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Effect of intra-industry trade on skill premium in manufacturing in China

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  • Feng, Xiaohua

Abstract

In making use of the panel data in 27 manufacturing industries, this paper examines the recent increase in skill premium in China's manufacturing. The paper argues that the recent increase in skill premium in Chinese manufacturing can be partly attributed to the decline in intra-industry trade. A reasonable explanation on this is that the decline in intra-industry trade occurred in the period studied is associated with a decrease in output. This led to a reduction in relative demand of low-skilled workers, which supports the hypothesis of the output-skill substitutability, and finally an increase in skill premium. Further, this paper finds that the negative effect of intra-industry trade on skill premium is larger for high-skilled manufacturing than low-skilled manufacturing. One more result in this paper is that the increase in capital input reduced the skill premium in Chinese manufacturing. The empirical evidence is consistent with a modified model of intra-industry trade with differentiated products and three factor inputs: high-skilled labor, low-skilled labor and capital.

Suggested Citation

  • Feng, Xiaohua, 2018. "Effect of intra-industry trade on skill premium in manufacturing in China," China Economic Review, Elsevier, vol. 47(C), pages 206-218.
    • Handle: RePEc:eee:chieco:v:47:y:2018:i:c:p:206-218
    DOI: 10.1016/j.chieco.2017.08.011
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    2. Aggarwal, Sakshi, 2023. "Intra-industry trade: Revisiting theory and Literature Survey," MPRA Paper 117182, University Library of Munich, Germany.

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