Does global value chain engagement improve firms' wages: Evidence from China

• Author: Yue Lu,Xiao Yu,Yunlong Lu,Rui Xie
• Date: 01 October 2019
• DOI: http://doi.org/10.1111/twec.12805
• Published date: 01 October 2019

World Econ. 2019;42:3065–3085. wileyonlinelibrary.com/journal/twec

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3065

© 2019 John Wiley & Sons Ltd

Received: 31 October 2017

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Revised: 27 March 2019

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Accepted: 10 April 2019

DOI: 10.1111/twec.12805

ORIGINAL ARTICLE

Does global value chain engagement improve firms'

wages: Evidence from China

YueLu1

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YunlongLu2

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RuiXie3

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XiaoYu4

1China Institute for WTO Studies,University of International Business and Economics, Beijing, China

2Institute of Market and Price,Chinese Academy of Macroeconomic Research, Beijing, China

3School of Economics and Trade,Hunan University, Changsha, China

4School of Statistics and Mathematics,Zhejiang Gongshang University, Hangzhou, China

Funding information

National Natural Science Foundation of China, Grant/Award Number: 71420107027, 71673083, 71503048 and 71873031

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INTRODUCTION

Over the past decades, deepening and widening global production fragmentation has allowed country

to specialise in specific stages of production processes. The countries whose major exports are la-

bour‐intensive goods actually undertake the processing and assembling of labour‐intensive production

processes and are no longer involved exclusively in finished products. The same is true of firms. This

implies that value in an enterprise's exports may include foreign content, while imported materials

may have domestic content. As a result, it is clear that analysis using gross trade flows to represent the

degree of firms’ internationalisation, which is typically based on value‐added terms, is an increasingly

misleading guide. Given the increasing unbundling of the production process, the question of whether

a firm's wage level improves from engagement in the global value chain (GVC) or not is critical in

understanding the nature of international integration and its welfare gains, which can provide us with

valuable development policy insights.

Our study draws on the literature on the effects of trade on wages. From the perspective of exports,

Bernard, Jensen, and Lawrence (1995) argue that exporters tend to have larger scale, higher produc-

tivity and a higher capital–labour ratio, and thus, they can pay higher wages to their employees. Melitz

(2003) finds that enterprises face bigger international markets when they export, and the expansion of

production scale increases the demand for labour. When labour supply does not change, exporters pay

higher wages, which represents the exporters’ wage premium effect. From the perspective of imports,

Martins and Opromolla (2009) consider that imports can improve enterprises’ productivity, thereby

increasing the wage level. Amiti and Davis (2012) hold that enterprises can earn more profit by im-

porting cheaper intermediate goods and thereby can pay higher wages to their employees.

However, this entire strand of literature has ignored an important feature of intra‐product trade,

whereby production is “sliced and diced” into separate fragments, and individual firms are respon-

sible for specific stages belonging to a supply chain; this is essentially different from traditional

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LU et aL.

inter‐industry and intra‐industry trade (Antràs & Chor, 2013; Antràs, Chor, Fally, & Hillberry,

2012; Fally, 2011). This would imply that the welfare effect analysis of trade should shift towards

intra‐product trade. Accompanied by the recent burgeoning literature on measuring value‐added

trade, value creation and profit distribution among various stages in the GVC have attracted increas-

ing attention, including research on the effects of intra‐product trade on labour wages. Grossman

and Rossi‐Hansberg (2008) is the first study to explore the impact of outsourcing on wages, by

developing an offshore outsourcing model and decomposing the economic impact of decreasing

outsourcing costs into the productivity effect, relative price effect and labour supply effect. The

productivity effect enhances the welfare level of low‐skilled workers, while the relative price and la-

bour supply effects suppress the welfare level of low‐skilled workers. To the best of our knowledge,

thereislittletheoretical and quantitative research on the wage effects of China's increasing engage-

ment in the GVC, particularly at the firm level. Our analysis supplements this part with calculating

firms’ GVC embedment and then analysing the effect of the GVC embedment on firms’ wage.

This study uses the merged data of Chinese customs transaction‐level trade database and Chinese

Annual Survey of Industrial Firms database, covering the universe of Chinese exporters in the period

2000–06, to examine whether and how GVC engagement influences firms’ wage.

The main contributions of our research are as follows: (a) We innovatively examine whether and

how a firm's GVC engagement affects firms’ wages. Compared with previous studies, which anal-

yse whether a firm enters the export market or not and how this affects wages, our study is more

comprehensive by incorporating these aspects from the perspective of GVC. (b) Specifically, our

transaction‐level data allow us to measure GVC engagement at firm level over time, which com-

plements the literature on the wage effect of the GVC at industry and aggregate levels (Costinot,

Vogel, & Wang, 2012; Lopez Gonzalez, Kowalski, & Achard, 2015), and thereby minimise aggre-

gation bias by giving expression to firm heterogeneity. (c) Finally, we examine the heterogeneous

impact of a firm's GVC engagement by distinguishing different ownership and factor intensity.

The rest of the paper proceeds as follows. Section 2 presents the theoretical analysis and hypotheses.

Section 3 describes the empirical specification, data source and the measurements. Section 4 discusses

the empirical results, and Section 5 presents an extended analysis. Section 6 is this paper's conclusion.

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LITERATURE REVIEW

With increasing GVC division, theoretical and empirical studies on the impact of GVC division on

wages are increasing. Feenstra and Hanson (2001) consider that with the deepening of the global

division of labour, developed countries have shifted low‐tech production to developing countries,

which provide technology‐intensive links for developing countries, thereby reducing the relative

demand and income of low‐skilled workers, and increasing the relative demand and wages of

skilled workers in both countries. Costinot et al. (2012) argue that developing countries concentrate

on the early stages of production in the division of labour in the GVCs, and income inequality is

alleviated among low‐skilled workers and aggravated among high‐skilled workers. For developed

countries, the opposite is true. Grossman and Helpman (2018) argue that knowledge sharing under

globalisation makes innovation more efficient, leading to the expansion of the innovation sector

and the rise of wages, as well as the increase of wages for highly skilled workers in the manufactur-

ing sector. Timmer, Los, Stehrer, and De Vries (2013) use World Input–Output Database (WIOD)

data to examine the impact of the GVC division on employment in the EU and find that GVC divi-

sion reduced overall employment, but increased the employment of highly skilled labour, resulting

in unequal distribution effects. Timmer, Erumban, Los, Stehrer, and De Vries (2014), based on