Liberalization and the Changing Inter‐industry Wage Structure of the Organized Manufacturing Sector in India, 1973/74–2003/04

• Published date: 01 May 2013
• Date: 01 May 2013
• Author: Monojit Chatterji,Homagni Choudhury
• DOI: http://doi.org/10.1111/rode.12037

Liberalization and the Changing Inter-industry Wage

Structure of the Organized Manufacturing Sector in

India, 1973/74–2003/04

Monojit Chatterji and Homagni Choudhury*

Abstract

This paper examines the inter-industry wage structure of the organized manufacturing sector in India for

the period 1973/74–2003/04 by estimating the growth of average real wages for production workers by

industry. Using wage data on 51 three-digit industries, our estimation procedure obtains estimates of

growth of real wages per worker that are wholly deterministic in nature by accounting for any potential

structural break(s) associated with the reforms. Our paper identifies three distinct regimes—pre-reform,

first phase reforms and second phase reforms, over which real wages have grown at varying rates for each

industry. Our findings suggest that the inter-industry wage differences have become more pronounced in

the post-reform periods. The paper provides new evidence from India on the need to consider seriously the

hypothesis that industry affiliation is potentially an important determinant of wages when studying any

relationship between reforms and wages.

1. Introduction

In common with many other developing countries, the Indian economy has under-

gone major market-based economic reforms in the 1990s. Despite a considerable

debate on the impact of these reforms on the Indian economy, there has been little

systematic empirical work on the effects of these reforms on industrial wage structure.

This paper seeks to remedy this gap. If indeed there is genuine liberalization in

product markets some industries will contract and others expand. Such sectoral shifts

are part of the reallocative process which product market liberalization should

induce. However, if such reforms are matched by labor market reforms, then wages

for similar workers should be equal through the standard undercutting competitive

mechanism.1As such wage growth should be equal in all industries unless there is

significant labor market segmentation. Hence analysis of inter-industry wage growth

is of importance in understanding how the labor market has responded to reforms.

In spite of a modest literature investigating wage inequality between skilled and

unskilled workers (Banga, 2005; Chamarbagwala, 2006; Sen, 2009, among others)

there has not been any explicit attempt to explore the inter-industry wage structure

for similar workers in India. The present study examines whether there is any evi-

dence that in the organized manufacturing sector in India, similar production (blue

collar) workers in some industries fared better than those in others.

* Choudhury: Economic Studies, University of Dundee, Dundee DD1 4HN, UK, and School of Manage-

ment and Business, Aberystwyth University, Aberystwyth SY23 3DD, UK. Tel: +44-7877740862; Fax: +44-

1382-384691; E-mail: h.choudhury@dundee.ac.uk and hoc6@aber.ac.uk. Chatterji: Economic Studies,

University of Dundee, Dundee DD1 4HN, UK, and Sidney Sussex College, University of Cambridge, Cam-

bridge, UK. E-mail: mc722@cam.ac.uk. The authors thank two anonymous referees and the Editor for their

comments. The usual disclaimer applies.

Review of Development Economics, 17(2), 365–378, 2013

DOI:10.1111/rode.12037

© 2013 Blackwell Publishing Ltd