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Offshoring and Wage Inequality: Theory and Evidence from China

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Listed:
  • Liugang Sheng
  • Dennis Tao Yang

Abstract

We present a global production sharing model that integrates the organizational choices of offshoring into the determination of relative wages in developing countries, highlighting that offshoring through foreign direct investment raises the demand for skill in the South more than arm’s length outsourcing. By leveraging the natural experiment in which China lifted its restrictions on foreign ownership for multinationals upon its accession to the World Trade Organization in 2001, we show that the significant shifts in firm ownership structure in offshoring promote skill upgrading in Chinese processing exports and the relative wage of skilled workers in China’s manufacturing sector from 1992 to 2008.

Suggested Citation

  • Liugang Sheng & Dennis Tao Yang, 2025. "Offshoring and Wage Inequality: Theory and Evidence from China," Economic Development and Cultural Change, University of Chicago Press, vol. 73(4), pages 1983-2027.
    • Handle: RePEc:ucp:ecdecc:doi:10.1086/733926
    DOI: 10.1086/733926
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    2. Bandyopadhyay, Subhayu & Basu, Arnab K. & Chau, Nancy H. & Mitra, Devashish, "undated". "The Pro-Trade Bias of Offshoring," Working Papers 313773, Cornell University, Department of Applied Economics and Management.
    3. Gino Gancia, 2012. "Globalization, technology and inequality," Economics Working Papers 1363, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2012.
    4. Bai, Chong-En & Liu, Qing & Yao, Wen, 2020. "Earnings inequality and China's preferential lending policy," Journal of Development Economics, Elsevier, vol. 145(C).
    5. Daron Acemoglu & Gino Gancia & Fabrizio Zilibotti, 2015. "Offshoring and Directed Technical Change," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(3), pages 84-122, July.
    6. Lai, Tat-Kei & Wang, Luhang, 2024. "Spatial disparity of skill premium in China: The role of financial intermediation development," China Economic Review, Elsevier, vol. 85(C).
    7. Timmer, Marcel & Los, Bart & Vries, Gaaitzen J. de, 2012. "China and the World Economy:A Global Value Chain Perspective on Exports, Incomes and Jobs," GGDC Research Memorandum GD-128, Groningen Growth and Development Centre, University of Groningen.
    8. Subhayu Bandyopadhyay & Arnab K. Basu & Nancy H. Chau & Devashish Mitra, 2022. "On Terms of Trade, Offshoring Ties, and the Enforcement of Trade Agreements," Working Papers 2022-039, Federal Reserve Bank of St. Louis, revised Apr 2023.
    9. Andrea Coveri & Elena Paglialunga & Antonello Zanfei, 2023. "Global value chains, functional diversification and within-country inequality: an empirical assessment," Working Papers 2302, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2023.
    10. Feicheng Wang & Chris Milner & Juliane Scheffel, 2022. "Export destination and the skill premium: Evidence from Chinese manufacturing industries," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(2), pages 1057-1094, May.
    11. Bie, Xiaodong & Ciani, Andrea, 2021. "Born similar, develop apart: Evidence on Chinese hybrid exporters," DICE Discussion Papers 364, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    12. Li, Hongbin & Li, Lei & Ma, Hong, 2022. "China's skill-biased imports," China Economic Review, Elsevier, vol. 74(C).
    13. Inoue, Atsushi & Jin, Lu & Rossi, Barbara, 2017. "Rolling window selection for out-of-sample forecasting with time-varying parameters," Journal of Econometrics, Elsevier, vol. 196(1), pages 55-67.

    More about this item

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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