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Offshoring and Wage Inequality: Theory and Evidence from China

Listed author(s):
  • Sheng, Liugang

    ()

    (Chinese University of Hong Kong)

  • Yang, Dennis T.

    ()

    (University of Virginia)

Registered author(s):

    We present a global production sharing model that integrates the organizational choices of offshoring into the determination of relative wages in developing countries. The model shows that offshoring through foreign direct investment contributes more prominently than arm's length outsourcing to the demand for skill in the South, thereby increasing the relative wage of skilled workers. We incorporate these theoretical results into an augmented Mincer earnings function and test the model based on a natural experiment in which China lifted its restrictions on foreign ownership for multinational companies upon its accession to the World Trade Organization in 2001. Empirical findings based on detailed Urban Household Surveys and trade data from Chinese customs provide support to our proposed theory, thus shedding light on the changes in firm ownership structure, the skill upgrading in exports, and the evolution of wage inequality from 1992 to 2008 in China's manufacturing sector.

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    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 10924.

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    Length: 66 pages
    Date of creation: Jul 2017
    Handle: RePEc:iza:izadps:dp10924
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