Academic journal article Indian Journal of Economics and Business

Trade Liberalization, Wage Discrimination and Inequalities in Indian Manufacturing Industry

Academic journal article Indian Journal of Economics and Business

Trade Liberalization, Wage Discrimination and Inequalities in Indian Manufacturing Industry

Article excerpt

Abstract

The paper aims to examine the effect of trade liberalization on wage discrimination (by capital / labor ratio) and wage inequalities by presenting an empirical analysis for Indian manufacturing industry group during the period 1991-92 to 2007-08. The findings of the study reveal that wages have increased at a lower rate as compared to exports and imports in all manufacturing industries during the postreform period. Out of all the 23 industries considered, capital intensive industries, followed by labor intensive, intermediate capital intensive and ultra labor intensive constituted high share in exports, imports and wages during the study period. Interindustry analysis reveals that exports exert positive and non-significant influence on wages at all three points of time while imports exert negative and significant impact on wages at all three points of time. X/S, M/S and T/S negatively and non-significantly affects wage inequalities thus indicating that trade liberalization has reduced wage inequality but non-significantly. Thus there is a need to increase more exports so as to increase employment and wages in manufacturing industry group. Downward pressure on wages due to import competition should be curtailed. Import liberalization policy should be such that if it increases the imports, these increased imports should be used to increase the domestic production in home market rather than act as competitors to domestic market and hamper the production and wages of domestic industries.

I. INTRODUCTION

Since times of David Ricardo (1870), trade has always been considered as a major force driving economic growth of a country. The Heckscher-Ohlin-Samuelson (H-O-S) model investigates the effects of trade openness on wage inequalities and predicts that under certain assumptions, trade leads to reduction in wage inequalities in developing countries via the 'Stopler-Samuelson Effect' (Stopler and Samuelson, 1947). This effect suggests that for a given technology, trade and wages are linked through the changes in relative prices of skilled and unskilled labor intensive products. Openness to trade leads to reduction in wage inequalities in unskilled labor-intensive developing countries by raising the relative price of unskilled labor-intensive products with a consequent increase in unskilled labor wages. However, empirical evidence is mixed and inconclusive. In East Asia, openness reduces wage inequalities (Wood, 1997). While in Latin American countries, openness contribute to an increase in wage inequalities (Bayer et al. 1999 in Chile; Gilani and Sanguinetti, 2003 in Argentina; Attanasio et al. 2004, in Colombia). Evidence for India suggest that there is a positive relationship between trade liberalization and wage inequalities (Dutta, 2004). Mishra and Kumar (2005) find that openness has reduced skill-wage premium and wage inequalities. Berman, Somananthan and Tan (2005) found that skill-wage share accelerated in 1990 but change in capital-skill complementarity alone explained very little of the acceleration. Output growth contributed to acceleration in skill-wage bill share. Capital-skill complementarity in Indian manufacturing increased in 1990s to level comparable to the US in 1960 and 1970.

Considering this, the paper adds to the literature on trade liberalization and wage discrimination (by capital/labor ratio) and wage inequalities by presenting an empirical analysis for Indian manufacturing industry group during the period 1991-92 to 2007-08. Accordingly, the paper has been divided into five sections including introduction. Section II deals with trends in trade and wage performance for these categories; Section III discusses impact of trade liberalization on wage discrimination; Section IV assesses impact of trade liberalization on wage inequalities. Conclusions have been given in Section V.

In order to study the impact of trade liberalization on wage discrimination and wage inequalities, data of public sector companies (mostly of Central Government Public Sector Enterprises), the private sector co-operatives and joint sector companies have been taken from CMIE. …

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