The effect of trade policy reforms on labour markets: evidence from India

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Abstract
This paper investigates the labour market impact of the 1991 trade reforms in India using a detailed panel data set on firms in five different import competing industries. We have two main results. First, we find only a small and insignificant effect of the reforms on employment - overall and in each of the five import competing industries. Second, we investigate the relationship between labour demand and mark-ups and find that there is a significant negative relationship between mark-ups and the demand for labour - overall and in four of the five industries studied. This provides evidential support for ‘pro-competitive’ effects of trade reforms on labour markets as suggested by the theory: trade liberalization increases the demand elasticity perceived by firms and induces them to reduce mark-ups and increase their output, thus (in direct contradiction to the predictions of competitive models of trade) inducing an increase in the demand for labour which may at least partially offset the reduction in labour demand caused by other factors.