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How did rising labor costs erode China’s global advantage?

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  • Huang, Yi
  • Sheng, Liugang
  • Wang, Gewei

Abstract

Labor costs in China have been increasing dramatically in recent years, spurring worries that the country may lose its comparative advantage in manufacturing and its role as the “World’s Factory”. This paper aims to evaluate the effects of rising labor costs on China’s attractiveness to multinationals and its competitiveness in exports, by using regional variations in minimum wage distortion as possibly exogenous shocks to unskilled-labor costs. We first develop a two-sector model by introducing the minimum wage into a general equilibrium model which integrates production and trade in a multi-regional setting. Consistent with model predictions, we find that rising minimum wage distortion reduces more of the exports in unskilled-labor intensive industries. Moreover, exports by foreign invested firms are more sensitive to changes in minimum wage distortion than exports by domestic firms, and both intensive and extensive margins matter for this distinction.

Suggested Citation

  • Huang, Yi & Sheng, Liugang & Wang, Gewei, 2021. "How did rising labor costs erode China’s global advantage?," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 632-653.
    • Handle: RePEc:eee:jeborg:v:183:y:2021:i:c:p:632-653
    DOI: 10.1016/j.jebo.2021.01.019
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    7. Yuping Deng & Yanrui Wu & Helian Xu, 2022. "Emission Reduction and Value-added Export Nexus at Firm Level," Economics Discussion / Working Papers 22-19, The University of Western Australia, Department of Economics.
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    More about this item

    Keywords

    International trade; Comparative advantage; Multinational production; Labor costs; Minimum wage;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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