Offshoring, Wages, and Skill Premiums: Firm‐level Evidence from China

Using detailed Chinese manufacturing firm production and trade data from 2000 to 2006, this study finds that offshoring significantly increases firms’ average wages. First, using the quasi‐natural experiment of China's accession to the World Trade Organization, we investigate how a reduction in offshoring costs affects the manufacturing firm's wages and find that a productivity effect and a job‐relocation effect are two possible channels. Second, the dynamic decomposition of industry‐level wages indicates that the within‐firm effect is 0.547, accounting for 31.5 percent of the total variation. Finally, a Mincer‐type regression shows that offshoring also increases within‐firm skill premiums. Our findings have strong implications for the government related to framing appropriate industrial policies to raise wages and reduce income inequality.