Relative Prices, Trade, Technology and Wage Inequality: Evidence from India

Abstract

This article examines the link between relative export, import and domestic goods’ prices and relative wages over the years by empirically testing the Stolper–Samuelson theorem for India. It also examines the role of other factors such as manufacturing trade, liberalization phase, inflation, foreign and domestic technology, etc. on rising wage inequality in the manufacturing sector in India. The results seem to prove the validity of Stolper–Samuelson theorem. The results also throw some light on Rybczynski theorem, which shows the relationship between output and endowment and factor price insensitivity elasticity, and the link between factor endowments and factor prices. The empirical testing is done using estimates of the translog production function and translog cost function along with the share equations. The elasticity of substitution between factors of production has been worked out using Allen’s and Morishima’s formulae, which in turn use estimates of the translog cost function.