Offshoring and Wage Inequality: Theory and Evidence from China

66 Pages Posted: 31 Aug 2017

See all articles by Liugang Sheng

Liugang Sheng

University of California, Davis

Dennis Tao Yang

Chinese University of Hong Kong - Department of Economics

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 Tao, Offshoring and Wage Inequality: Theory and Evidence from China. IZA Discussion Paper No. 10924, Available at SSRN: https://ssrn.com/abstract=3029794 or http://dx.doi.org/10.2139/ssrn.3029794

Liugang Sheng (Contact Author)

University of California, Davis

One Shields Avenue
Apt 153
Davis, CA 95616
United States

Dennis Tao Yang

Chinese University of Hong Kong - Department of Economics ( email )

Shatin N.T.
Hong Kong
Hong Kong

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