Wages in Imperfect Markets: A Post-reforms Study of Indian Manufacturing

Abstract

This study analyzes the effects of structural market imperfections on wage growth in the Indian manufacturing following concerns over wage inequality post economic reforms, 1991. Using firm-level sales, expenditure, and wage data, we construct indices for market concentration, mark-up, and wage growth for 22 three-digit manufacturing industries for the period 1999–2016. Preliminary observations show falling wage shares in 18 industries, a rising level of concentration in all the industries and a fluctuating mark-up across the period confirming the results of other empirical studies. A panel regression shows that the impact of imperfect markets on wage growth is dialectical: an increase in market concentration has a positive effect on wage growth, whereas an increase in mark-up has a negative effect. The study finds that having fewer firms in a market is more beneficial for wage growth, given that there are prudential regulations to check monopoly behaviour. The study recommends that the Competition Commission of India incorporates these wage concerns when deciding to prohibit the abuse of dominant positions.