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Industrial Deregulation, Skill Upgrading, and Wage Inequality in India


Rubiana M. Chamarbagwala


Indiana University Bloomington - Department of Economics

Gunjan Sharma


World Bank

January 22, 2008

CAEPR Working Paper No. 2008-002

Abstract:     
We investigate the relationship between economic deregulation (delicensing), skill upgrading, and wage inequality during the 1980s and 1990s in India. We use a unique dataset on India's industrial licensing regime to test whether industrial deregulation during the 1980s and 1990s played a role in generating demand for skilled workers, as measured by the employment and wagebill shares of white-collar workers, and in raising the returns to skilled labor, as measured by the skill premium. Our analysis focuses not only on the difference between licensed and delicensed industries but also on the comparison of these differences during the 1980s, when India's external sector remained relatively closed to the world economy, and the 1990s, when India underwent massive liberalization reforms and became increasingly integrated with the global economy. We identify two main channels through which industrial delicensing affects the demand for skills and wage inequality: capital- and output-skill complementarities. Our analysis finds two important results. First, capital- and output-skill complementarities existed for firms in both licensed and delicensed industries but were stronger in delicensed industries both before and after 1991. The exception is output-skill complementarities with respect to the skill premium, where delicensed industries experienced lower output-skill complementarities compared to licensed ones both before and after 1991. Second, the contribution of industrial delicensing to both types of complementarities was considerably higher during the 1980s and much smaller after 1991. These results suggest that industrial delicensing benefited skilled labor via capital- and output-skill complementarities during the 1980s, the decade before India liberalized it's trade and investment regime. Thus, much of the increase in the demand for and returns to skill as a result of capital- and output-skill complementarities can be attributed to domestic reforms during the pre-1991 period in India.

Number of Pages in PDF File: 30

Keywords: Capital-skill complementarities, industrial delicensing, trade liberalization, India

JEL Classification: F16, J23, J24, O14, O38

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Date posted: January 22, 2008  

Suggested Citation

Chamarbagwala, Rubiana M. and Sharma, Gunjan, Industrial Deregulation, Skill Upgrading, and Wage Inequality in India (January 22, 2008). CAEPR Working Paper No. 2008-002. Available at SSRN: http://ssrn.com/abstract=1086420 or http://dx.doi.org/10.2139/ssrn.1086420

Contact Information

Center for Applied Economics And Policy Research (Contact Author)
Indiana University Bloomington - Department of Economics
Wylie Hall
Bloomington, IN 47405-6620
United States
Rubiana M. Chamarbagwala
Indiana University Bloomington - Department of Economics ( email )
Wylie Hall
Bloomington, IN 47405-6620
United States

Gunjan Sharma
World Bank ( email )
1818 H Street, NW
Washington, DC 20433
United States
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