The Stolper Samuelson theorem, is the first theoretical formulation to explain the effect of trade liberalization on income distribution among productive factors. This theorem combined with Heckscher-Ohlin model asserts that with increasing protectionism, real return to the countries scarce factor increase. So in case of trade liberalization, it’s the abundant factor that should gain in real terms. Since India is abundant on labor, a positive impact on labour should be expected with trade liberalization. But empirical evidences seems to be contradictory to this prediction. Trend in the growth rate of industrial wages in pre and post liberalization period at two digit level data of Annual Survey of Industries reveal that the trend growth rate of industrial wages is lower in post-liberalization period.
The manufacturing sector as a whole, the real industrial wages which were growing at the rate of 3.3 per cent per annum in pre- liberalization period are witnessing a negative growth rate of -1.0 per cent in post liberalization period. Similarly at two digit level, in eight out of fifteen industrial groups, the growth rate of real wages have turned negative in post-liberalization period. Whereas in other five groups though the trend is positive but growth rates have reduced. This is in contrast to standard trade theory and indicates the downsizing effect of trade liberalization which is inevitable consequences of growing international competition. With trade liberalization composition of manufacturing employment has changed drastically. In 1993-94 the share of contract worker in employment was around 12%, which has increased to around 24% in 2003-04. Given the fact that contract workers are paid less than permanent ones this decline is justified. There are just two exceptions to this declining trend wood and wood products and Basic metal and alloys industries.Undoubtedly following the trade liberalization Indian economy has witnessed high growth characterized by increasing exports and foreign investment but this growth has adversely affected our abundant factor labor which is an issue to look at.