The Indian Journal of Labour Economics (2020) 63:291–309

https://doi.org/10.1007/s41027-020-00220-x

ARTICLE

Does Global Economic Integration affect Labour Income

Share in India?

Jagannath Mallick1

Published online: 18 June 2020

© Indian Society of Labour Economics 2020

Abstract
This paper examines the impact of economic integration on labour income share
both at the aggregate as well as at the disaggregate industry levels of Indian econ-
omy. The paper uses the ARDL approach for the aggregate level analysis and the
panel GMM method for the disaggregate level analysis. The results from both the
analysis confirm that global economic integration and technological progress affect
the labour income share in India. It also brings out the evidence that a stronger
degree of economic integration is associated with the declining labour income share
which is accompanied by rising labour productivity, employment, wage rates, and
capital income. That means there is a positive correlation of economic integration
with the wage rate, employment, capital earnings and labour productivity. However,
it also makes an important observation that the labour share is adversely affected, as
the wage rate growth lags the labour productivity growth and the compositional shift
takes place due to the rising capital income. The increases in employment and wage
rate are not enough to offset the adverse effects on the labour share in India.

Keywords  Globalization · Emerging economies · Labour income share ·

Productivity · ARDL · System GMM

JEL classifications  F02 · F06 · F43 · R11 · R12 · L1

1 Introduction

The studies on functional income distribution have identified that there has been
a symptom of declining labour share in national income in recent years in various
countries (Elsby 2013; Karabarbounis and Neiman 2013; Stockhammer 2015; IMF
2017). The labour income share has been falling in most of the developed, develop-
ing and emerging countries. In particular, there is about 20% decline in the labour

* Jagannath Mallick
mallickjagannath@gmail.com
1
State Bank of India, State Bank Institute of Leadership (SBIL), Kolkata, India

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income share in the Asian developing countries (Doan and Wan 2017). The distribu-
tion of labour income is more equal than that of capital income (Daudey and García-
Peñalosa 2007; Garcia-Penalosa and Orgiazzi, 2013; Jacobson and Occhino 2012),
and the country that relatively experiences rising income share of capital, it is also
likely to experience rising income and wealth inequality (Piketty 2014; Atkinson
2009). The downward trend of labour income share is associated with the rising
trend of the degree of globalization in the emerging countries. The existing litera-
ture analysed the globalization effects on income inequality and productivity in the
emerging countries (Goldberg and Pavcnik 2007; Mallick 2015, 2018a, b; Topalova
2007; Wan and Ming Lu 2007; Xue and Luo 2014). As the functional distribution
of income is the root cause of the rising inequality, it is thus policy imperative to
explore whether the rising degree of global economic integration leads to a down-
ward trend of labour income share, mainly in the emerging countries.
Since the initiation of New Economic Policy (NEP) measures in early 1990s by
the Government of India, India has been taking drastic reform measures relating to
international trade so as to increase its participation in the global market and thereby
integrate the economy with the rest of the world. In the process, major trade bar-
riers are slowly removed, the licensing system has been gradually dismantled, and
private investment is being encouraged in various core economic activities including
strategic sector like defence, and so on. The increasing participation in the global
economic integration leads to a significant change in the composition and struc-
ture of the economy, and also of the international trade structure. This, in turn, may
affect both the product market and labour market conditions. Hence, India’s increas-
ing participation in the global economic integration might have affected its func-
tional income distribution. However, the existing studies are mainly concentrated on
labour income share in the manufacturing sector in India (Abraham and Sasikumar
2007; Jayadev and Narayan 2018; Kujur 2018; D’souza and Naik 2018). The role of
globalisation or global economic integration is not considered while explaining the
labour share in India.
In light of the above discussion, this paper aims to examine the impact of eco-
nomic integration through both trade openness and financial integration on labour
income share in the second-largest emerging economy, India. The study contributes
to the existing literature in various ways. First, we analyse the impact of global eco-
nomic integration on the labour share in the aggregate economy. Second, we also
estimate the impact of trade integration on the labour share by considering 27 dis-
aggregate industries’ of the macroeconomy. This analysis is new as no study has
attempted studying 27 disaggregated industries of the Indian economy in dealing
with labour share and trade openness.
The rest of the paper is organized as follows. Section 2 provides a discussion on
the economic integration, and trade structure at the aggregate level for the entire
economy and also at the disaggregate level industries in India. Section  3 presents
the trends and patterns of labour income share and productivity in the total economy
and industries. Section  4 discusses the theoretical perspectives on the factors that
affect labour income share. Section 5 provides the empirical methodology and data
sources. Section 6 presents the results from the empirical analysis. The last section
concludes the paper.

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70.0 KOFT-India 60.0

60.0 KOFT-China
50.0
KOFF-India
50.0
40.0
KOFF-China
40.0
30.0
30.0
20.0
20.0

10.0 10.0

0.0 0.0
1984

2015
1980
1981
1982
1983

1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Fig. 1  Trends of Global Economic Integration of India. Source: Gygli et al. (2019)

2 Trends of Global Economic Integration

Globalization is measured in many dimension—economic integration, social glo-

balization and political globalization—where economic integration constitutes
financial integration (KOFF) and trade integration (KOFT) (Gygli et al. 2019; Mal-
lick 2013, 2017). Further, KOFF comprises of foreign direct investment (FDI), port-
folio investment, international debt, international reserves and international income
payments. KOFT is defined to include trade openness and trade diversification.
In this paper, we focus on trade openness, which is the major component of eco-
nomic integration. There is significant progress in trade openness in India since the
1990s (see, Fig. 1). If we compare India with the largest emerging economy, which
is China, the degree of trade openness of India was far behind China until 2008.1
After 2008, the gap in trade openness between these two countries has consider-
ably decreased. In the next, we discuss the patterns of export and imports to get a
succinct picture of the status and patterns of international trade integration of India
compared with China from 1980 to 2015.

2.1 Patterns of Export and Imports

India has traditionally been a trade-deficit economy. Its income is mainly contrib-
uted by the domestic demand. The ratio of exports and imports to GDP trends in
Fig.  2 shows that the trade structure changes over the period from 1980 to 2015
compared to China. After the comprehensive economic reform measures in 1991
and trade liberalization measures in the 1990s, both exports and imports have
increased significantly in India. But the exports have grown at a lower rate than
that of imports, which results in an increase in the trade deficit in India and hence
affecting its current account balance.2 The Fig.  2 shows that the degree of trade

1
  2008 is the year of the global financial crisis which started in September 2007 and persisted until 2011.
2
  The drop in both the import and export in 2009 and post-2012 is due to the global financial crisis and
the global economic crisis, respectively.

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0.220
India Export
0.170 India Import
China Export
0.120
China Import

0.070

0.020
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
-0.030

Fig. 2  Ratio of export and import of final goods to GDP. Sources: PWT 9.1 Database

openness is significantly lower than that of China, particularly in the post-1990s.

Also, other developing countries including Bangladesh, Brazil and Indonesia have
a higher degree of trade openness (in terms of their export and import shares in
GDP) than India in the recent years. India has to rely on international trade to avoid
the middle-income trap and sustain its high economic growth trend. Though India
enjoys a comparative advantage in services, mainly ICT-related services but it is not
competitive in the merchandise sector mainly due to trade laws, poor infrastructure
and logistics costs. India is not able to take advantage of rising wage costs in China,
whereas Bangladesh, Cambodia and Vietnam are taking this benefit from manufac-
turing product exports, for example the apparel products. There are various chal-
lenges of India which stand in the way to take the benefit of this situation. Some of
these challenges are: (1) the competitors including Bangladesh and Vietnam enjoy
duty-free access to USA, EU and Japan through bilateral treaties (2) High domes-
tic taxes, stringent labour regulations; and high logistics cost (Government of India
2017).

2.2 Patterns of Export and Imports of the disaggregated level Industries

The 27 industry classifications of India Capital Labour Energy Materials and Ser-
vices (KLEMS) are used as the benchmark for the analysis. We use the Trade in
Value added (TiVa) database of OECD for the sectoral level data on exports and
imports. The concordances of 27 industries of India KLEMS with TiVa are con-
structed. Again for the simplification purpose, we classify 27 industries into 8 cat-
egories: agriculture, rest of industries, consumer goods, intermediate goods, invest-
ment goods, non-ICT services, ICT services and non-market services. The TiVa
data are available from 1995 onwards, hence, our industry-level trade analysis starts
from the year 1995.
The pattern of exports and imports in those eight industries from 1995 to
2015 is presented in Table 1. It shows that there has been a change in the struc-
ture of India’s export basket from traditional items to modern goods and ser-
vices. This has occurred because of industrialization and adoption of measures
of trade liberalization in the 1990s.The share of market services particularly the

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Table 1  International trade Broad industries Exports share Imports share

patterns in the broad industries,
India; Sources: OECD TiVa 1995 2005 2015 1995 2005 2015
(2016; 2017)
Agriculture 0.03 0.01 0.01 0.04 0.02 0.02
Industry 0.01 0.00 0.00 0.01 0.00 0.00
Manufacturing 0.54 0.55 0.53 0.61 0.63 0.65
 Consumer goods 0.42 0.32 0.26 0.15 0.19 0.20
 Intermediate goods 0.06 0.14 0.14 0.13 0.07 0.07
 Investment goods 0.06 0.09 0.13 0.33 0.36 0.38
Market services 0.34 0.38 0.41 0.29 0.28 0.25
 Non-ICT intensive 0.12 0.12 0.10 0.14 0.13 0.07
 ICT intensive 0.22 0.27 0.31 0.14 0.14 0.18
Non-market services 0.09 0.05 0.05 0.05 0.08 0.08

Table 2  International trade Broad industries Exports Imports

patterns in the broad industries,
China; Sources: OECD TiVa 1995 2005 2015 1995 2005 2015
(2016; 2017)
Agriculture 0.02 0.01 0.01 0.048 0.03 0.04
Industry 0.01 0.00 0.00 0.020 0.01 0.01
Manufacturing 0.61 0.89 0.89 0.64 0.67 0.56
 Consumer goods 0.38 0.33 0.31 0.145 0.09 0.10
 Intermediate goods 0.05 0.06 0.08 0.053 0.04 0.05
 Investment goods 0.18 0.50 0.50 0.438 0.55 0.41
Market services 0.31 0.09 0.10 0.271 0.24 0.32
 Non-ICT intensive 0.11 0.05 0.04 0.111 0.11 0.17
 ICT intensive 0.19 0.04 0.06 0.159 0.13 0.14
Non-market services 0.06 0.00 0.00 0.025 0.04 0.08

ICT intensive services in the export basket of India has been increasing. Inter-
estingly, the consumer products of the manufacturing industries was the pre-
dominant sector in the export basket that has been declining continuously from
0.42 in 1995 to reach 0.26 in 2015. The share of each of the intermediate goods
and investment goods in the total manufacturing output was 0.6 in 1995 which
increased to 0.14 and 0.13 in 2015.
In China, the manufacturing exports have been increasing significantly from
61% of total export in 1995 to 89% in 2015 (Table 2). The imports in this sec-
tor have increased from 64% in 1995 to 67% in 2005, and then it has declined
significantly to 56% in 2015. Within the manufacturing industry, there is a sig-
nificant decline in the export of consumer goods and multiple increases in the
export of investment goods. Whereas, its market services exports have declined
and imports have increased.

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16.00 0.80

14.00 0.70

12.00 0.60

10.00 0.50
WI
LI
8.00 0.40
LPI
6.00 0.30
KII
4.00 0.20 LIS
2.00 0.10

0.00 0.00
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Fig. 3  Productivity and labour income share in India. WI wage index, LI labour index, LPI laboiur pro-
ductivity index, KII capital income index, LIS labour income share. Source: Penn World Table 9.1

3 Labour Income Share and Labour Productivity

This section provides a brief description of the patterns of labour income share and
labour productivity to understand their relationships in India.

3.1 Patterns of Productivity and Labour Income Share

The trend in labour income share (LIS) is driven by two factors: (1) the growth of
real wages and (2) the growth of employment. The wage is driven by labour produc-
tivity under the condition of a perfectly competitive market. However, when the real
wage rate growth is more (less) than the labour productivity growth, it leads to an
increase (decrease) in labour income share. Below, we present the trends of labour
income share along with the trends of the real wage index (WI), employment index
(LI), labour productivity index (LPI) and capital income index (KII) (where the ref-
erence year 1980 = 1).
The labour income share in 2015 is 0.51 which indicates that 51% of national
income goes to the labour in terms of wages and salaries (Fig.  3). It is observed
that the labour income share of the total economy in India has declined significantly
from the middle of the 1980s. In 2015, the LPI is 4.47, accompanied by the capital
income index 15.06, the real wage index 3.07, and the employment index 1.8. This
means that labour productivity in India has become 4.47 times that of 1980, where
the capital income has become 15.06 times, the real wage rate has grown by 3.07
times: the employment has grown by 1.8 times compared to 1980. Hence, the real
wage rate growth is lagging behind the labour productivity growth, which results in
the declining labour share in India. The other important reason could be the informal
sector which is a very big component of the Indian economy. The size of the infor-
mal economy in India is the largest in the world as well. In general, the informal
workers are exploited, and they receive a lower wage rate. Further, the formal part
of the labour market in India is highly rigid which might be affecting the employ-
ment and the wage structure. Though the reform measures have begun recently to

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5.00
Non-Market
services
4.50
- ICT intensive
4.00
- Non ICT
3.50 Intensive
Market services
3.00
- Investment goods
2.50
- Intermediate
2.00 goods
- Consumer goods
1.50
Manufacuring
1.00
Industry
0.50
Agrculture
0.00
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Fig. 4  Labour income share in industries. Source: Author’s calculation from IKLEMS Version 2019,
RBI

eradicate the rigid laws (Bhattacharjea 2019), there exists a number of national and
state levels labour Act.
Also, the rising capital income is altering the composition of capital earnings and
labour earnings in the national income of India. Hence, the rising capital income at a
faster rate than the wage rate leads to the declining labour share. The capital income
has been increasing multifold due to both the rising capital stock and the rate of
return. Further, there is also a faster rate of trade integration particularly after 1991
as we discussed in the previous section. International trade facilitates resource allo-
cation and affects both the product and factor markets. This results in changes in the
payments and the inflow of capital, and thereby the changes in factor share.

3.2 Labour Income Share and Productivity in the Disaggregated Industries

First, we aggregate the labour share of the KLEMS disaggregated industries into
eight broad industries: agriculture, the rest of industries, consumer goods, interme-
diate goods, investment goods, non-ICT services, ICT services and non-market ser-
vices. It shows that the labour share has declined in all the eight industries from
1980 to 2015 except agriculture (see, Fig. 4). Whereas, the labour share only in the
agriculture sector is more or less stable over the years.
The factors of such patterns of labour share are delineated in Table 3. In 1995,
the labour productivity index in agriculture was 1.2 relative to our reference year
(1980–1981 = 1). It has increased to 1.5 and 2.6 in the years 2005 and 2015, respec-
tively. Whereas, its wage index was 1.2 in 1995 and it has increased to 1.5 and 2.7
in 2005 and 2015, respectively. The labour person index of this sector has declined
from 1980 to 2015. This sector has also experienced a rising capital income index
from 1.4 in 1995 to 2.5 in 2015. The matching of growth of real wage rate with that
of labour productivity makes the labour income share stable over the years. The rest
of the industries include the mining and quarrying, utility and construction activ-
ities, which have experienced huge growth in employment, but its real wage rate

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Table 3  Indices of labour, real wage rate, labour productivity and capital income; Source: Author’s calculation from IKLEMS Version 2019, RBI
LI WI LPI KII
1995 2005 2015 1995 2005 2015 1995 2005 2015 1995 2005 2015

Agriculture 1.19 1.26 1.00 1.2 1.5 2.7 1.2 1.5 2.6 1.4 1.9 2.5
Industry 2.21 3.72 8.64 0.8 1.1 0.8 1.0 1.1 0.8 2.7 4.8 7.9
Manufacturing 1.30 1.70 1.86 1.6 1.8 4.1 1.9 2.5 4.9 2.6 4.9 9.9
 Consumer goods 1.26 1.63 1.57 1.3 1.5 3.5 1.4 1.8 3.8 1.8 3.1 6.0
 Intermediate goods 1.42 1.85 2.25 1.6 1.8 4.0 2.1 2.8 5.0 3.2 5.8 11.8
 Investment goods 1.57 2.09 4.58 1.7 2.0 2.9 1.9 2.9 3.1 3.2 6.8 14.6
Market services 1.79 2.67 3.16 1.3 1.8 3.9 1.5 2.2 4.7 2.8 7.0 17.6
 Non-ICT intensive 1.74 2.78 3.59 1.3 1.5 2.7 1.4 1.9 2.9 2.7 6.8 11.9
ICT intensive 1.81 2.62 2.97 1.3 1.9 4.7 1.5 2.4 5.8 2.9 7.1 19.9
Non-market services 1.53 2.08 2.83 1.7 2.1 3.5 1.6 2.2 3.5 2.3 5.2 10.9
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The Indian Journal of Labour Economics (2020) 63:291–309 299

and labour productivity, have not grown. Also, there is a significant rise in capital
income in this industry. Hence, the labour share has declined in this industry.
As regards the manufacturing sector, labour productivity has increased by 4.9
times in 2015 compared to 1980–1981. But wage rate has not grown in accordance
with the pace of labour productivity growth, which led to a huge growth of capi-
tal income during this period. This results in a declining trend of labour share in
the manufacturing sector. Similarly, the higher growth of labour productivity than
the growth of the real wage rate accompanied by the significant growth of capital
income results in the declining trend of labour share in the consumer goods, inter-
mediate goods and investment goods industries. Also, in the service sector, the
growth of the real wage rate has been lagging behind the labour productivity growth,
and there is a huge growth of the capital income, which results in the declining
labour share over the period from 1980–1981 to 2015–2016.

4 Theoretical Prospective

We have seen in the previous section that the labour share changes due to differences
in growth of employment, growth of wage rate and capital income. According to
Bentolila and Saint-Paul (2003), under the equilibrium condition, the labour income
share can be expressed as a sole function of capital-output ratio (k) as below.
1 1
( ( ))( ( ( )))
LIS = k f −1 f � f −1 . (1)
k k
The Eq.  1 indicates that capital output ratio affects the labour share negatively.
Further Dao et al. (2017) views that the degree of impact of the capital–output ratio
on the functional distribution of income depends on the elasticity of substitution
between capital and labour. When the elasticity of substitution of capital for labour is
larger than 1 (highly substitutability of labour), a decline in the relative cost of capi-
tal encourages firms to substitute capital for labour, which may be responsible for
the decline in the labour income share (Arrow et al. 1961). Further, the technologi-
cal progress led by the innovations in information and communication technologies
and automation, by lowering the prices of capital goods can encourage substitution
of capital for labour disproportionately, affecting the relative labour share adversely
(Karabarbounis and Neiman 2014; Acemoglu and Restrepo 2018). Besides, the ris-
ing capital intensity due to rising industry concentration and the emergence of large
scale firms have a role in changing the labour share (Autor et al. 2017; Kehrig and
Nicolas 2017).
The theoretical perspectives of the impact of international trade or global eco-
nomic integration have been well debated in Guerriero and Sen (2012). Economic
integration has a larger role in the labour income share mainly through trade, off-
shoring and participation in global value chains (GVCs) (Elsby et al. 2013; Harrison
2012; Rodrigues and Jayadev 2010; WEO 2007). The globalisation is also respon-
sible as various countries engage in adopting different policy measures like fiscal
reform (like capital cess, tax concessions, etc.) to attract capital for the industrial

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development in a globalized world (Rodrik 1998). Further, the global value chain
participation and offshoring can affect the labour share negatively by influencing
the productivity (Feenstra and Hanson 1997). This may affect the labour income
share through mechanism of traditional trade theory and the bargaining power
framework (Doan and Wan 2017). The traditional trade models like Neoclassical’s
Heckscher–Ohlin model and Stolper–Samuelson model fails to explain the declining
labour share in the labour-abundant countries like India, because of the considera-
tion of several unrealistic assumptions. These models do not capture the effect of the
mobility of capital and labour across the countries, and the heterogeneity of labour
in terms of their skills. The globalisation may also favour skilled labour in develop-
ing and emerging countries (Stockhammer 2009).
The second channel is the bargaining power framework (Rodrik 1997; Slaughter
1999). Under imperfect competition, the objective of entrepreneurs and workers is
to maximise their factor prices. The maximisation of factor prices depends on their
bargaining power, which is in turn determined by the fixed costs of relocating to the
foreign country, and importantly the differences in the return to factor between the
home country and the foreign country (Harrison 2005). Hence, the promotion of
globalisation in developing and emerging economies through removing the barriers
to trade and FDI inflows lead to the reduction of fixed costs and increase the rate
of return. The more mobile factors like capital, take the advantage of globalisation
(Rodrik 1997).

5 Empirical Methodology and Data

The study focuses on the impact of economic integration on labour share both at the
aggregated and sectoral levels in India. For the aggregated level analysis spanning
from the year 1980 to 2015, we use the time-series auto-regressive distributed lag
(ARDL) method. ARDL cointegration technique is robust when there is a long-run
relationship between the variables under consideration in a small sample size.3 The
cointegration of the variables is identified through the F statistic (or Wald test).
The second part of the empirical analysis includes 27 KLEMS sectors over the
period from 1995–1996 to 2015–2016, which results in a panel data structure. A
general panel data equation is:
Yit = 𝜕 + 𝛽GTit + ∅Cit + 𝜇i + 𝜀it , (2)
where i = 1, 2,… n (n = 27) and t = 1995–1996, 1996–1997,…, 2015–2016. Yit is the
labour share and ­GTit is the variables related to economic integration i.e., trade and
financial integration, and Cit is the vector of control variables. The composite resid-
ual error consists of µi and 𝜀it . The µi is a time-invariant sector-specific component
that captures the unobservable characteristics specific to the sectors, which have a

3
  For the detailed methodology, see, Pesaran et al. (2001) and Narayan (2005)

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Table 4  Variables and data for the aggregated economy analysis

Variables Measurement Data

Labour income share (LIS)
Capital intensity (KIN)
Total factor productivity (TFP)
Human capital (HC)
International Trade
Economic globalisation
Trade globalisation (KOFT)
Financial integration (KOFF)
Ratio of total compensation of labour to total income Penn
Ratio of capital stock to labour World
Table
Total factor productivity index
(ver-
This index captures years of schooling with the returns to sion
education 9.1)
Sum of export share and import share in GDP (TRADE)
Export share in GDP (EXP)
Import share in GDP (IMP)
Overall globalisation index includes economic integration, KOF
social globalisation and political globalisation, where data-
economic integration is defined to include both the trade base
and financial integrations Gygli
This includes trade in goods and services and trade diversity et al.
(2019)
Foreign direct investment, portfolio investment, inter-
national debt, international reserves and international
income payments

significant impact on the LIS. The 𝜀it , is the disturbance term which satisfies the
assumptions of the classical linear regression model.
We used the dynamic panel generalized method of moments (GMM) estimator,
mainly due to two reasons. First, some of the regressors, such as productivity, are
expected to have endogenous relations with labour share which can be understood
through the growth accounting approach. Second, the number of sectors/industries
(n) is larger than the number of the time periods (T). The dynamic representation of
Eq. 2 can be written as:
Yit = 𝛼Yit−1 + 𝛿Xit + 𝜆Zit + μi + 𝜀it , (3)
where Yit–1 is a 1-year lag of LIS, Xit is the strictly exogenous variables, and Zit is
predetermined and endogenous variables, and where α, 𝛿 and λ are the parameters.
The panel GMM can be estimated through two approaches: (1) difference GMM
and (2) system GMM. The difference GMM uses the lagged values of the explana-
tory variables as instruments. However, if the first differences of the explanatory
factors are persistent, this leads to weakening of the instruments. This increases the
variance of the estimated coefficient and thereby introduces biasness in estimations
with small samples. Hence we have employed system-GMM estimator in which the
regressors in the level are instrumented by their lagged values in differences, and the
regressors in differences are instrumented by the lagged values of the level. The con-
sistency of the GMM estimator is decided by the validity of the moment conditions.4

4
  The validity of the instruments is judged by two specification tests: (1) Hansen’s test of over-identify-
ing restrictions. This tests the joint null hypothesis that the instruments are valid. (2) Arellano–Bond test:
This verifies the null hypothesis of no second-order serial correlation in the residual error term.

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5.1 Data

To address the issue at the aggregate level of the economy, our data consist of
annual data spanning the year from 1980–1981 to 2015–2016, which are mainly
sourced from Pen World Table (PWT) and KOF databases (Gygli et al. 2019). The
detailed measurement of variables and respective databases are provided in Table 4.
The labour income share is the share of income accrued to labour in the total income
of an economy. Economic integration consists of trade openness and financial inte-
gration, where trade openness is represented by four alternative variables: trade
index of KOF (KOFT), the ratio of trade to GDP (trade), export ratio to GDP (EXP)
and the ratio of import to GDP (IMP). The financial integration is measured by the
KOFF index as mentioned earlier. The other explanatory variables are total factor
productivity (TFP), capital intensity (KIN) and human capital (HC). The impact of
economic reform is taken into account by introducing a dummy variable that takes
value 0 before 1991 and otherwise 1 for the remaining years for post liberalisation
period.
The disaggregated analysis consists of 27 KLEMS sectors during the period from
1995–1996 to 2015–2016. The data are taken from IKLEMS of RBI and TiVa of the
Organisation of Economic Cooperation and Development (OECD). The construc-
tion of variables and data is described in Table 5. There is no data on financial inte-
gration at the disaggregated industries. Hence, we included only the variable related
to trade i.e., trade openness, the ratio of imports to total trade and offshore for the
disaggregate industry analysis. The other explanatory factors included in this analy-
sis are capital intensity, TFP and sectoral value-added share.

6 Empirical Results

6.1 The Aggregated Economy Analysis

The aggregated level analysis uses the ARDL cointegration approach. This method
has a precondition that none of the included variables is of the integrated of order 2,
i.e., I (2). This is because of the fact that the computed F statistics of Pesaran et al.
(2001), that determines the existence of the long-run equilibrium does not work if
the model includes any I(2) variable. Hence, we verified the order of integration
of the included variables through augmented Dicky–Fuller (ADF) and Phillips–Per-
ron (PP) tests including the most powerful unit root test, the Kwiatkowski–Phil-
lips–Schmidt–Shin (KPSS) test. These tests confirm that all the variables are either
I(0) or I(1).
First, the models are specified by determining the lag order of the variables based
on the Akaike information criterion (AIC). We needed to choose the optimum lag
structure to avoid residual serial correlation, and over-parameterized problem in the
error correction model (Pesaran et al. 2001). Once the model is appropriately speci-
fied, we have used the ARDL-bound test to determine whether there is cointegration
(or the long-run equilibrium relation) between the variables in the chosen model. In
this method, if the computed F statistics is larger than the upper bound of the critical

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 Table 5  Variables and data for the disaggregated industries analysis
Variables Measurement Data Remarks

Labour income share (LIS) Ratio of total compensation of labour to total IKLEMS 2019, RBI
income
Capital intensity (KIN) Ratio of capital stock to labour
Value-added share Sectoral share in the total economy’s GDP
Total factor productivity (TFP) Total factor productivity index Total factor productivity growth is exponen-
tially indexed with reference year 1994 = 1
The Indian Journal of Labour Economics (2020) 63:291–309

International trade (1) ratio of export and import of final goods to TiVa of OECD versions 2016 and 2018 Export and import at current year prices in USD
GDP (TRADE) is converted to constant prices in national
(2) ratio of import to total trade (IMPT) prices using the aggregated export and import
deflator from Asia Productivity Organisation
(APO) data
Offshore Ratio of imported intermediate goods to the Imported intermediate goods of TiVa Imported intermediate goods are also converted
total intermediate goods and total intermediate goods of to constant prices at 2011
IKLEMS

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Table 6  Long-run results
Regressors Model 1 Model 2 Model 3 Model 4 (1 2 2 2 2 2)
(2 1 1 1 2 2) (1 1 2 0 2 2) ( 1 1 2 0 2 2)

TFP − 0.33 (0.08)*** − 0.44(0.17)** − 0.34 (0.16)** − 0.44 (0.15)**

KIN 0.05 (0.02)** 0.10 (0.06)*** 0.02 (0.03) 0.09 (0.05)**
KOFT − 0.06 (0.02)*** −  −  − 
Trade −  − 0.62 (0.43)* −  − 
EXP −  −  −  − 1.98 (0.95)**
IMP −  −  − 0.07 (0.27) − 
KOFF − 0.04 (0.02)** − 0.03 (0.02)*** − 0.10 (0.02)*** − 0.08 (0.02)***
HC − 0.02 (0.12) 0.05 (0.17) 0.13 (0.17) 0.06 (0.2)
F-stat 9.67 5.34 4.73 4.85
k = 5 90% 95% 99%
I(0)-lower bound 2.26 2.62 3.41
I(1)-upper bound 3.35 3.79 4.68

*, ** and *** indicates statistical significance at the 10%, 5% and 1% levels, respectively

value, then we decide that there is the presence of cointegrating relations in the
model. After that we estimate the error correction representation of the model which
gives results on the significance of the error correction term, long-run relations and
short-run relations. We use the diagnostic tests of the Breush–Godfray serial cor-
relation LM test, Breush–Pagan Godfray test of heteroscedasticity and Cusum and
Cusum square test of stability to ensure the validity of the estimated model. We
estimated four sets of the model starting from labour share as a function of KOFT,
KOFF, TFP, capital intensity and human capital. The KOFT is replaced by TRADE,
imports and exports in the second, third and fourth models, respectively.
To start with model 1, the AIC criteria determines its lag order as (2 1 1 1 2 2)
in Table  6. The existence of the long-run causality is established from the F stat
as its computed value (9.67) is larger than the upper bound value.5 The estimated
results reveal that the productivity and both the variables of economic integration
i.e. KOFT and KOFF adversely affect the labour share, whereas, capital intensity
affects the labour share positively over the long run. However, it is surprising to find
that human capital does not affect the labour share in the long run. The same steps
are followed to estimate the other three models in which the computed statistics are
also larger than the upper bound values. This enables us to infer that there are long-
run equilibriums in the other models as well. The impact of TFP, capital intensity,
KOFF and human capital is consistent in all the models except in model 3.
The error correction representations of the estimated ARDL models 1–4 are
provided in Table  7. The negative sign and statistical significance of the error

5
  Narayan (2005) argues that the critical values of F stat depend on the sample sizes. As the critical
values of Pesaran et al (2001) are for larger sample sizes, we also compare the values with 34 number of
observations from Narayan (2005).

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Table 7  Short-run results
Regressors Model 1 Model 2 Model 3 Model 4

D(LIS(-1)) 0.28 (0.14)**

D(TFP) − 0.28 (0.10)** − 0.19 (0.11)* − 0.14 (0.11) − 0.19 (0.11)*
D(TFP(-1)) −  −  −  0.12 (0.12)
D(KIN) − 0.60 (0.18)*** − 0.54 (0.23)** − 0.54 (0.22)** − 0.56 (0.22)**
D(KIN (-1)) −  0.39 (0.22)* 0.27 (0.22) 0.30 (0.20)
D(KOFT) − 0.002 (0.001)* −  −  − 
D(KOFT(-1)) 0.06 (0.02)*** −  −  − 
D(TRADE) −  − 0.16(0.18) −  − 
D(TRADE-1)) −  0.38 (0.24) −  − 
D(IMP) −  −  − 0.07 (0.25) − 
D(EXP) −  −  −  − 0.66(0.47)
D(EXP(-1)) −  −  −  1.13 (0.60)*
D(KOFF) − 0.001 (0.0008)* − 0.003 (0.03) − 0.02 (0.02) − 0.01 (0.03)
D(KOFF(-1)) 0.003 (0.001)** 0.07 (0.02)** 0.07 (0.02)** 0.08 (0.02)***
D(HC) 0.78 (0.49)* 1.26 (0.45)** 1.25 (0.46)** 1.31 (0.44)**
D(HC(-1)) 0.79 (0.41)* 0.94 (0.47)** 0.87 (0.48)* 0.99 (0.46)**
d91 − 0.02 (0.01)*** − 0.02 (0.01)*** − 0.01 (0.01)* − 0.01 (0.007)*
ECM(-1) − 1.36 (0.21)*** − 0.92 (0.20)*** − 0.90 (0.20)*** − 1.05 (0.22)***
C 0.58 (0.26)** − 0.19 (0.55) 0.48 (0.30) 0.13 (0.42)
AdjRsq 0.69 0.62 0.60 0.64

*, ** and *** indicates statistical significance at the 10%, 5% and 1% levels, respectively

correction terms, ECM (-1) reconfirm the existence of long-run causality from
independent variables to labour share in all these models. The results in Model
1 show that KOFT has a mixed effect in the short run as evidenced by a nega-
tive and statistical significance of its coefficient. However, its effect turns out to
be positive with 1-year lag period. Similar kinds of effects are also evidenced
for the financial integration variable, KOFF. The sign of the coefficient of TFP
in the short run is consistent with that of long-run results in explaining labour
share. Whereas, capital intensity affects the labour share negatively in the short
run, and this effect turns to be positive in the long run. Further, the human capi-
tal affects the labour share positively in short run in contrast to its no effect in
the long run. Finally, the dummy for the economic reform measures affects the
labour share negatively. The ECM representation of ARDL models satisfies the
diagnostic tests for autocorrelation, heteroscedasticity and stability. The same
steps are followed for the other models, and found that the signs of all the coef-
ficients are consistent in all other models except few deviations. The adjusted R
square is found to be 0.69 in model 1 which indicates that this model performs
better than the other three models.

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Table 8  Results of panel GMM system

Model 5 Model 6 Model 7

L. LIS 0.94 (0.01) *** 1.01 (0.02)*** 0.94 (0.02)***

Global economic integration
TRADE − 0.009 (0.003)**
Import in trade openness − 0.00004 (0.00002)**
Offshore − 0.03 (0.009)***
Other factors
TFP − 0.005 (0.003)* − 0.17 (0.007)*** − 0.01 (0.005)**
Capital intensity 0.029 (0.006)*** 0.05 (0.00002)** 0.03 (0.009)**
Economic structure − 0.59 (0.09)** − 0.68 (0.35) ** 0.06 (0.24)
Observations 540 540 540
Groups 27 27 27
 AR(1) − 3.77*** − 3.78 − 3.68***
 AR(2) − 1.64 − 1.63 − 1.62
Hansen over ID 24.66 26.44 23.4

*, ** and *** indicates statistical significance at the 10%, 5% and 1% levels, respectively

6.2 The Disaggregated Industry Level Analysis

The impact of the economic integration on the labour share through the factors
related to trade has been analysed across 27 KLEMS industries during the period
from 1995–1996 to 2015–2016 using the panel GMM-system method. The func-
tional specification of the empirical analysis is expressed as LIS is a function of
TRADE, KIN, TFP and economic structure. All the endogenous variables and exog-
enous variables are estimated with their 1-year lag values. The diagnostic statistics
are found to be suitable for the chosen specification for the estimation of system
GMM. Three models from 5 to 7 are estimated for the alternative measurements
of trade openness (Table  8). Model 5 uses TRADE for trade openness, which is
replaced by imports in Model 6 and by offshore in Model 7.
First, the coefficient of TRADE is negative and statistically significant in Model
5. This confirms the negative effect of trade openness on the labour share, which
is also evidenced by our total economy analysis. Second, we include other factors
such as TFP of industries, capital intensity and value-added share of industries in
the analysis. The results show that the coefficient of TFP is negative and statistically
significant in Model 5, which is in confirmation with our economy level aggregation
analysis as well. Similarly, the coefficient of capital intensity is positive and statisti-
cally significant. The economic structure is also found to be negative and statisti-
cally significant in the model. The above results in Model 5 are consistent in Models
6 and 7 except the coefficient of economic structure which is not statistically signifi-
cant in Model 7.
The results from the disaggregated industries analysis with regards to TFP, cap-
ital intensity and TRADE are consistent with the results from our total economy
level analysis. Besides, it gives some additional findings particularly on the impact

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The Indian Journal of Labour Economics (2020) 63:291–309 307

of imports and offshore on LIS. The coefficient of imports is negative and statisti-
cally significant in Model 6. The coefficient of offshore is also negative and strongly
statistically significant in Model 7.
The findings on trade openness are consistent with some of the studies includ-
ing Maiti (2018). Maiti argues that trade openness weakens the bargaining power of
workers and thereby it reduces labour share. However, other studies such as Ashan
and Mitra (2014) find that the impact of trade openness depends on the size and
nature of the industry. Ashan and Mitra established that trade liberalization posi-
tively affects the wage share in total revenue for small, average labour-intensive
firms, but negatively affect the wage share in the larger, less labour-intensive firms
using the three-digit level industry data. Similarly, there are also mixed views on
the effect of capital intensity on the labour share in India. Abraham and Sasikumar
(2007) find a negative effect of capital intensity on the labour share in the organised
manufacturing sector in 1980–2012. Jayadev and Narayan (2018) find the negative
effect of capital intensity, economic structure (or the firm size) and human capital
on the labour share in India’s formal industrial sector in 1983–2014. However, Maiti
(2018) finds a positive effect of capital on the labour share. Our findings show that
capital intensity negatively affects labour share in the short run, this effect tends to
be positive in the long run.

7 Conclusions

The preliminary analysis has highlighted that the declining trend of labour share
started in the middle of the 1980s in the Indian economy. One of the reasons for
the declining labour share from 1980 to 2015 is that the wage rate has not grown in
keeping with the labour productivity growth, and the other reason is the high growth
of capital income share. The empirical results from the total economy level analysis
points to the dominant role of TFP or technology and global economic integration
in determining the labour income share in India. The results from the disaggregated
industry-level analysis also confirm the role of TFP and trade openness along with
offshore in determining the labour income share from 1995–1996 to 2015–2016.
The paper has crucial policy implications to improve labour share and thereby
reduce the income inequalities. The empirical evidence shows that the rising degree
of economic integration is associated with the declining labour income share which
is accompanied by rising labour productivity, employment, wage rates and capital
income. That means there is a positive correlation of economic integration with the
wage rate, employment, capital income and labour productivity. But labour share is
affected adversely as the growth of wage rate is lagging behind the labour productiv-
ity growth and the compositional shift in income shares takes place due to the rising
capital income as well. The increase in employment and wage rate is not enough to
offset these adverse effects on the labour share. Hence, we recommend that the poli-
cies should be devised to support the workers to better deal with disruptions due to
technological advancement and global economic integration, mainly by improving
the human capital, promoting skills and skill up-gradation.

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