Trade liberalization, employment, labour productivity, and real wages : a study of the organized manufacturing industry in India in the 1980s and 1990s

This paper studies the trends in labour productivity and real wages in the organized manufacturing industry in India during 1980s and 1990s. It seeks to document and analyse the changes in productivity levels, employment, and wage levels with the advent of trade liberalization in the Indian economy.

The paper seeks to document and analyse the changes in productivity levels, employment, and wage levels with the advent of trade liberalization in the Indian economy.

The sample used by the author covers around 75 industries from the Annual Survey of Industries' three digit classification, spread across three use-based industry groups - intermediate goods, capital goods, and consumer goods. The paper assesses India's trade policy since the advent of planned economic development focusing on the two dominant forms of trade barriers - tariff rates and non-tariff barriers. While there has been a discussion on the major changes in trade policy since the 1980s, the impact of trade liberalization on employment, labour productivity, and real wages has not been analysed in detail. This study is an attempt to fill this gap - it correlates trade policy changes as represented by effective rates of protection, import coverage ratio, and import penetration rates with the employment growth of both organized manufacturing industries and use-based sectors using explicit measures of trade liberalization.

The study shows that the successive phases of trade reforms have had a positive impact on the labour market indicators - employment, labour productivity, and real wages. Trade liberalization brings about consistent growth in labour intensive industries. It also finds that there is a positive relationship between high labour productivity growth and high employment growth. The increase in demand for labour creates an upward pressure on real wages in the organized manufacturing sector. This holds for both broad industry groups as well as use-based sectors. The study, therefore, offers an interesting insight into the impact of trade reforms on the organized industrial labour market and its ramifications on wages and poverty.