Trade, Labor Share, and Productivity in India’s Industries

  • Dibyendu MaitiEmail author
Part of the ADB Institute Series on Development Economics book series (ADBISDE)


This paper explores whether trade can explain a part of the sharp decline in the labor share of Indian formal industries from around 30% in 1980 to less than 10% in 2014. Decline in strikes and lockouts, reduced labor time lost from disputes per factory and increased use of contract workers in all major states in India are signs of reduced bargaining power. In order to estimate the influence of trade, the mark-up and bargaining power affecting the labor share and resultant productivity is derived. A semi-parametric approach is applied on a 3-digit level of industrial data over major states during 1998–2014 to regress Solow residual (the proxy for productivity) on trade share along with its interaction terms capturing market imperfections. The results confirm that trade, by dampening the bargaining power of labor, reduces labor share and hence raises productivity. It is argued that the joint effects of market size and competition arising out of trade cannot dominate the adverse effect of specialization in the presence of unions. The degree of specialization or comparative advantage that appears due to the increased market share of the most productive firms, who require fewer workers, thereby reducing the demand for workers with the trade. The drop in demand weakens bargaining power and shifts away distributive share from workers. But the competitive policy encouraging entry can negate such adverse effects of trade, to a large extent.


Trade Market imperfections Labor share and productivity growth JEL classification D24 F16 L11 


  1. Acemoglu, D. & Restrepo, P. (2018). Artificial Intelligence, Automation and Work, NBER Working Paper No. 24196.
  2. Aghion, P., Burgess, R., Redding, S., & Zilibotti, F. (2008). The unequal effects of liberalization: evidence from dismantling the license raj in india. American Economic Review, 94(4), 1397–1412.CrossRefGoogle Scholar
  3. Ahluwalia, I. J. (1991). Productivity and growth in indian manufacturing. New Delhi: Oxford University Press.Google Scholar
  4. Ahsan, A., & Pages, C. (2009). Are all labor regulations equal? evidence from indian manufacturing. Journal of Comparative Economics, 37(1), 62–75.CrossRefGoogle Scholar
  5. Ahsan, R., & Mitra, D. (2014). Trade liberalization and labors slice of the pie: evidence from indian firms. Journal of Development Economics, 108, 1–16.CrossRefGoogle Scholar
  6. Amiti, M. & Davis, D. R. (2012) Trade, firms, and wages: theory and evidence. The Review of Economic Studies, 79(1), 1–6, Scholar
  7. Arbache, J. S. (2004). Does trade liberalization always decrease union bargaining power? Economia, 5(1), 99–121.Google Scholar
  8. Arkolakis, C., Costinot, A., Donaldson, D. & Rodrguez-Clare, A. (2015). The Elusive Pro-Competitive Effects of Trade, NBER Working Paper w21370, National Bureau of Economic Research.
  9. Arrow, K. J., Chenery, H. B., Minhas, B. S., & Solow, R. M. (1961). Capital-labor substitution and economic efficiency. The Review of Economics and Statistics, 43(3), 225–250.CrossRefGoogle Scholar
  10. Autor, D., Dorn, D., Katz, Lawrence F., Patterson, C., & Van Reenen, J. (2017). Concentrating on the fall of the labor share. American Economic Review, 107(5), 180–185.CrossRefGoogle Scholar
  11. Balakrishnan, P. & Pushpangadan, K. (1994). Total factor productivity growth in manufacturing industry: a fresh look. Economic and Political Weekly, 29(30).Google Scholar
  12. Balakrishnan, P., Parameswaran, M., Pushpangadan, K., & Babu, S. M. (2006). Liberalization, market power, and productivity growth in Indian industry. Journal of Economic Policy Reform, 9(1), 5573.Google Scholar
  13. Besley, T., & Burgess, R. (2004). Can regulation hinder economic performance? evidence from india. Quarterly Journal of Economics, 119(1), 91–134.CrossRefGoogle Scholar
  14. Bhagwati, J. & Srinivasan, T. N. (1975). Foreign Trade Regimes and Economic Development, India. XF2006172468.Google Scholar
  15. Bhalotra, S. R. (1998). The puzzle of jobless growth in indian manufacturing. Oxford Bulletin of Economics and Statistics, 60(1), 5–32.CrossRefGoogle Scholar
  16. Bhattacharjea, A. (2009). The effects of employment protection legislation on indian manufacturing. Economic and Political Weekly, 44(22), 55–62.Google Scholar
  17. Bhattacharjea, A. (2019). Labour market flexibility in Indian industry: a critical survey of the literature, CDE Working Paper No. 296, Delhi School of Economics,
  18. Brock, E., & Dobbelaere, S. (2006). Has international trade affected workers bargaining power? Review of World Economics, 142(2), 233–266.CrossRefGoogle Scholar
  19. Dao, M. C., Das, M., Koczan, Z. & Weicheng, L. (2017). Why is labour receiving a smaller share of global income? theory and empirical evidence. In International Monetary Fund, Stock No. WPIEA2017169
  20. Das, D. K. (2004). Manufacturing productivity growth under varying trade regimes, 1980–2000. Economic and Political Weekly, 39(05), 423–433.Google Scholar
  21. Davidson, C., Matusz, S., & Shevchenko, A. (2008). Globalization and firm level adjustment with imperfect labor markets. Journal of International Economics, 75(2), 295–309.CrossRefGoogle Scholar
  22. De Loecker, J. & Eeckhout, J. (2018). Global Market Power. National Bureau of Economics Research, Working Paper Series, 24768, NBER.Google Scholar
  23. Dixit, A. K., & Stiglitz, J. E. (1977). Monopolistic competition and optimum product diversity. American Economic Review, 67(3), 297–308.Google Scholar
  24. Dobbelaere, S. (2004). Estimation of price-cost margins and union bargaining power for belgian manufacturing. International Journal of Industrial Organization, 22, 1381–1398.CrossRefGoogle Scholar
  25. Dougherty, S. (2009). Labour regulation and employment dynamics at the state level in india. Review of Market Integration, 1(3), 295–337.CrossRefGoogle Scholar
  26. Dumont, M., Rayp, G., & Willemé, P. (2006). Does internationalization affect union bargaining power? an empirical study for five eu countries. Oxford Economic Papers, 58(1), 77–102.CrossRefGoogle Scholar
  27. Dutta, P. V. (2007). Trade protection and industry wages in india. ILR Review, 60(2), 268–286.CrossRefGoogle Scholar
  28. Edmond, C., Midrigan, V., & Xu, D. Y. (2015). Competition, markups, and the gains from international trade. American Economic Review, 105(10), 3183–3221.CrossRefGoogle Scholar
  29. Eichengreen, B., & Gupta, P. (2013). The two waves of service-sector growth. Oxford Economic Papers, 65(1), 96–123.CrossRefGoogle Scholar
  30. Eichengreen, B. & Gupta, P. (2011). The service sector as India’s road to economic growth. NBER Working paper No. w16757, National Bureau of Economic Research.Google Scholar
  31. Elsby, M., Hobijn, B. & Sahin, A. (2013). The Decline of the U.S. Labor Share. Working Paper Series 2013–27, Federal Reserve Bank of San Francisco.Google Scholar
  32. Feenstra, R. C., & Hanson G. H. (1997). Productivity measurement and the impact of trade and technology on wages: estimates for the U.S., 1972–1990. NBER Working Papers 6052, National Bureau of Economic Research, Inc.Google Scholar
  33. Goldar, B. (2013). Wages and wage share in india during the post-reform period. The Indian Journal of Labour Economics, 56(1), 75–94.Google Scholar
  34. Goldar, B. N., & Kumari, A. (2003). Import of liberalization and productivity growth in Indian manufacturing industries in the 1990s. Developing Economics, 41(4), 436–460.CrossRefGoogle Scholar
  35. Gupta, P. & Helble, M. (2018). Adjustment to Trade Opening: The Case of Labor Share in India’s Manufacturing Industry. ADBI Working Paper 845. Tokyo: Asian Development Bank Institute. Available:
  36. Hasan, R., Mitra, D., & Ramaswamy, K. V. (2007). Trade reforms, labor regulations, and labor-demand elasticities: empirical evidence from india. Review of Economics and Statistics, 89(3), 466–481.CrossRefGoogle Scholar
  37. Helpman, E., & Itskhoki, O. (2010). Labor market rigidities, trade and unemployment. Review of Economic Studies, 77(3), 1100–1137.CrossRefGoogle Scholar
  38. Helpman, E. & Krugman, P. R. (1985). Market Structure and Foreign Trade, MIT Press, Cambridge MA.Google Scholar
  39. Hsieh, C.-T., & Klenow, P. J. (2009). Misallocation and manufacturing TFP in China and India. The Quarterly Journal of Economics, 124(4), 1403–1448.CrossRefGoogle Scholar
  40. ILO (2017). The World Employment and Social Outlook 2017, Trends, Labour Market Trends and Policy Evaluation Unit of the ILO Research Department.Google Scholar
  41. Isaksson, A. (2007). Determinants of Total Factor Productivity: A Literature Review. Staff Working Paper 2/2007,
  42. Jones, R. W. (1965). The structure of simple general equilibrium model. Journal of Political Economy, 73, 557–572.CrossRefGoogle Scholar
  43. Karabarbounis, L., & Neiman, B. (2014). The global decline of the labor share. Quarterly Journal of Economics, 129, 61–103.CrossRefGoogle Scholar
  44. Kathuria, R., Porth, S., Kathuria, N. N., & Kohli, T. (2010). Competitive priorities and strategic consensus in emerging economies: evidence from india. International Journal of Operations & Production Management, 30, 879–896. Scholar
  45. Kehrig, M. & Vincent, N. (2017). Growing productivity without growing wages: The micro-level anatomy of the aggregate labor share decline. Economic Research Initiatives at Duke (ERID) Working Paper No. 244.Google Scholar
  46. Krishna, P., & Mitra, D. (1998). Trade Liberalization, market discipline and productivity growth: new evidence from India. Journal of Development Economics, 56, 447–462.CrossRefGoogle Scholar
  47. Krugman, P. (1980). Scale Economies, product differentiation, and the pattern of trade. The American Economic Review, 70(5), 950–959.Google Scholar
  48. Kumar, S. (2006). A decomposition of total productivity growth: a regional analysis of indian industrial manufacturing growth. International Journal of Product Perform Management, 55(3/4), 3113–3131.Google Scholar
  49. Levinsohn, J., & Petrin, A. (2003). Estimating production functions using inputs to control for unobservables. Review of Economic Study, 70(1), 317–342.CrossRefGoogle Scholar
  50. Li, J. & Treichel, V. (2012). Applying the growth identification and facilitation framework: The Case of Nigeria. In Li, J. (ed) New Structural Economics, The World Bank, Washington DC, pp. 215–258.Google Scholar
  51. Lin, J. Y. & Treichel, V. (2012). Learning from China’s rise to escape the middle-income trap: A new structural economics approach to latin America. In Policy Research Working Paper 6165. World Bank, Washington, DC.Google Scholar
  52. Madsen, J. B., Saxena, S. & James, B. A. (2009). The indian growth miracle and endogenous growth. Journal of Development Economics. Scholar
  53. Maiti, D. (2009). Institution, network and industrialisation: Field evidence on flexibility and fragmentation from India. In IPPG Discussion Paper 26, Consortium of Institutions for Pro-Poor Growth, University of Manchester,
  54. Maiti, D. (2013). Market imperfections, trade reform and total factor productivity growth: Theory and practices from India. Journal of Productivity Analysis, 40(2), 407–418.CrossRefGoogle Scholar
  55. Maiti, D. (2014). Reform, productivity growth and formal labour market in India. London: Routledge Publisher.Google Scholar
  56. Maiti, D. (2018). Trade, Market Imperfection and Labour Share’ CDE Working Paper No. 292,
  57. McCalman, P. (2018). International trade income distribution and welfare. Journal of International Economies, 118, 1–15.CrossRefGoogle Scholar
  58. Melitz, M. J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica, 71, 1695–1725.CrossRefGoogle Scholar
  59. Melitz, M. J., & Ottaviano, G. (2008). Market size, trade and productivity. Review of Economic Studies, 75(1), 295–316.CrossRefGoogle Scholar
  60. Melitz, M. J. & Redding, S. J. (2014). Heterogeneous firms and trade. In Gopinath, G., Helpman, E. & Rogoff, K. (eds.). Handbook of International Economics, Vol 4, pp. 1–55.Google Scholar
  61. Milner, C., Vencappa, D., & Wright, P. (2007). Trade policy and productivity growth in Indian manufacturing. World Economy, 30(2), 249–266.CrossRefGoogle Scholar
  62. Neary, P. (2016). International trade in general oligopoly equilibrium. Review of International Economics, 24(4), 669–698.CrossRefGoogle Scholar
  63. Olley, S., & Pakes, A. (1996). The dynamics of productivity in the telecommunication equipment industry. Econometrica, 64(5), 1263–1297.CrossRefGoogle Scholar
  64. Piketty, T. (2014). Capital in the twentieth century. Cambridge: Harvard University Press.CrossRefGoogle Scholar
  65. Restuccia, D., & Rogerson, Richard. (2008). Policy distortions and aggregate productivity with heterogeneous plants. Review of Economic Dynamics, 11(4), 707–720.CrossRefGoogle Scholar
  66. Rodrik, D. (1998). Why do more open economies have bigger governments? Journal of Political Economy, 106(5), 997–1032.CrossRefGoogle Scholar
  67. Rodrik, D. (1997). Has globalization gone too far?. Washington, DC: Institute for International Economics.CrossRefGoogle Scholar
  68. Sehgal, S., & Chandan, S. (2010). Impact of infrastructure on output, productivity and efficiency: evidence from the indian manufacturing industry. Indian Growth and Development Review, 3(2), 100–121.CrossRefGoogle Scholar
  69. Slaughter, M. (2001). International trade and labor-demand elasticities. Journal of International Economics, 54(1), 609–629.CrossRefGoogle Scholar
  70. Sweeney, P. (2017). IMF Study of Downward Share of Labour Income is Recognition of the Major Economic Issue of our Time,
  71. Topalova, P. (2007). Trade Liberalization, Poverty and Inequality: Evidence from Indian Districts. NBER Working Paper,
  72. Unel, M. B. (2003). Productivity trends in India’s manufacturing sectors in the last two decades. IMF Working Paper No. 03/22, International Monetary Fund;
  73. Yeaple, S. (2005). A simple model of firm heterogeneity, international trade and wages. Journal of International Economics, 65(1), 1–20.CrossRefGoogle Scholar

Copyright information

© Asian Development Bank Institute 2019

Authors and Affiliations

  1. 1.Department of Economics, Delhi School of EconomicsUniversity of DelhiNew DelhiIndia

Personalised recommendations