Skilled Labour Specificity and the Pure Theory of International Trade: An Application to the Indian Information Technology Sector

The factor price-equalization theorem predicts a convergence of returns in the long run to capital and labour across trading partners when trade is liberalized. Thus, developing countries, which tend to export labour-intensive goods, should experience the benefits of a rise in relatively unskilled-labour wages when they undertake trade reforms. However, this does not seem to have occurred in practice, at least for a number of developing and emerging market nations. In this paper, a model is set up to explain this deviation from the results of the pure theory of international trade, drawing upon the developments in the Indian information technology sector, specifically its distinctive labour input requirements.