International Trade and Wage Inequality in India: Does Direction of Trade Matter?

Abstract

After following import-substituting policies for nearly three decades, India opted for liberal economic regime in the early 1990s. Since then, it has emerged as one of the fastest growing economies in the world. However, concerns have been raised about the distributional consequences of liberalization. This article attempts to quantify the impact of trade on wage inequality in the Indian manufacturing sector. Estimating a relative wage equation with a panel of 49 manufacturing industries, this article found a positive association between trade and wage disparity in Indian manufacturing, but the association is contingent on the direction of trade. Our results show that after controlling skill-biased technological change and other variables, trade, especially exports to developed and developing countries, has an opposite impact on wage disparity.