“Trade Liberalization and Skill Wage Premium: from the perspective of Quality Upgrading”

Yihong Tang, Central University of Finance and Economics

Wenxiao Wang, Central University of Finance and Economics

Increasing concern about trade is its ambiguous impact on wages, especially wage inequality among different skills. The paper proposes an alternative channel, quality upgrading, to study the effect of trade on wage gaps among skilled, semi-skilled and unskilled labor. The paper first verifies that trade liberalization promotes quality upgrading, especially for developing countries. Then the empirical result shows that quality upgrading could change the share of skills in total cost, and affects their wage premium indirectly. The results vary across countries. In developing countries, semi-skilled workers enjoy the highest improvement in rewards by quality upgrading, which widens the wage gap between semi-skilled and unskilled labor while narrows the difference between skilled and semiskilled workers. The results show that the increasing wage inequality in developing countries is mainly blamed for semi-skilled rather than skilled labor. It is because developing countries are still scarce in skilled labor, where quality upgrading relies primarily on semi-skilled labor instead of skilled ones. Meanwhile, in the developed countries, quality upgrading has no significant impact on semi-skilled premium. But the wage inequality between skilled and unskilled labor is enlarged with quality upgrading.