Intra-industry trade and labour market adjustment: Indian manufacturing sector

Abstract

The study investigates the role of trade, labor market regulations and institutions on labour adjustment costs. The study develops a linear dynamic panel model using quasi-maximum likelihood fixed effects estimator. Using a panel data of 40 Indian manufacturing sectors we find that the better labour market regulations and institutions reduce the labour market adjustment costs. This result using both the set of proxies for labour adjustment costs -job re-allocation rates as well as absolute employment change- supported this view. We find the same to be true when examining the male and female labour adjustment costs individually. Nonetheless, the study did not find any evidence to support the impact of trade expansion as well as the structure of trade expansion on labour market adjustment costs. The results are robust to static and dynamic panel methods.