Multi Fibre Arrangement and Wage Inequality: Firm and State‐level Evidence from India and a Theoretical Model

• Published date: 01 July 2017
• Author: Saibal Kar,Mausumi Kar
• DOI: http://doi.org/10.1111/twec.12437
• Date: 01 July 2017

Multi Fibre Arrangement and Wage

Inequality: Firm and State-level Evidence

from India and a Theoretical Model

Mausumi Kar

1

and Saibal Kar

2,3

1

Women’s Christian College, Kolkata, India,

2

Department of Economics, Calcutta University, Kolkata,

India and

3

Institute for the Study of Labor (IZA), Bonn, Germany

1. INTRODUCTION

THE implications of international trade policies on the labour market of a country can be

varied. The wage and employment effects of bilateral and multilateral trade reforms have

been studied both theoretically and empirically (for developing countries, see Goldberg and

Pavcnik, 2007; Hasan et al., 2007; Attanasio et al., 2004; Harrison and Hanson, 1999; etc.).

The present paper studies the impact of trade policy reforms on the wage of industrial work-

ers through the lens of the Multi Fibre Arrangement (MFA) –an industry-specific (textile and

apparel) quantitative trade policy that the multilateral agencies chose to withdraw over a span

of a decade.

1

The extant literature offers many studies on the impact of the withdrawal of MFA on the

export prospects of textile industries located predominantly in the developing countries. The

present paper contributes to this literature by looking at the wage response for exporting firms

in India, in addition to the industry-wise and state-wise effects on labour income. Further, we

discuss the post-MFA market concentration for textile and apparel exporting firms located in

India. To the best of our knowledge, a detailed analysis of the effect of a multilateral trade

policy reform (in this case MFA) on firm-level as well as state-level wages, and of the level

of concentration of an industry (here, textile and clothing, henceforth T&C) in India, is

unavailable in the literature. Finally, we generalise the trade-policy-to-factor-income relation

with the help of a short model to derive the implications of export quota and other ref orms

on factor returns.

The specific relationships between trade reform and industrial adjustments at the country

level is available in important contributions, such as, Aghion et al. (2008), and Topalova and

Khandelwal (2011, firm-level disaggregation). The distribution of manufacturing firms in such

studies as exporters and non-exporters is also not uncommon. For example, Mallick and Yang

(2013) show that any negative international policy shock transmits harder on the least produc-

tive exporters in India. The present paper also deals with firms in India, where we have iden-

tified companies in the T&C sector, which have consistently performed as exporters for the

entire period under consideration (1998–2012). Following withdrawal of MFA, it is expected

Mausumi Kar wishes to thank participants at the Development Economics Conference held at UNU-

WIDER, Helsinki, in September 2014 for helpful comments. The authors thank two anonymous review-

ers for extremely helpful suggestions. Suggestions from Nabamita Dutta are also duly acknowledged.

The usual disclaimer applies.

1

A number of important studies earlier engaged with what is to be expected in the post-MFA regime in

India and other places (see Kar and Kar, 2011). For an earlier review, see Tewari (2006); and further,

UNCTAD (2005) and USITC (2004).

©2016 John Wiley & Sons Ltd 1473

The World Economy (2017)

doi: 10.1111/twec.12437

The World Economy

that the exporting firms need to make the imminent adjustment and the industry adjusts

shortly through various interlinked factors. Inter-industry and interregional rise in wage

inequality are possible consequences of such changes.

2

This brings us to an important ques-

tion on selection of firms, which we discuss shortly in the methodology section.

We argue that the implications of this trade policy reform on firm-level wage and on the

aggregate state-level labour earnings have come with a reasonable adjustment lag for the tex-

tile and allied industries in India. Further, we also discuss regional wage disparity in the

aggregate to the extent it can be explained by concentration of factories at the state level and

any state-specific features in India given substantial heterogeneity in polices at the state

level.

3

Note that only a few papers discuss impact of MFA on wage inequality, despite several

studies on the industry-level effects of MFA. In this regard, Marouani (2009) shows that

for Tunisia, withdrawal of MFA has led to an increase in unemployment and wage inequa-

lity but has not significantly affected the main macroeconomic variables, as the exchange

rate management took into account the expected shock. Ernst et al. (2005) forecasted some

of these changes and found that China’s export growth to the quota-imposing regions

would go up by 386.5 per cent, way above the 37.2 per cent rise for India. The realised

differences are, however, more modest. More recently, relating firms and workers, Egger

and Kreickemeier (2010) show that exporting firms end up paying higher wages, which

consequently leads to losses from trade, lowers employment and raises intragroup wage

inequality. Clearly, the variations in these estimates and the possible impact on inequality

–at the firm level or across regions –need further analysis. It is not automatic that all

policies and reforms lead to rise in inequality; indeed, on the contrary, financial reforms

in a country may lower inequality via financial deepening (see, Agnello et al., 2012). The

present paper draws on these arguments and shows that the rise in industrial concentration

following removal of the quota leads to similar effects, including a fall in wages (if

impending unemployment is to be averted). The same factors that we have used for

measuring industrial concentration also feature in the main empirical specification linking

labour income as a response to trade policy reforms. In this context, the study by

Greenaway et al. (2009) dealing with Swedish firms exiting the industry due to mergers

(and not closures) is quite instructive.

Subsequently, in Section 1awe offer a brief background and motivation to establish why

the textile industry in India and more specifically, the impact of trade policy on the industry,

is of importance. Section 2 shows how the total labour cost at the firm level reacts to export

performance. The relationship is controlled for various important parameters that capture the

effects of the withdrawal of MFA on the labour market. This section also deals with regional,

rather state-level, deviation in terms of aggregate wage earnings in the T&C sector. Section 3

offers the short model. Section 4 concludes.

2

Winchester et al. (2006), for example, discuss the effect of trade on wage inequality given skill disper-

sion in the economy. We bypass the question of skill in favour of available discussion on the rich sub-

ject. Also see, Lopez-Acevedo and Robertson (2012); showing differential wage impact across industry

types following withdrawal of MFA; Hossain (2011) for Bangladesh.

3

We thank two anonymous reviewers for separate suggestions on selection of firms and for pointing out

possible heterogeneity across firm and state levels, which we have addressed suitably in Section 2.

©2016 John Wiley & Sons Ltd

1474 M. KAR AND S. KAR