Liberalization and Wage Inequality : Evidence from Indian Manufacturing Industry - A Critical Review of Literature

Liberalization measures was adopted by the developed and developing countries to realize the benefit from expansion of market size, inflow of low priced product, inflow of foreign capital, increase in productivity, and growth which in turn reduces social problem of unemployment and income and wealth inequality. However, studies conducted in developed and developing countries on measuring the social impact of liberalization (particularly on wage inequality) shows the negative consequences. Studies find that trade and wage inequality are related in long run but in short run there is no evidence to support this argument however, causal impact of wage inequality on trade is found to be exist. For most of the countries, it is found that the main cause of increase in wage inequality is Skill Biased Technological Change (SBTC) which raises the demand for skilled labor and so prices of skilled labor. For few countries, decrease in supply of skilled labor is found to be associated with increase in wage inequality. As far as Foreign Direct Investment (FDI) is concerned, its effect on wage inequality varies across countries not only in magnitude but also in its direction. From the comprehensive review of literature we found that there are certain unexplored areas, particularly in the context of India, for example effects of traded and non traded goods sector, trade with developing countries, immigration, increase in minimum wages etc. on wage inequality has not been analyzed yet. To make a sound policy based on inclusive growth it is necessary to understand the implication of these issues on wage inequality. Therefore, there is need to carry out the study to address these issues