The Effects of Exogenous Technological Change on Wage Inequality in Rural India

Abstract

This article develops a theoretical model that studies the economic benefits to skilled rural artisans receiving toolkits under a given poverty reduction programme. The model encompasses the frameworks for understanding the relationship between the supply of skilled labour (artisans) with improved toolkits, changes in rural economic activities and the relative incomes. Consequently, it provides a natural setting to infer their empirical relevance. The counterfactual analysis from a large sample of data reveals that once the toolkits are provided to the rural skilled artisans, the artisans as a broad social group are more likely to have benefited from the programme. Less benefit can be, but is not necessarily, associated with poor education level and other assets owned by the rural artisans. More interestingly, while the real wages of skilled workers are expected to rise due to the use of skill-biased toolkits, the wages of unskilled workers may either remain unaffected or even fall. The issue of supply of skilled labour has, therefore, become an area of immense interest largely because of the rising inequality in the relative wages of skilled and unskilled labour.