Offshoring and Wage Inequality: Theory and Evidence from China

65 Pages Posted: 27 Jul 2017

See all articles by Liugang Sheng

Liugang Sheng

The Chinese University of Hong Kong

Dennis Yang

University of Virginia - Darden School of Business

Date Written: July 6, 2017

Abstract

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.

Keywords: Offshoring, Ownership Structure, Processing Trade, Wage Inequality, China

JEL Classification: F16, J31, D23

Suggested Citation

Sheng, Liugang and Yang, Dennis, Offshoring and Wage Inequality: Theory and Evidence from China (July 6, 2017). Darden Business School Working Paper No. 3007876, Available at SSRN: https://ssrn.com/abstract=3007876 or http://dx.doi.org/10.2139/ssrn.3007876

Liugang Sheng

The Chinese University of Hong Kong ( email )

Shatin, N.T.
Hong Kong
Hong Kong

Dennis Yang (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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