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Trade liberalization and labor's slice of the pie: Evidence from Indian firms

Reshad Ahsan () and Devashish Mitra ()

Journal of Development Economics, 2014, vol. 108, issue C, 1-16

Abstract: We examine the impact of trade reforms initiated in 1991 on labor's share in revenue among a sample of Indian firms. Theoretically, trade reforms will affect this share by reducing firm-level price–cost markups as well as the bargaining power of workers. A simple model suggests that these changes can have ambiguous effects on firm-level labor share and that the net effect of trade reforms will depend on the labor intensity of production. Using firm-level data from India, our empirical results suggest that trade liberalization led to an increase in labor's share in revenue for small, labor-intensive firms but a reduction in this share in the case of larger, less labor-intensive firms. These results are robust to controlling for alternative sources of heterogeneity and to the use of long-lagged tariffs as instruments. We also find that trade liberalization, on average, led to a decline in the bargaining power of workers.

Keywords: Trade reforms; Bargaining power of workers; Labor share; Markups; India; Firm-level data (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.jdeveco.2013.12.011

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