Multi Fibre Arrangement and Wage Inequality: Firm and State‐Level Evidence from India and a Theoretical Model

The phased elimination of Multi Fibre Arrangements (MFA) for textile and apparel has been one of the most compelling trade policy reforms that removed a system of bilateral quotas. The reform brought in significant changes in the industrial structures for exporters from the south, including India. Has the labour-intensive high-employment textile and clothing industry in India benefited from this global move towards freer trade? For India, the industry has witnessed unprecedented market concentration of export-oriented firms. Firm-level empirical estimate illustrates that workers in the export-oriented firms in India are adversely affected due to withdrawal of quota. Accumulation of net fixed assets and growth of sales impart positive impact on firm-level wages that cannot outweigh negative impact due to fall in exports. We also find negative impact of profit on aggregate wage bill for the industry with firms spread over 11 major states in India. We show that the mean deviation of industry-level wage is positively and significantly associated with mean deviation of the number of factories at the state level and negatively with profit. Finally, a brief analytical exercise obtains conditions under which joint withdrawal of quota and import tariff could raise the aggregate labour income in developing countries, in general.