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Adjustment to Trade Opening: The Case of Labor Share in India’s Manufacturing Industry

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  • Prachi Gupta
  • Matthias Helble

Abstract

This paper is to studies how manufacturing plants in India adjusted to trade liberalization during the period 1998–99 to 2007–08. It estimates how the labor share changed due to tariff reduction. The results indicate that a decline in output tariffs led to an increase in the labor share of income. In contrast, a fall in input tariffs led to a decrease in the labor share. Controlling for factor intensity, it finds that in technology intensive and human capital resource intensive sectors, both a decline in input and output tariff rates led to a decline in labor share. A fall in tariffs only led to an increase in labor share for labor intensive and low-technology plants. Hence, India’s bias towards capital and technology intensive production explains the overall decline in labor share in the post reform period. Furthermore, the empirical results show that labor adjustment occurred more efficiently in Indian states with flexible labor laws.

Suggested Citation

  • Prachi Gupta & Matthias Helble, 2018. "Adjustment to Trade Opening: The Case of Labor Share in India’s Manufacturing Industry," Working Papers id:12810, eSocialSciences.
    • Handle: RePEc:ess:wpaper:id:12810
    Note: Institutional Papers
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    Cited by:

    1. Weilin Liu, 2022. "Did Trade Liberalization Boost Total Factor Productivity Growth in Manufacturing in India in the 1990s?," International Productivity Monitor, Centre for the Study of Living Standards, vol. 43, pages 110-139, Fall.
    2. Dibyendu Maiti, 2019. "Trade, Labor Share, and Productivity in India’s Industries," ADB Institute Series on Development Economics, in: Gary Fields & Saumik Paul (ed.), Labor Income Share in Asia, chapter 0, pages 179-205, Springer.
    3. Leblebicioğlu, Asli & Weinberger, Ariel, 2021. "Openness and factor shares: Is globalization always bad for labor?," Journal of International Economics, Elsevier, vol. 128(C).
    4. Mertens, Matthias, 2019. "Micro-mechanisms behind declining labour shares: Market power, production processes, and global competition," IWH-CompNet Discussion Papers 3/2019, Halle Institute for Economic Research (IWH).

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