Import shock and local labour market outcomes: A Sino-Indian case study

Focusing on Sino-Indian trade, this paper uses detailed district-level data, exploits India’s drastic increase in imports from China since 2001, and uses the instrumental variables approach to examine the impact of trade shock on the local labour market outcomes. Through a matching procedure, the geographical coverage of the paper is significantly improved compared with prior studies. The range of labour market outcome variables examined is also much broader, including wage, residual wage fluctuation, employment, unemployment and underemployment as shares of the working-age population. The paper finds that the import competition from China had a negative impact on the districts’ average wages but a positive impact on districts’ shares of employment. Moreover, the paper allows heterogeneous effects across consumption, age, gender, occupation and industrial groups. The results confirm that the effect of import shock is not uniformly distributed within the districts. Rather, it varies with respect to specific socio-economic characteristics. The wage effect, for example, is positive for those from the lower consumption basket.