IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v183y2021icp632-653.html
   My bibliography  Save this article

How did rising labor costs erode China’s global advantage?

Author

Listed:
  • Huang, Yi
  • Sheng, Liugang
  • Wang, Gewei

Abstract

Labor costs in China have been increasing dramatically in recent years, spurring worries that the country may lose its comparative advantage in manufacturing and its role as the “World’s Factory”. This paper aims to evaluate the effects of rising labor costs on China’s attractiveness to multinationals and its competitiveness in exports, by using regional variations in minimum wage distortion as possibly exogenous shocks to unskilled-labor costs. We first develop a two-sector model by introducing the minimum wage into a general equilibrium model which integrates production and trade in a multi-regional setting. Consistent with model predictions, we find that rising minimum wage distortion reduces more of the exports in unskilled-labor intensive industries. Moreover, exports by foreign invested firms are more sensitive to changes in minimum wage distortion than exports by domestic firms, and both intensive and extensive margins matter for this distinction.

Suggested Citation

  • Huang, Yi & Sheng, Liugang & Wang, Gewei, 2021. "How did rising labor costs erode China’s global advantage?," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 632-653.
    • Handle: RePEc:eee:jeborg:v:183:y:2021:i:c:p:632-653
    DOI: 10.1016/j.jebo.2021.01.019
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167268121000329
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jebo.2021.01.019?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Head, Keith & Mayer, Thierry, 2014. "Gravity Equations: Workhorse,Toolkit, and Cookbook," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 131-195, Elsevier.
    2. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
    3. Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(2), pages 569-600.
    4. Dennis Tao Yang & Vivian Weijia Chen & Ryan Monarch, 2010. "Rising Wages: Has China Lost Its Global Labor Advantage?," Pacific Economic Review, Wiley Blackwell, vol. 15(4), pages 482-504, October.
    5. Simonovska, Ina & Waugh, Michael E., 2014. "The elasticity of trade: Estimates and evidence," Journal of International Economics, Elsevier, vol. 92(1), pages 34-50.
    6. Baccini, Leonardo & Impullitti, Giammario & Malesky, Edmund J., 2019. "Globalization and state capitalism: Assessing Vietnam's accession to the WTO," Journal of International Economics, Elsevier, vol. 119(C), pages 75-92.
    7. Feenstra, Robert C. & Hong, Chang & Ma, Hong & Spencer, Barbara J., 2013. "Contractual versus non-contractual trade: The role of institutions in China," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 281-294.
    8. Richard Baldwin & James Harrigan, 2011. "Zeros, Quality, and Space: Trade Theory and Trade Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 60-88, May.
    9. Head, Keith & Mayer, Thierry & Ries, John, 2010. "The erosion of colonial trade linkages after independence," Journal of International Economics, Elsevier, vol. 81(1), pages 1-14, May.
    10. Hanson, Gordon H. & Lind, Nelson & Muendler, Marc-Andreas, 2015. "The Dynamics of Comparative Advantage," CAGE Online Working Paper Series 252, Competitive Advantage in the Global Economy (CAGE).
    11. Natalia Ramondo & Andrés Rodríguez-Clare, 2013. "Trade, Multinational Production, and the Gains from Openness," Journal of Political Economy, University of Chicago Press, vol. 121(2), pages 273-322.
    12. John Romalis, 2004. "Factor Proportions and the Structure of Commodity Trade," American Economic Review, American Economic Association, vol. 94(1), pages 67-97, March.
    13. Sheng, Liugang & Yang, Dennis Tao, 2016. "Expanding export variety: The role of institutional reforms in developing countries," Journal of Development Economics, Elsevier, vol. 118(C), pages 45-58.
    14. Hiau Looi Kee & Heiwai Tang, 2016. "Domestic Value Added in Exports: Theory and Firm Evidence from China," American Economic Review, American Economic Association, vol. 106(6), pages 1402-1436, June.
    15. Harald Hau & Yi Huang & Gewei Wang, 2020. "Firm Response to Competitive Shocks: Evidence from China’s Minimum Wage Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(6), pages 2639-2671.
    16. Cheng Chen & Wei Tian & Miaojie Yu, 2019. "Outward FDI and Domestic Input Distortions: Evidence from Chinese Firms," The Economic Journal, Royal Economic Society, vol. 129(624), pages 3025-3057.
    17. Loren Brandt & Johannes Van Biesebroeck & Luhang Wang & Yifan Zhang, 2017. "WTO Accession and Performance of Chinese Manufacturing Firms," American Economic Review, American Economic Association, vol. 107(9), pages 2784-2820, September.
    18. Chen, Xikang & Cheng, Leonard K. & Fung, K.C. & Lau, Lawrence J. & Sung, Yun-Wing & Zhu, K. & Yang, C. & Pei, J. & Duan, Y., 2012. "Domestic value added and employment generated by Chinese exports: A quantitative estimation," China Economic Review, Elsevier, vol. 23(4), pages 850-864.
    19. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    20. Long, Cheryl & Murrell, Peter & Yang, Li, 2019. "Memories of colonial law: The inheritance of human capital and the location of joint ventures in early-reform China," China Economic Review, Elsevier, vol. 58(C).
    21. Gopinath, G. & Helpman, . & Rogoff, K. (ed.), 2014. "Handbook of International Economics," Handbook of International Economics, Elsevier, edition 1, volume 4, number 4.
    22. Davis, Donald R, 1998. "Does European Unemployment Prop Up American Wages? National Labor Markets and Global Trade," American Economic Review, American Economic Association, vol. 88(3), pages 478-494, June.
    23. Gan, Li & Hernandez, Manuel A. & Ma, Shuang, 2016. "The higher costs of doing business in China: Minimum wages and firms' export behavior," Journal of International Economics, Elsevier, vol. 100(C), pages 81-94.
    24. Jin, Keyu, 2019. "Misallocation Under Trade Liberalization," CEPR Discussion Papers 13976, C.E.P.R. Discussion Papers.
    25. Bai, Xue & Chatterjee, Arpita & Krishna, Kala & Ma, Hong, 2021. "Trade and minimum wages in general equilibrium: Theory and evidence," Journal of International Economics, Elsevier, vol. 133(C).
    26. Richard A. Brecher, 1974. "Minimum Wage Rates and the Pure Theory of International Trade," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 88(1), pages 98-116.
    27. Yan Bai & Keyu Jin & Dan Lu, 2019. "Misallocation Under Trade Liberalization," NBER Working Papers 26188, National Bureau of Economic Research, Inc.
    28. Koopman, Robert & Wang, Zhi & Wei, Shang-Jin, 2012. "Estimating domestic content in exports when processing trade is pervasive," Journal of Development Economics, Elsevier, vol. 99(1), pages 178-189.
    29. Lorenzo Caliendo & Fernando Parro, 2015. "Estimates of the Trade and Welfare Effects of NAFTA," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(1), pages 1-44.
    30. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
    31. Miaojie Yu, 2015. "Processing Trade, Tariff Reductions and Firm Productivity: Evidence from Chinese Firms," Economic Journal, Royal Economic Society, vol. 125(585), pages 943-988, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Witt, Michael A. & Lewin, Arie Y. & Li, Peter Ping & Gaur, Ajai, 2023. "Decoupling in international business: Evidence, drivers, impact, and implications for IB research," Journal of World Business, Elsevier, vol. 58(1).
    2. Martins, Pedro S. & Dai, Li & Duan, Wenjing, 2024. "Local labour concentration moderates the disemployment effects of minimum wages in China," GLO Discussion Paper Series 1504, Global Labor Organization (GLO).
    3. Yuanhong Hu & Sheng Sun & Min Jiang & Yixin Dai, 2021. "Research on the promoting effect of servitization on export technological sophistication of manufacturing enterprises," PLOS ONE, Public Library of Science, vol. 16(8), pages 1-29, August.
    4. Sierk Horn & Tomoki Sekiguchi & Matthias Weiss, 2021. "Thrown off track? Adjustments of Asian business to shock events," Asian Business & Management, Palgrave Macmillan, vol. 20(4), pages 435-455, September.
    5. Yang Liuyi & Zhu Yunchan & Ren Feirong, 2023. "Does government investment push up manufacturing labor costs? Evidence from China," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-10, December.
    6. Wei, Zhihua & Ren, Zerong & Zhu, Caiyun & Zhou, Yisihong & Liu, Xiaowen, 2023. "Minimum wage effects on firms’ R&D investment: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 287-305.
    7. Paul Hong & Hao-Wei Chen & Fred Ahrens & Young Soo Park & Young Sik Cho, 2023. "Challenges and Opportunities of Altasia: A National Benchmarking Assessment," Sustainability, MDPI, vol. 15(19), pages 1-22, October.
    8. Yuping Deng & Yanrui Wu & Helian Xu, 2022. "Emission Reduction and Value-added Export Nexus at Firm Level," Economics Discussion / Working Papers 22-19, The University of Western Australia, Department of Economics.
    9. Lu, Lan & Yin, Shuiying & Wen, Fuying & Xu, Qingqing, 2023. "The spatial structure of labour force employment in China’s industries: Measurement and extraction," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 472-486.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Brandt, Loren & Li, Bingjing & Morrow, Peter M., 2021. "Processing trade and costs of incomplete liberalization: The case of China," Journal of International Economics, Elsevier, vol. 131(C).
    2. Heid, Benedikt & Larch, Mario, 2016. "Gravity with unemployment," Journal of International Economics, Elsevier, vol. 101(C), pages 70-85.
    3. Bas, Maria & Mayer, Thierry & Thoenig, Mathias, 2017. "From micro to macro: Demand, supply, and heterogeneity in the trade elasticity," Journal of International Economics, Elsevier, vol. 108(C), pages 1-19.
    4. Liu, Chen & Ma, Xiao, 2023. "Migration, tariffs, and China's export surge," Journal of International Economics, Elsevier, vol. 140(C).
    5. Head, Keith & Mayer, Thierry, 2014. "Gravity Equations: Workhorse,Toolkit, and Cookbook," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 131-195, Elsevier.
    6. Fontagné, Lionel & Martin, Philippe & Orefice, Gianluca, 2018. "The international elasticity puzzle is worse than you think," Journal of International Economics, Elsevier, vol. 115(C), pages 115-129.
    7. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 197-261, Elsevier.
    8. Benny Kleinman & Ernest Liu & Stephen J. Redding, 2024. "International Friends and Enemies," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(4), pages 350-385, October.
    9. Tang, Heiwai, 2012. "Labor market institutions, firm-specific skills, and trade patterns," Journal of International Economics, Elsevier, vol. 87(2), pages 337-351.
    10. Pol Antràs & Davin Chor, 2021. "Global Value Chains," NBER Working Papers 28549, National Bureau of Economic Research, Inc.
    11. French, Scott, 2017. "Revealed comparative advantage: What is it good for?," Journal of International Economics, Elsevier, vol. 106(C), pages 83-103.
    12. Alonso de Gortari, 2018. "Disentangling Global Value Chains," 2018 Meeting Papers 139, Society for Economic Dynamics.
    13. Miaojie Yu, 2020. "China-US Trade War and Trade Talk," Springer Books, Springer, number 978-981-15-3785-1, June.
    14. Sheng, Liugang & Yang, Dennis Tao, 2016. "Expanding export variety: The role of institutional reforms in developing countries," Journal of Development Economics, Elsevier, vol. 118(C), pages 45-58.
    15. Patrick Alexander, 2016. "Producer Heterogeneity, Value-Added, and International Trade," Staff Working Papers 16-54, Bank of Canada.
    16. Markus Brueckner & Ngo Van Long & Joaquin L. Vespignani, 2020. "Non-Gravity Trade," Globalization Institute Working Papers 388, Federal Reserve Bank of Dallas.
    17. Liu, Chen & Ma, Xiao, 2018. "China's Export Surge and the New Margins of Trade," MPRA Paper 103970, University Library of Munich, Germany, revised Oct 2020.
    18. repec:spo:wpmain:info:hdl:2441/3lmdaefcr886ao8sahjmam30ke is not listed on IDEAS
    19. Bolatto, Stefano & Moramarco, Graziano, 2023. "Gains from trade and their quantification: Does sectoral disaggregation matter?," International Economics, Elsevier, vol. 174(C), pages 44-68.
    20. Anderson, James E. & Yotov, Yoto V., 2020. "Short run gravity," Journal of International Economics, Elsevier, vol. 126(C).
    21. French, Scott, 2016. "The composition of trade flows and the aggregate effects of trade barriers," Journal of International Economics, Elsevier, vol. 98(C), pages 114-137.

    More about this item

    Keywords

    International trade; Comparative advantage; Multinational production; Labor costs; Minimum wage;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:183:y:2021:i:c:p:632-653. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jebo .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.