Trade Liberalization and Labor’s Slice of the Pie: Evidence from Indian Firms (with Devashish Mitra)

Journal of Development Economics, 108(1): May 2014, 1-16.

Abstract: In this paper we examine the impact of major trade reforms initiated in 1991 on the relative welfare of workers in India. In particular, we evaluate the effect of trade reforms on the share of wages in total revenue among a sample of firms. Theoretically, trade reform will affect workers’ shares in output by reducing the price-cost markups charged by firms as well as the bargaining power of workers. We develop a simple model that suggests that these changes can have ambiguous effects on the share of wages in total revenue. The model predicts that the net effect of trade reform will depend on the factor intensity of a given firm. Using firm-level data from India, our empirical results suggest that, on average, trade liberalization led to an increase in the share of wages in total revenue for small, labor-intensive firms but a reduction in this share in the case of larger, less labor-intensive firms. These results are obtained after controlling for time effects to capture macroeconomic factors that are potentially correlated with changes in wage shares. We also find that trade reforms, on average, led to a decline in the bargaining power of workers in firms across all size categories.

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