Trade and Development Review, Vol 7, No 2 (2014)

Foreign Competition and Distributive Share of Indian Formal Workers: Theory and Evidences

Dibyendu Maiti


Increasing trade competition usually redistributes factor share in both developed and developing economies and whether it favours workers depends on the nature of foreign competition, labour relation and trade union. A simple theoretical model, using the cournot game between domestic and foreign firms with alternative combinations of labour market and trade union types, is used to investigate its effects on the distributive share of formal workers. We find that when the import competition due to tariff-cuts unambiguously hurts their wage and its share at a higher rate in the developing countries. Even if the foreign firm directly invests in the domestic country, the wage and its share unambiguously decline in the presence of decentralised unions and also in a developing economy under centralised union, but not in a developed economy. Indian economy registered a gradual drop in industrial disputes, strikes and lockouts as well as the wage share of the formal workers during 1980-2006, indicating a declining trend of union bargaining power with the advent of trade reforms. Panel regression results clearly establish that the foreign competition, due to tariff cuts and inward FDI, causes expansion of non-unionised sector and thus depresses the distributive share of the unionised sector.  

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