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Trade Liberalization and Labour Market Dynamics: Evidence from India

Author

Listed:
  • Aaheli Ahmed

    (Indian Institute of Foreign Trade (IIFT))

  • Debashis Chakraborty

    (Indian Institute of Foreign Trade)

  • Sakshi Aggarwal

    (Infogain)

Abstract

The current paper develops a general equilibrium framework containing features of both the specific factor and the Hechsher-Ohlin models of trade to investigate the impact of trade liberalization on the wage rates of the workers. The theoretical results underline that reduction of tariff in a capital-intensive importing sector raises wages of both the skilled and the unskilled workers in an economy in the presence of intra-industry factor reallocation, followed by an expansion of the other sectors. Applying the two-stage least squares (2SLS) method of estimation, the empirical validation of the theoretical construct is carried out for India over 2000-01 to 2019-20. The results reveal that the sectors witnessing greater trade overlap experience lower employment adjustment costs. Moreover, rise in productivity and output levels as well as introduction of specific policy interventions (e.g., Make-in-India initiative in 2014) also reduce such adjustment costs. Conversely, factors such as increase in skilled and unskilled real wage rate, skilled worker intensity and trade openness enhance these expenses. The results indicate that while trade liberalization is not necessarily bad for industrial growth, it may not be sufficient either.

Suggested Citation

  • Aaheli Ahmed & Debashis Chakraborty & Sakshi Aggarwal, 2024. "Trade Liberalization and Labour Market Dynamics: Evidence from India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 22(4), pages 851-881, December.
    • Handle: RePEc:spr:jqecon:v:22:y:2024:i:4:d:10.1007_s40953-024-00408-8
    DOI: 10.1007/s40953-024-00408-8
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    References listed on IDEAS

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    More about this item

    Keywords

    2SLS; Trade reforms; Marginal intra industry trade; Skilled and unskilled wage; Labour adjustment costs; Indian industry;
    All these keywords.

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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