By Reshad N Ahsan (University of Melbourne) and Arpita Chatterjee (University of New South Wales)

Economic globalization is currently under threat from a populist political backlash.  A common narrative is that this backlash is partly a result of a trade-induced increase in inequality.[1]  In our recent research, we show that the same mechanism that causes greater trade-induced inequality – a higher relative demand for skill – also allows an increasing number of Indian sons from underprivileged backgrounds to enter better occupations than their father.[2]  This suggests that, when thinking about the effects of trade on labour-market opportunities for the poor, we must keep in mind international trade’s ability to provide a pathway for children from underprivileged backgrounds to move up the occupational ladder.

Once regarded as one of Asia’s least open economies, India experienced a rapid increase in trade following its trade reforms in 1991.  These reforms led to a decrease in India’s average manufacturing tariffs from 149 percent in 1988 to 45 percent in 1998. This dramatic trade reform occurred in a country where occupations are highly persistent across generations.  This is vividly illustrated in Figure 1 below, where we show that conditional on having a father who is at the bottom decile of the fathers’ occupational distribution in 1999 there is a 57 percent chance that a son in 1999 is also in the bottom decile of the sons’ occupational distribution.  We also observe high levels of persistence at the other end of the occupational distribution.  In particular, we find that, conditional on having a father who is at the top decile of the fathers’ occupational distribution in 1999 there is a 39 percent chance that a son in 1999 is also in the top decile of the sons’ occupational distribution.

Figure 1: The occupational deciles of sons who have fathers in the bottom decile of the fathers’ occupational distribution.

To identify the impact of trade on occupational mobility, we use nationally representative household surveys collected by the National Sample Survey Organisation (NSSO).  These data are for the year 1999 and allow us to categorize individuals in our sample in to 335 three-digit occupations.  With these data in hand, we examine whether, all else equal, a son residing in an urban district with greater exposure to trade liberalization is more likely to be in an occupation that is higher ranked than that of his father.[3]  We define a district’s exposure to trade liberalization as the change in the weighted average tariffs of all manufacturing industries located in that district between 1987 and 1998.  A key advantage of our context is the fact that India’s trade reforms were enacted under pressure from the International Monetary Fund and provides us with exogenous variation in tariffs in the post-reform period.[4]

Our analysis shows that greater exposure to trade liberalization allows an increasing number of sons from underprivileged backgrounds in India to enter better occupations than their father.  This result is both statistically significant and economically meaningful.  It suggests that differential exposure to trade explains 46 percent of the difference in upward occupational mobility between a district at the 25th percentile of upward mobility when compared to a district at the 75th percentile.

What explains this effect?  We show that sons residing in more liberalized districts in 1999 are more likely to be employed in skill-intensive industries. This is consistent with the idea that trade induces an increase in the relative share of skilled occupations.[5] While this effect goes hand-in-hand with a rise in the gap in skilled and unskilled wages, it also creates exactly the type of occupations that underprivileged sons need to move up the occupational ladder.  Interestingly, we also find evidence of spillover effects where manufacturing tariff liberalization leads to greater intergenerational occupational mobility amongst sons working in non-manufacturing industries.  We show that this result can be partly explained by the rising demand for skill in downstream manufacturing industries spilling over in to upstream non-manufacturing industries.

An alternate explanation for our results is that trade liberalization improved occupational mobility via its impact on educational mobility.  This means that households that invest more in their son’s education as a result of trade are the ones that experience greater upward intergenerational occupational mobility.  However, our results do not support this conjecture.  Interestingly, in a second new result, we show that greater investment in education only facilitates greater intergenerational occupational mobility in areas where we expect to see the largest increases in the employment share of high-skill occupations.  These results suggest that education can act as a harbinger of social mobility only if there is a sufficient increase in the demand for skill.

Our results offer a more nuanced perspective on the prevailing narrative that trade leads to adverse labour-market outcomes for underprivileged individuals. While trade may increase the skill premium, it also has longer-term effects that facilitate upward intergenerational mobility. For developing countries in particular, these longer-term effects of trade on occupational mobility have the potential to significantly improve the lives of underprivileged individuals.

References

Aghion, P., Blundell, R., Griffith, R., Howitt, P., and Prantl, S., 2009. “Online Supplement to The Effects of Entry on Incumbent Innovation and Productivity.” The Review of Economics and Statistics, 91(1): 20–32.

Ahsan, R.N., and Chatterjee, A., 2017. “Trade Liberalization and Intergenerational Occupational Mobility in Urban India.” Journal of International Economics, 109(1): 138-152.

Rodrik, D., 2017. “Populism and the Economics of Globalization.” NBER Working Paper Number 23559.

Topalova, P., 2010. “Factor Immobility and Regional Impacts of Trade Liberalization: Evidence on Poverty from India.” American Economic Journal: Applied Economics, 2(4), 1–41.

Endnotes

[1] See Rodrik (2017).

[2] See Ahsan and Chatterjee (2017).

[3] We rank occupations by calculating the average education of individuals in that occupation in 1987, which is prior to the trade reform of 1991.  Thus, we do not allow this ranking to change over time. Our results are robust to ranking occupations based on average wages instead.

[4] See Topalova (2010).

[5] We develop this idea more formally in an appendix to our paper. Following Aghion et al. (2009), we show that the threat of foreign entry encourages domestic firms that are relatively close to the technology frontier to increase their innovation effort, thereby leading to an increase in the share of high-skill occupations.