The role of China’s trade and investment openness in increasing the wage gap between unskilled and skilled workers is the focus of a new study by CEIBS Professor of Economics and Finance Bin Xu. His paper, entitled “Trade, Technology, and China’s Rising Skill Demand,” explores the impact of trade and foreign direct investment on China’s increasing demand for skilled labor and widening wage gap.

The paper was co-authored with Professor Wei Li (Darden School, University of Virginia) and will be published in a forthcoming issue of Economics of Transition.
Through analysing data from 1,500 companies, professors Xu and Li found that although China’s exportation of labor-intensive goods increases demand for unskilled labor, export competition also causes Chinese firms to use more skill-intensive production technology. This, in turn, increases the demand for skilled labor. The authors estimate the net effect of trade to have contributed 5 percent to China’s rising wage gap during the period 1998 to 2000.

The authors also examined the role of foreign direct investment in China on the wage gap. They found that majority foreign-owned companies tend to use technologies that save unskilled labor, and the increasing number of these firms contributed 22 percent to China’s rising wage gap during the three-year period.