Access to imported intermediates and intra‐firm wage inequality

• Published date: 01 August 2019
• Author: Tony Fang,Ying Ge,Yeheng Jiang
• Date: 01 August 2019
• DOI: http://doi.org/10.1111/twec.12793

ORIGINAL ARTICLE

Access to imported intermediates and intra‐firm

wage inequality

Ying Ge

1

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Tony Fang

2

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Yeheng Jiang

3

1

School of Economics, Zhejiang University, Zhejiang, China

2

Xihua University, Chengdu, China and Department of Economics, Memorial University of Newfoundland, St. John's,

Newfoundland and Labrador, Canada

3

Research Institute of Forestry Policy and Information, Chinese Academy of Forestry, Beijing, China

Funding information

This paper is funded by China Social Science Foundation Grant (17BSH076), Social Sciences and Humanities Research

Council of Canada Grant (890‐2016‐4023), and Stephen Jarislowsky Foundation Research Grant (Dr. Tony Fang) and

National Nature Science Foundation of China (No. 71433002) (Dr. Ying Ge).

KEYWORDS

global production sharing, wage inequality, world bank investment climate survey

1

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INTRODUCTION

The distribution effect of globalisation is a central topic of research on international trade and

economic development (Goldberg & Pavcnik, 2007; Harrison, McLaren, & McMillan, 2011;

Winters, McCulloch, & McKay, 2004). Recent globalisation trends show rapid expansion of trade in

intermediate inputs and global production sharing (Antras, Chor, Fally, & Hillberry, 2012; Baldwin

& Lopez‐Gonzalez, 2015; Grossman & Rossi‐Hansberg, 2008; Hummels, Ishii, & Yi, 2001; Johnson

& Noguera, 2012; Koopman, Wang, & Wei, 2014). According to the World Development Report

(UNCTAD, 2014), approximately 60% of global trade consists of trade in intermediate inputs and ser-

vices via global value chains (GVCs). On average, value‐added trade contributes approximately 30%

of the GDP of developing countries and 18% of the GDP of developed countries. To determine

whether it is strategically beneficial to promote participation in GVCs, developing countries must

carefully evaluate the effects of GVCs on both their economic growth and income distribution.

China provides an interesting setting to study the distribution effect of global production shar-

ing. China has extensively participated in global GVCs and has become the hub in “Asian Fac-

tory,”especially after World Trade Organization (WTO) accession (Baldwin & Lopez‐Gonzalez,

2015). In the same period, however, China has also experienced a significant rise in income

inequality. In this paper, we empirically examine the linkage between global production sharing

and increasing wage inequality in China: How do imported intermediate inputs contribute to wage

inequality between and within the firms?

Using Chinese firm‐level data from the World Bank Investment Climate Survey, we find a sig-

nificant and positive association between imported intermediate inputs and wage inequa lity. First,

there is significant and positive import wage premium that intermediates importers offer, an

approximately 11% higher (log) wage than non‐importers. Second, firms that import intermediate

Received: 15 November 2017

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Revised: 14 February 2019

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Accepted: 21 February 2019

DOI: 10.1111/twec.12793

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© 2019 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/twec World Econ. 2019;42:2364–2384.

inputs exhibit greater intra‐firm wage dispersion than non‐importers. Intra‐firm wage dispersion is

about 46% higher in importers than in non‐importers. To address the potential selection bias, we

control for firm productivity and use the transport cost and custom efficiency as instrum ents. The

findings are robust for different estimation strategies and alternative measures.

We further explore the channels by which importing intermediates may contribute to inter‐firm

and intra‐firm wage inequality. Our evidence is consistent with three important channels: (i) access

to imported inputs complements skilled labour; (ii) compared with non‐importers, firms that import

intermediates are more likely to use performance‐pay schemes; and (iii) importers are more likely

to invest in research and development (R&D) and provide employee training, as well as to make

greater use of computers and Internet than non‐importers.

Our study is related to a large body of literature on the link between heterogeneous firms' trad-

ing activities and intra‐industry wage inequality. Most studies focus on the impact that trade liber-

alisation has on skill premium and inter‐firm wage inequality. Vertical integration and offshoring

have long been recognised as important driving forces of increasing the skill premium (Feenstra &

Hanson, 1996, 1997, 1999; Hummels, Jorgensen, Munch, & Xiang, 2014) and skill composition

(Becker, Ekholm, & Muendler, 2013; Biscourp & Kramarz, 2007). Exporting activities a lso con-

tribute to intra‐industry wage inequality. For example, Bernard and Bradford (1997) show that

increases in the skill premium can be attributed to an intra‐industry reallocation of employees from

firms with a low skill premium to firms with a high skill premium. The increased skill premium is

largely due to the expansion of exporting firms. Verhoogen (2008) finds that shocks that encourage

exporting activities increase the wage dispersion across firms in the same industry. Helpman, Its-

khoki, and Redding (2010) and Helpman, Itskhoki, Muendler, and Redding (2017) show both the-

oretically and empirically that wage inequality arises within sector—occupations and that trade

liberalisation increases wage dispersion between firms. Frias, Kaplan, and Verhoogen (2009) argue

that intra‐industry wage changes are primarily explained by exporters' wage premiums, rather than

skill premiums. Amiti and Davis (2012) show that output‐tariff cuts reduce wages in domestically

oriented firms, but increase wages offered by exporters. Input‐tariff cuts increase wages in the

importers of intermediate inputs but have no significant effects on firms that rely on domestic

intermediates. However, few studies focus on the wage distribution within firms, and the link

between globalisation and intra‐firm inequality is less clear. Our study contributes to the literature

by investigating the impact and the mechanism through which firms' importing activities may

affect both inter‐and intra‐firm wage inequality.

Our study also contributes to recent research on the impacts of importing intermediate inputs in

less developed countries. Most studies find that access to superior foreign inputs contributes to

firm productivity (Amiti & Konings, 2012; Kasahara & Rodrigue, 2008; Topalova & Khandelwal,

2011; Halpern, Koren, & Szeidl, 2015), increases domestic product scope (Goldberg, Khandelwal,

Pavcnik, & Topalova, 2009, 2010) and promotes innovation activities (Bøler, Moxnes, & Ulltveit‐

Moe, 2015; Chen, Zhang, & Zheng, 2017a). Our study focuses on the distribution effects of

imported inputs and suggests that access to foreign inputs is positively associated with both

inter and intra‐firm wage inequality.

Few studies have focused on the impacts of trade liberalisation on intra‐firm wage inequality in

the case of China, mainly due to limited data. In particular, there is no firm‐level information on

the wages of skilled labour and unskilled labour. One exception is the work of Chen, Yu, and Yu

(2017b). They use information on firm‐level wage and skill composition and develop a Mincer‐

type approach to estimate the skill premium. They find that input trade liberalisation increases the

firm‐level skill premium in China. In this paper, we use enterprise survey questions to construct

four direct indicators of the intra‐firm wage gap: (i) the wage gap between the highest salary and

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