Academic journal article The Journal of Developing Areas

Trade and Labor Demand in an Emerging Market Economy: An Analysis for Indian Manufacturing during 1991-2010

Academic journal article The Journal of Developing Areas

Trade and Labor Demand in an Emerging Market Economy: An Analysis for Indian Manufacturing during 1991-2010

Article excerpt

ABSTRACT

The paper investigates into the impact of international trade on labor market in an emerging market economy. In specific, the paper estimates the impact of manufactured exports on demand for both production and non-production workers and employment elasticity for aggregate as well as disaggregated manufacturing in India during post reforms period. Econometric estimation is carried out for a panel data set comprising of fifteen disaggregated manufacturing industries for the period 1991 to 2010 using dynamic panel data estimation methods. The estimates show that exports have a positive impact on aggregate employment level and on employment elasticity for production as well as non-production workers in India's aggregate manufacturing. However, the effect of trade on employment elasticity varies across industries. Employment elasticity increases in those industries, where the growth rate of real wage declines or labor market is relatively flexible due to high growth of contract labor during post reforms years.

JEL Classifications: F16, F14, J23, J21, C23

Keywords: International Trade, Employment Elasticity, Dynamic Panel Data Analysis

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

The issue linking international trade and factor markets has assumed significance in emerging market economies like India with increasing participation of these economies in world trade. India's merchandise exports witnessed quantum growth during post reforms years accompanied by wide ranging changes in commodity composition towards more value-added manufactured exports.2 Such high growth in merchandise exports and changing commodity composition are likely to have immense implications for labor market outcomes in India. This paper investigates into the impact of international trade on aggregate labor demand and employment elasticity in aggregate as well as disaggregated manufacturing in India.

The theoretical trade literature, a la Heckscher-Ohlin and Stolper-Samuelson, shows that international trade favors the relatively abundant factor of the trading nations. In trade theory, free trade raises the consumption level in the trading countries which, in turn, increases the global demand for traded goods as well as generates employment opportunities. Indian economy witnessed quantum growth in export accompanied by the fluctuation in employment generation in the organized manufacturing sector in post liberalization period. Organized manufacturing employment grows at rate of 7.5% per annum from 2003-04 to 2007-08 (Goldar, 2011). However following Goldar (2011) and Upender (2011), faster expansion of private ownership in organized manufacturing sector causes this high growth. Following mainstream trade theory, in developing countries or emerging market economies, job loss in import competing industries consequent upon trade liberalization is compensated by job gain in export oriented industries. The impact on demand for goods as well as aggregate labor demand, however, may be uncertain. In case of labor-abundant emerging market economies, this uncertainty decreases as the export oriented industry is labor-intensive and import competing industry is capital- intensive. Further, trade liberalization aids overall employment opportunity through higher export growth and transfer of foreign capital from developed to emerging market economies. Export growth helps to utilize the excess capacity3 and to expand the domestic scale of production. Thus, in emerging market economies, exports can be expected to have a positive impact on employment and employment elasticity.

Among other empirical studies on employment elasticity, two important studies that deserve mention are Ghose (2000) and Goldar (2002). Developing countries, as Ghose (2000) finds, benefit from manufacturing trade with industrialized countries. For instance, employment elasticity in India's manufacturing increased during trade liberalization. …

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