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Citation Information

Type Working Paper - Indian Council for Research on International Economic Relations Working Paper
Title Impact of liberalisation on wages and employment in Indian manufacturing industries
Issue 153
Publication (Day/Month/Year) 2005
URL http://www.icrier.org/pdf/wp153.pdf
In an attempt to estimate the impact of liberalisation on labour markets, this paper
examines the impact of foreign direct investment (FDI), trade and technology on wages
and employment in Indian organised manufacturing industries in the post reforms period.
To capture labour market rigidities that exist in India, i.e., lack of flexibility in wage
setting and rigid hire and fire policies, the study estimates dynamic panel data (DPD)
model using generalised method of moments (GMM). The analysis is undertaken for 78
three-digit level industries. The impact of technology is captured through three
components, which are research and development intensity, import intensity of capital
goods and import intensity of soft technology. An index for technology acquisition is also
constructed using principal component analysis to estimate the impact of technological
progress. The results show that FDI, trade and technological progress have differential
impact on wages and employment. While higher extent of FDI in an industry leads to
higher wage rate in the industry, it has no impact on its employment. On the other hand,
higher export intensity of an industry increases employment in the industry but has no
effect on its wage rate. Technological progress is found to be labour saving but does not
influence the wage rate. Further, the results show that domestic innovation in terms of
research and development intensity has been labour utilising in nature but import of
technology has unfavourably affected employment. An immediate policy direction that
emerges from the study is that to improve the employment potential of the economy trade
should be encouraged and higher incentives should be generated for attracting FDI into
export-oriented sectors. As the economy opens up, cost adjustments become increasingly
important and flexibility labour laws are required to facilitate cost adjustments.

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