“The rise in capital goods imports, which embody advanced technology, can explain the
rising demand for skill in China,” Hongbin Li from the Stanford University, Lei Li from the
University of Mannheim and Hong Ma from the Tsinghua University wrote in a
recent paper.
The authors show that a simultaneous rise in the skill wage premium, i.e. the wage gap
between workers with a college degree and those without, and the amount of high-skilled
workers in China during the 1990s and 2000s are due to an increased demand for skilled
workers.
“Imports of capital goods took off in the 1990s, around the same time when the skill
premium started to rise,” the economists explain. Because machinery embodies advanced
technologies which are more beneficial for skilled workers, importing machinery increases
the skill premium.
The study is based on data of the Chinese Urban Household Survey from 1992 to 2009 for
information on wages and jobs and focused on 18 representative provinces and individuals
between 16 and 60 years old with labour income.
The wage premium for skilled workers shot up over the observation period and remained
around 20 per cent in the late 1990s and then rose rapidly to 44 per cent in 2009. “Note
that the wage premium for skilled workers increased despite a dramatic increase in the
supply of skilled workers due to the massive college expansion since 1999,” the scientists
pointed out.
Between 1992 and 2007 the average real wage jumped by 202 per cent, accompanied by a
sharp rise in wage inequality, other economists have shown. Capital accumulation and
skill-biased technological change are seen as the major forces behind the evolving wage
structure in urban China.
At the same time, the impact of capital goods from the most advanced countries such as
Germany or the United Kingdom are substantially larger than the impact of those from an
average country. More specifically, a 10 percentage point increase in the import intensity of
capital goods can increase the skill premium by 3.8 percentage points.
Firm-level evidence shows that the operators of imported machines pay higher wages, and
firms using imported capital goods hire more skilled workers, use computers more
intensively and have higher labour productivity, according to the paper.
Overall, imported capital goods, such as computers and machinery, show that these
imports are skill-complementary. While focusing on China, the authors conclude “that
capital goods imports could also be an important driver of the skill premium in other
developing countries.“
The presented discussion paper is a publication without peer review of the Collaborative Research
Center Transregio 224 EPoS. Access the full discussion paper here. Find the list of all discussion papers of the
CRC here.
Authors
- Hongbin Li, Senior Fellow at the Stanford Institute for Economic Policy Research (SIEPR) and the Freeman Spogli Institute for International Studies (FSI) and Co-director at the Stanford Center on China’s Economy and
Institutions at Stanford University - Lei Li, member of the Collaborative Research Center Transregio 224 EPoS and Assistant Professor at the
University of Mannheim - Hong Ma, Professor at Tsinghua University