Impact of trade reforms on labour income share in Indian manufacturing

Abstract

There was a clear downward trend in labour income share in India’s organized manufacturing in the 1980s, which continued subsequently in the post-reform period till about 2007–08, following which there was a trend reversal, and the income share of labour in organized manufacturing rose between 2007–08 and 2017–18. The chapter investigates whether India’s trade reforms were an important factor responsible for the decline in labour income share in organized manufacturing. Econometric analyses are undertaken for this purpose using industry- and plant-level panel data covering respectively the periods 1995–96 to 2014–15 and 1998–99 to 2007–08, with a focus primarily on the impact of variables that represent import liberalization. The econometric results indicate that, in the post-reform period, import liberalization had a negative effect on the labour income share in organized manufacturing, particularly in industries characterized by medium- and high-technology and relatively low labour intensity. The results indicate that increases in capital intensity and in total factor productivity, which are presumably connected with the process of economic reforms, adversely impacted the labour income share in organized manufacturing, and an adverse impact arose also from the increased use of contract workers in organized manufacturing, which is again, arguably, connected with trade reforms.