THE EFFECT OF INFORMATION TECHNOLOGY ON WAGE INEQUALITY: EVIDENCE FROM INDIAN MANUFACTURING SECTOR

A persistent widening of skill based wage inequality in the Indian Organised Manufacturing sector has been reported by many researchers. Two main hypotheses had been tested in developed economies to explain such a phenomenon; an inter-sectoral shift in demand structure and an intra-sectoral shift in production technology. A decomposition of the change in wage share of skilled workers showed that sector bias explained very little of the changes in the share of skilled worker wages while more than 85 percent of the changes occurred within industries, giving support to the argument of changing skill mix within industries, rather than between industries. While scale effect and capital skill complementarities do tend to give partial explanations for the increasing share of skilled worker wage share, the most consistent and quantitatively large explanation seems to appear from the effect of Information Technology intensity in the production process, whatever the specifications be. Moreover, argument of the skill biased wage inequality is only weakly supported by mere IT adoption, but it is the intensity in IT use that is the most dominant factor. However there is no evidence for an enhanced effect of IT on wage shares since the signing of the ITA agreement and the probably increased import of IT goods. Neither is there any evidence to show that technology endowed capital goods have had an impact on the changes in skill biased wage share during 1998-99 to 2004-05. Key words: Skill Biased Technological Change, Wage Inequality, Information Technology, Indian Manufacturing sector. JEL Classification: J31, L6, O33