trade policy and wage inequality: evidence from Indian manufacturing," Indian Growth and Development Review, Emerald Group Publishing, vol. 1(2), pages 147-171, September.
  • Handle: RePEc:eme:igdrpp:v:1:y:2008:i:2:p:147-171
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    Citations

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    Cited by:

    1. Furuta, Manabu, 2016. "Trade Liberalization and Wage Inequality in the Indian Manufacturing Sector," MPRA Paper 73709, University Library of Munich, Germany.
    2. Manabu Furuta & Prabir Bhattacharya & Takahiro Sato, 2017. "Effects of Trade Liberalization on the Gender Wage Gap: Evidences from Panel Data of the Indian Manufacturing Sector," Discussion Paper Series DP2017-22, Research Institute for Economics & Business Administration, Kobe University, revised Mar 2018.

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