Why Is Labor Receiving a Declining Share of Income in India? Role of Trade and Market Share Reallocation

Abstract In this paper we conduct an empirical analysis of the drivers of labor share decline in India by combining economy-wide, industry-level, and firm-level evidence across both formal and informal sectors. Atypical patterns of structural transformation—where India largely bypassed labor-intensive industrialization and shifted directly from agriculture to capital- and skill-intensive manufacturing and services—emerge as a central factor. Market share reallocation is identified as the principal driver of labor share decline. Firm-level evidence shows that trade openness—via tariff liberalization, the “China shock,” and global value chain participation—is positively associated with labor share but only partially offsets the effects of domestic structural dynamics.