Abstract
We examine the effects of trade and services liberalization on wage inequality in India. We find that labor reallocations and wage shifts attributable to liberalization account for at most 29% of the increase in inequality between 1993 and 2004, and that the effects of services reforms are many times larger than those of trade liberalization. In contrast, 30–66% of the increase in wage inequality is due to changes in industry wages and skill premiums that cannot be empirically linked to liberalization. These results suggest that if liberalization did, in fact, contribute significantly to increased inequality, the bulk of its effects do not linger in inter-industry wage and skill premiums but are subsumed by general equilibrium effects. Studies of the liberalization-inequality relationship that focus on differences in employment and wage outcomes across industries, or on tradable goods alone, may therefore only be exploring the tip of the iceberg.
Highlights
India’s market-oriented economic reforms, which were initiated in the 1980s but took full shape in the 1990s, are widely credited with having raised India’s rates of economic growth
What have been the implications of these reforms for inequality? In what follows, we provide a brief review of the literature, focusing on the channels through which trade liberalization, in particular, may influence wage inequality
In order to understand how much of the observed change in wage inequality between 1993 and 2004 is accounted for by changes in trade policy and services liberalization, both directly through their effects on wages as well as indirectly through their effects on employment reallocation, we modify the method developed by FLW
Summary
India’s market-oriented economic reforms, which were initiated in the 1980s but took full shape in the 1990s, are widely credited with having raised India’s rates of economic growth. Evidence of rising inequality over the 1990s comes from other sources, including data on wages from the NSSO’s employment– unemployment surveys (Kijima 2006); corporate incomes; starting salaries of graduates of India’s top universities; and even Forbes magazine’s annual list of the world’s billionaires (see Walton 2010 for a detailed discussion on growing inequality in India). Have India’s economic reforms contributed to inequality as the simple timing-based evidence suggests? To what extent have liberalization of trade policy as it applies to the manufacturing sector and investment policy in the services sector—key elements of India’s market-oriented economic reforms— contributed to a rise in inequality? We use the NSSO’s employment–unemployment surveys for 1993 and 2004 to examine the links between trade liberalization and services liberalization on one hand, and wage inequality on the other
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