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Distributional Effects of Trade Liberalisation on Wages in India

Author

Listed:
  • Nidhi Dhamija

Abstract

There is a high level of policy interest on the effect of trade liberalisation on inequality, especially in developing countries, because of their large vulnerable populations. India also initiated the process of liberalisation as a response to the severe balance of payments crisis of 1991. However, both rural and urban inequality has been increasing since the period 1993–1994, with urban inequality increasing at a higher rate. This study empirically examines the impact of trade openness on wage inequality using panel data for Indian states (separately for rural and urban areas). The results of this study indicate that trade openness does not lead to decrease in the wage inequality in the states and their rural areas. However, urban wage inequality is found to be increasing due to trade openness. These results are analysed and explained by various factors present in the Indian economy such as, skill biased technological changes; trade in intermediate goods; barriers to domestic labour mobility; and pattern and composition of India’s exports. An interesting aspect emerging is that higher education levels lead to increase in wage inequality as returns to education and inequality are increasing and the increase is also attributed to liberalisation. JEL Codes: F16, O18, C23

Suggested Citation

  • Nidhi Dhamija, 2025. "Distributional Effects of Trade Liberalisation on Wages in India," Foreign Trade Review, , vol. 60(1), pages 54-82, February.
    • Handle: RePEc:sae:fortra:v:60:y:2025:i:1:p:54-82
    DOI: 10.1177/00157325221126588
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    References listed on IDEAS

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    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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