China & World Economy / 109–126, Vol. 25, No. 1, 2017

Did International Outsourcing Cause the Increase in China’s Skill Premium?

Jun Wang*

Abstract

This study analyzes the transmission mechanism for the increase in the skill premium caused by international outsourcing through skill-biased technological change (SBTC). Using 2000–2013 panel data from 27 manufacturing industries in China, this study conducts both probit and Tobit tests and shows that international outsourcing led to SBTC in China’s manufacturing industries. A positive correlation is found between international outsourcing and the increase in the skill premium in both static and dynamic models. For each 1-percent increase in the international outsourcing index, the skill premium will rise approximately 10 percent. This finding indicates the existence of a mechanism through which the effect of international outsourcing on the skill premium is reinforced where SBTC is occurring. However, this may enlarge wage gaps within the same industry. Therefore, China should not only use the skill premium to promote the transformation and upgrading of industries benefiting from outsourcing and optimize the structure of employment but also prevent the negative effects of an increased skill premium.

Key words: international outsourcing, skill-biased technological change, skill premium
JEL codes: F21, F23, J31, O31