Relative Prices, Trade, Technology and Wage Inequality: Evidence from India
| Author | Archana Srivastava,Somesh Kumar Mathur |
| DOI | 10.1177/0015732513496618 |
| Published date | 01 August 2013 |
| Date | 01 August 2013 |
| Subject Matter | Articles |
Relative Prices, Trade,
Technology and Wage
Inequality: Evidence from
India
Archana Srivastava
Somesh Kumar Mathur
Abstract
This article examines the link between relative export, import and domes-
tic goods’ prices and relative wages over the years by empirically testing the
Stolper–Samuelson theorem for India. It also examines the role of other factors
such as manufacturing trade, liberalization phase, inflation, foreign and domestic
technology, etc. on rising wage inequality in the manufacturing sector in India.
The results seem to prove the validity of Stolper–Samuelson theorem. The
results also throw some light on Rybczynski theorem, which shows the relation-
ship between output and endowment and factor price insensitivity elasticity,
and the link between factor endowments and factor prices. The empirical test-
ing is done using estimates of the translog production function and translog cost
function along with the share equations. The elasticity of substitution between
factors of production has been worked out using Allen’s and Morishima’s for-
mulae, which in turn use estimates of the translog cost function.
JEL: F16, J31
Keywords
Trade liberalization, wage inequality, translog production function, Stolper–
Samuelson elasticity, Rybczynski elasticity, factor price insensitivity elasticity, translog
cost function, Allen’s and Morishima’s formulae for elasticity of substitution
Introduction
Labour market effects of international trade have always been a matter of concern
for researchers. Considerable debate has taken place in the literature over past few
Article
Foreign Trade Review
48(3) 359–381
©2013 Indian Institute of
Foreign Trade
SAGE Publications
Los Angeles, London,
New Delhi, Singapore,
Washington DC
DOI: 10.1177/0015732513496618
http://ftr.sagepub.com
Archana Srivastava, Senior Research Student, Indian Institute of Technology, Kanpur,
India. E-mail: archanas@iitk.ac.in
Somesh Kumar Mathur, Associate Professor, Indian Institute of Technology, Kanpur,
India. E-mail: skmathur@iitk.ac.in
Foreign Trade Review, 48, 3 (2013): 359–381
360 Archana Srivastava and Somesh Kumar Mathur
decades regarding trade as a reason for increased or decreased wage inequality. The
Stolper–Samuelson theorem (Stolper & Samuelson, 1941) is one of the most impor-
tant traditional theorems which relates the prices of goods and factor prices. The
theorem states that under some economic assumptions (constant returns, perfect
competition) a rise in the relative price of a good will lead to a rise in the real return
to that factor which is used most intensively in the production of the good and to a
fall in the real return to the other factor. Therefore, when liberal trade is allowed
between developed and developing countries, prices of unskilled labour-intensive
(exported) products should increase the wages of unskilled workers and the prices
of skilled labour-intensive (imported) products should decrease the wages of skilled
workers in the developing countries. A number of studies have been conducted to
assess the impact of north–south trade. Most of them concluded that the effects were
modest—Krugman (1995) and Lawrence (1996) estimated the effect of trade on the
skilled–unskilled wage ratio and found it to be only 3 per cent. Cline (1997) esti-
mated it to be 7 per cent while Borjas et al. (1997) estimated it to be 1.4 per cent.
An extension of the Heckscher–Ohlin and Stolper–Samuelson model consid-
ers capital, unskilled and skilled labour as relevant factors of production. However,
in alternative types of model, capital and skill complementarity is an underlying
assumption. It was originally proposed by Rosen (1968) and Griliches (1969) and
has been recently explored by Goldin and Katz (1998), Machin and Van Reenen
(1998) and more recently by Krusell et al. (2000) and Acemoglu (2003).
This article attempts to empirically investigate the validity of the Stolper–
Samuelson theorem in the Indian context using the translog production function
approach. It also tries to see the link between change in factor endowments and
outputs by examining the Rybczynski elasticity and understand the relationship
between factor endowments and factor prices through estimates of factor price
insensitivity elasticity. The article further explores the role of other factors such as
liberalization, inflation, foreign and domestic technology, etc., on rising wage
inequality in India using the translog cost function approach.
The section that follows gives a brief background of trade reforms and the
instance of rising wage inequality in India’s manufacturing sector. Literature is
reviewed in the next section. Methodology is discussed thereafter. The fourth sec-
tion explains data and data sources in detail. Results are discussed in the fifth
section. The sixth section concludes with policy implications.
Trade Reforms and Wage Inequality in India
The process of trade liberalization in India began in late 1970s and especially in early
1990s. Here, an important question is whether trade reforms have been able to deliver
fruitful outcome in terms of reduction in wage inequality between skilled and
unskilled labour in the Indian manufacturing industry. The question is of immense
importance from the point of view of policymakers who need to appropriately design
policies for reducing the gap between the rich and the poor. Figure 1 shows the sharp
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