Trade Liberalization and Wage Inequality: Evidence from India

43 Pages Posted: 9 Jan 2006

See all articles by Prachi Mishra

Prachi Mishra

International Monetary Fund (IMF) - Research Department

Date Written: January 2005


We evaluate empirically the impact of the dramatic 1991 trade liberalization in India on the industry wage structure. The empirical strategy uses variation in industry wage premiums and trade policy across industries and over time. In contrast to earlier studies on developing countries, we find a strong, negative, and robust relationship between changes in trade policy and changes in industry wage premiums over time. The results are consistent with liberalization-induced productivity increases at the firm level, which get passed on to industry wages. Since tariff reductions were proportionately larger in sectors that employ a larger share of unskilled workers, the increase in wage premiums in these sectors implies that unskilled workers experienced an increase in their relative incomes. Thus, our findings suggest that trade liberalization has led to decreased wage inequality in India.

Keywords: Trade liberalization, wage premium

JEL Classification: F16, J31

Suggested Citation

Mishra, Prachi, Trade Liberalization and Wage Inequality: Evidence from India (January 2005). IMF Working Paper No. 05/20, Available at SSRN:

Prachi Mishra (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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