Trade Liberalization and Wage Inequality: Evidence From India
IMF Working Papers, January 1, 2005
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Bibliographic details
- Authors: Prachi Mishra, Utsav Kumar
- Published: January 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451860399.001
Summary and main findings
- Evaluates empirically the impact of the 1991 trade liberalization in India on the industry wage structure.
- Uses variation in industry wage premiums and trade policy across industries and over time.
- Finds a strong, negative, and robust relationship between changes in trade policy and changes in industry wage premiums over time.
- Results are consistent with liberalization-induced productivity increases at the firm level that get passed on to industry wages.
- Because tariff reductions were proportionately larger in sectors that employ a larger share of unskilled workers, the increase in wage premiums in these sectors implies that unskilled workers experienced an increase in their relative incomes.
- Conclusion: trade liberalization has led to decreased wage inequality in India.
Methodology and empirical strategy
- Empirical strategy leverages variation across industries and over time in:
- industry wage premiums
- trade policy (tariff changes and related measures)
- Compares industry-level changes in wage premiums with industry-level changes in trade policy to identify effects of liberalization.
Interpretation and mechanisms
- The negative relationship between changes in trade policy and changes in industry wage premiums is interpreted as reflecting:
- productivity increases at the firm level induced by liberalization
- transmission of firm-level productivity gains into higher industry wages
- Distributional implication hinges on the cross-sectoral pattern of tariff reductions:
- sectors with larger tariff cuts tended to employ a larger share of unskilled workers
- wage premium increases in those sectors raised unskilled workers’ relative incomes
Keywords and subject focus
- Subject: Tariffs, Trade barriers, Trade liberalization, Wage adjustments, Wages
- Keywords: coverage ratio, industry indicator, industry wage difference, trade policy, wage premium, WP
Publication metadata (from source)
- Authors: Prachi Mishra, Utsav Kumar
- Date: January 1, 2005
- Series: Working Paper No. 2005/020
- Issue: 020
- Pages: 42
- ISBN: 9781451860399
- ISSN: 1018-5941
- DOI: https://doi.org/10.5089/9781451860399.001
IMF Working Paper — Prachi Mishra and Utsav Kumar (January 1, 2005).