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

• Published date: 01 September 2021
• Author: Liang Zhang,Bin Qiu,Xiaocong Xu,Shaoqin Sun
• Date: 01 September 2021
• DOI: http://doi.org/10.1111/cwe.12389

©2021 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 1–27, Vol. 29, No. 5, 2021 1

Offshoring, Wages, and Skill Premiums:

Firm-level Evidence from China

Liang Zhang, Bin Qiu, Xiaocong Xu, Shaoqin Sun*

Abstract

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 fi rm’s wages and fi nd 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-

fi rm skill premiums. Our fi ndings have strong implications for the government related to

framing appropriate industrial policies to raise wages and reduce income inequality.

Key words: offshoring, skill premiums, wage, WTO accession

JEL codes: F10, F12, F14

I. Introduction

Imports are an important hub that connects domestic and foreign economies, and actively

expanding imports is an important means of capitalizing on international resources and

markets. For China, studying the impact of imports on the wage gap between skilled

and unskilled labor is of great importance to domestic income distribution, and thus the

country’s economic reform and sustainable development. The impact of offshoring on

*Liang Zhang, PhD Candidate, School of Economics and Management, Southeast University, China. Email:

230179547@seu.edu.cn; Bin Qiu (corresponding author), Professor, School of Economics and Management ,

Southeast University, China. Email: b_qiu@126.com; Xiaocong Xu (joint corresponding author), Assistant

Professor, School of Economics, Nanjing University, China. Email: xuxiaocong@nju.edu.cn; Shaoqin Sun,

Professor, Business School, Nanjing University of Information Science and Technology, China. Email:

ssqok@126.com. This research was financially supported by the National Social Science Foundation of

China (No. 20AJY014), the Social Science Foundation of Jiangsu Province (No. 20EYA002), and the Key

Project of Philosophy and Social Science Research in Colleges and Universities in Jiangsu Province (No.

2018SJZDA011). The authors thank two anonymous reviewers for their helpful comments and suggestions for

improving this paper.

Liang Zhang et al. / 1–27, Vol. 29, No. 5, 2021

©2021 Institute of World Economics and Politics, Chinese Academy of Social Sciences

2

the wage gap between workers with different skill types therefore has a very important

practical signifi cance; studying it allows the identifi cation of measures to deal with an

unequal distribution of labor income, especially wage income inequality in the context

of globalization. The relationship between offshoring and wages has always generated

vigorous debate and differing opinions in theoretical and empirical studies in the fi eld of

international trade and labor economics.

Those who favor offshoring argue that it increases welfare, while its opponents

believe that offshoring can trigger domestic unemployment. Intuitively, offshoring could

lead to job losses among low-skilled workers while enhancing a firm’s productivity.

In the 21st century, with the rapid development of the firm-level trade theories, many

studies have focused on firm performance (Bernard et al., 2003; Melitz, 2003; Melitz

and Ottaviano, 2008). They suggested that higher productivity fi rms are more likely to

export, pay higher wages, and hire more skilled workers. Other studies have focused on

the relationship between international trade and labor demand, wages, and skill premiums

(Verhoogen, 2008; Helpman et al., 2010; Brambilla et al., 2012; Hummels et al., 2014).

Our study is related to the literature on the determinants of wages and skill

premiums. Our economic intuition is that a fi rm’s import and export activities play an

important role in its wage decisions. Brambilla et al. (2012) demonstrated that fi rms that

export to high-income countries hire more skilled workers and pay higher wages than

those that sell only domestically or export to low- and middle-income countries. Other

literature on how exports affect skill premiums includes Bernard and Jensen (1997)

and Schank et al. (2007), among others. Offshoring and export activities usually have

an asymmetric effect on wages of different skill types. Using Danish matched worker-

firm data, Hummels et al. (2014) found that, within job spells, offshoring increases

the wages of highly skilled workers while exporting increases the wages of all skill

types. The wage effects of input and output tariffs are another research focus. Amiti and

Cameron (2012) examined the correlation between output, input tariff reductions, and

skill premiums in Indonesia. They found that an increase in input tariffs raised the skill

premium in import fi rms, but no signifi cant effects occurred as a result of the reduction

of tariffs on final goods. Using the employer–employee data in 2009, Dai and Xu

(2017) explored the wage gap between skilled and unskilled workers in export and non-

export fi rms. They found that export fi rms paid higher wages for skilled workers, which

provided evidence of inequality within trading fi rms. In terms of research methods, Liu

and Wang (2019) took China’s accession to the WTO as a quasi-natural experiment

and used the difference-in-difference (DID) method to investigate the effect of export

expansion on wage inequality. Their study shows that China’s vast export expansion

has increased wage inequality signifi cantly. A recent study has given more attention to