Factor specificity and wage inequality in a developing economy: The role of technology and trade in Indian manufacturing

The wage inequality between skilled and unskilled labour has been observed to have risen in both developed and developing countries in recent years. The received explanations for this phenomenon have been mainly attributed to (1) outsourcing and (2) skilled biased technological change. However, very few of these explanations were carried out in a general equilibrium framework. In a recent paper using a general equilibrium framework with factor specificity it has been suggested that differential marginal productivity growth of skilled and unskilled labour could be a possible cause of rising wage inequality. While this is an interesting testable hypothesis, it is in essence, seems to be incomplete as it does not try to explain why the productivities of skilled and unskilled labour should move differently. In our paper, we shall try to first, examine the trend of wage inequality in Indian manufacturing and second, examine whether the productivity differential hypothesis as an explanation of rising wage inequality in India can be validated. Having done this we further try to examine the possible factors that might be affecting the marginal productivities of skilled and unskilled labour differently.