Wage Inequality and Input Trade Liberalization:
Firm-Level Evidence from China[1]
Bo Chen[2] Miaojie Yu[3] Zhihao Yu[4]
No. E2013005 September 19, 2013
Abstract：This paper investigates how input trade liberalization affects firm-level wage inequality between skilled and unskilled labor. A fall in input tariffs generates increased firm profits, which, in turn, widens wage inequality since skilled labor enjoys a larger proportion of the incremental profits. In the paper we analyze this type of channel with an augmented Amiti-Davis(2012) model. Using Chinese firm-level production data, we first estimate and calculate firm-level wage inequality. We find that, in China, wage inequality is much greater than it is in the U.S. After controlling for possible endogeneity, we find empirical evidence consistent with our theoretical prediction that input trade liberalization widens firm-level wage inequality. Reductions in input tariffs are found to increase firm-level wage inequality by approximately 23% during the period under study.
JEL Classifications: F10, F12, F14
Keywords: Wage Inequality, Input Trade Liberalization, Firm Evidence
[1]We thank Meredith Crowley, Zhiyuan Li, Yang Yao, Xiaobo Zhang, and participants at the 2012 Columbia-Tsinghua conference and SSE-CCER international conference in Beijing for their constructive and helpful suggestions. However, all errors are ours.
[2]Bo Chen, School of International Business Administration Building, Shanghai University of Finance and Economics, 100 Wudong Rd., Shanghai, China, 200433. Tel: 86-21-65907042, E-mail: chen.bo@shufe.edu.cn.
[3]Miaojie Yu, China Center for Economic Research (CCER), National School of Development, Peking University, Beijing 100871, China. Tel: 86-10-6275-3109, E-mail: mjyu@ccer.pku.edu.cn.
[4]Zhihao Yu, Department of Economics, Carleton University, 1125 Colonel By Drive, Ottawa, ON, K1S 5B6, Canada; Email: zhihao_yu@carleton.ca, or zhihao.yu@gmail.com
