Trade Liberalization and Labor’s Slice of the Pie: Evidence from Indian Firms

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 include time effects that control for 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. * We are indebted to the editor, Dani Rodrik, and two anonymous referees for very useful comments and suggestions on an earlier version. We also thank seminar participants at Deakin University, Monash University-Caulfield, Ryerson University, the University of Melbourne, the University of New South Wales, the University of Wollongong and York University and participants at the Australasian Development Economics Workshop and the UIBE-Syracuse Conference on Firm Responses to Trade Reforms held in Beijing. † Department of Economics, Level 5, Economics and Commerce Building, University of Melbourne 3010, Victoria, Australia; email: [email protected]. ‡ Department of Economics, The Maxwell School, Syracuse University, Eggers Hall, Syracuse, NY, 13244; email: [email protected].