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Globalization affects India, too

A look at trade openness and the labor income share in India

A previous post discussed the recent decrease in the labor share and increase in the capital share in GDP for many nations. Reasons for this decline in payments to labor include capital-augmenting technology growth, globalization, and changing skill composition of the labor force. In this post, we focus solely on India’s story.

In the 1990s, India began to implement a series of economic reforms that, among other things, helped open up the economy to trade and foreign investment. These policy changes reduced import tariffs and regulations, with the aim of making the economy more market-oriented. As a result, the labor share of India’s income decreased significantly.

The graph above shows that India’s trade openness, measured as the ratio of the sum of India’s exports and imports to India’s GDP, increased by nearly 124% between 1980 and 2017. (In comparison, U.S. trade openness increased by only 19% over the same period.) India’s labor share of income fell by 30%, with a 24% fall from 1990 to 2017.

So, how are trade openness and labor shares related? Trade openness often goes hand-in-hand with reforms that allow greater international mobility of capital but not labor. If higher wages would lead capital to relocate abroad, domestic labor’s bargaining power and wage increases may be limited. Also, domestic firms may face greater foreign competition and respond accordingly. If they increase the use of labor-saving technologies, that can dampen domestic wages.

Is this bad news for India’s workers? Not necessarily. All the graph shows is that trade openness and the labor share in India have been negatively correlated. This analysis doesn’t suggest labor is worse off. A declining labor share simply means that labor income growth is slower than GDP growth; it does not mean that labor income has declined. Finally, the graph doesn’t capture the effects of the tax and transfer policies of the Indian government. If trade openness increases GDP growth, it also increases tax revenues at given tax rates; this can be good for labor if they benefit more from the government’s tax and expenditure policies.

How this graph was created: Search for the series “Goods, Value of Exports for India” (FRED series ID VALEXPINM052N) and change the frequency to “Annual” with the aggregation method as “Sum.” Use the “Customize data” search bar to search for and add “Good, Value of Imports for India” (VALIMPINM052N) and “Gross Domestic Product for India, current U.S. Dollars” (MKTGDPINA646NWDB). In the formula bar, enter (a+b)/c. Then add a second line to the graph: “Share of Labor Compensation in GDP at Current National Prices for India” (LABSHPINA156NRUG). Finally, change the start date of the graph to 1980-01-01. 

Suggested by Subhayu Bandyopadhyay and Asha Bharadwaj.

View on FRED, series used in this post: LABSHPINA156NRUG, MKTGDPINA646NWDB, VALEXPINM052N, VALIMPINM052N

A New Year’s resolution: More homemade food

Food prices for dining out vs. staying home

Here at the FRED Blog we’re continuously looking for self-improvement opportunities, and our New Year’s resolution is to focus on home-cooked foods. Food at home is often fresher and healthier, but it’s also less expensive: The graph above shows that the cost of food away from home has been increasing much faster than the average of all foods. We’ll try to pepper the FRED Blog with healthier and tastier posts all through the year.

How this graph was created: Search for “CPI food,” check the two series, and click “Add to Graph.”

Suggested by Christian Zimmermann.

View on FRED, series used in this post: CPIFABSL, CUSR0000SEFV

Is the decline in manufacturing economically “normal”?

Deciphering the phases of economic development

The FRED graph above tracks the proportions of employees working in three industries—construction, mining and logging, and manufacturing—since 1939. Construction (the blue line) has remained roughly horizontal. Mining and logging (the green line) has steadily declined. And manufacturing (the red line) has noticeably declined as well. This trend may look like weakness for the U.S. economy, but is it something to worry about?

Let’s take a step back: Historically, economic development has led to a declining share of workers in goods-producing sectors. The first sector to decline is agriculture,* whose workers moved to manufacturing and mining during the Industrial Revolution (which pre-dates our graph by a century or so). In the 19th century and beyond, the U.S. economy grew further and progressed to the next phases of development, with mining and manufacturing losing relative importance.

So if the U.S. economy is growing, where is it growing? The graph below shows the service sector has taken up the slack. At the start of the graph, in 1939, this sector had already made up 50% of non-farm employees, and it has continued to grow. The remaining sector, government, has remained relatively flat over the 80 years of this data series. Clearly, the U.S. economy is now much less focused on “making things.” Rather, the emphasis is now on education, health, leisure, retail, information, and finance.

How these graphs were created: Search the Current Employment Statistics release table and choose Table B-1 (seasonally adjusted); select the series you want and click “Add to Graph.” From the “Edit Graph” panel, for each line add series “All employees, non-farm” and apply formula a/b*100.

*Why don’t we show agricultural employment here? For one thing, it’s really hard to count: Many are part-time/seasonal workers and relatives that work on family farms.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: CES0800000001, MANEMP, PAYEMS, USCONS, USGOVT, USMINE

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