Road Infrastructure and the Skill Premium: Evidence from Indian Manufacturing

Abstract

We examine the relationship between new road infrastructure and local labor markets in India's manufacturing sector by exploiting the variation in completion times of a major highway construction project. Using firm and individual-level data, we find that the skill premium increases in districts that are on a completed section of the highway project. This effect is driven by large firms, especially those with a large share of transportation assets, indicating the presence of capital-skill complementarity. On the other hand, the skill composition at the firm level remains unchanged, pointing to labor market imperfections: the skill premium increases in districts with a larger than average share of under-qualified workers. Further, completion of a highway segment reduces the monopsony power of local firms, enabling high skilled workers to bargain for higher wages.

Keywords: Infrastructure, Roads, Public Investment, Golden Quadrilateral, Manufacturing, Skill Premium, Monopsony, Capital-Skill Complementarity, Skill mismatch.

JEL Classification: E2, H4, H5