Labour Market Adjustment and Intra-Industry Trade: Empirical Results from Indian Manufacturing Sectors

Abstract

During the last two decades, India has witnessed several trade and industrial policy reforms. The objective of the study is to examine the relationship between dynamism of India’s two-way trade, measured through Marginal Intra-Industry Trade (MIIT) index, and labour market adjustments, reflected through absolute employment changes, in select manufacturing sectors over 2001–2015. India’s MIIT in select sectors generally display an upward trend over the sample period, while a mixed dynamics is observed on the employment front. The generalized method of moments (GMM) estimation results indicate that MIIT, increase in productivity, skilled workforce intensity, industrial concentration, incremental FDI inflows and trade openness positively influence absolute employment changes, whereas unskilled wage exerts a negative impact on the same. The analysis further concludes that high relative growth rate, skill-intensity, incremental FDI inflows and higher productivity in a sector, also characterized by higher MIIT, may lead the firms to employ more productive and competitive resources, resulting in higher absolute changes in employment. The obtained results do not support the Smooth Adjustment Hypothesis (SAH) predictions in the Indian context.