Trade Liberalization and Intergenerational Occupational Mobility:Theory and Evidence from India

Abstract: The persistence of occupations across generations is an important barrier to reducing long run inequality in developing countries. In this paper, we examine whether international trade, by changing the distribution of occupations and the returns to higher-skilled occupations, can allow children to escape such occupational traps and enter occupations that are better than their parents. In particular, we exploit India's dramatic trade reforms of 1991 to causally examine the relationship between trade liberalization and intergenerational occupational mobility. Our results suggest that a son residing in a district with greater exposure to trade liberalization is more likely to be in an occupation that is more skill-intensive than that of his father.  This suggests that trade liberalization, by allowing sons from low-income backgrounds to enter better occupations than their father, could lead to a more equitable distribution of income in the long run even if it increases inequality in the short run.