Export Destination, Product Quality and Wages in a Middle‐Income Country. The Case of South Africa

• Published date: 01 February 2013
• Author: Volker Schöer,Neil Rankin
• DOI: http://doi.org/10.1111/rode.12015
• Date: 01 February 2013

Export Destination, Product Quality and Wages in a

Middle-Income Country. The Case of South Africa

Neil Rankin and Volker Schöer*

Abstract

A robust finding in the firm-level literature is that exporting firms pay higher wages. Using South African

data this paper investigates the relationship between export destination and wages at a worker level. South

Africa, a middle-income country,has two distinct main export markets—a regional market where per capita

incomes are lower than at home, and an international market with higher per capita incomes.Our estimates

show that workers in firms that export to the region earn less than those that produce for the domestic

market. Thosein firms that export outside the region earn more than either domestic producers or region-

only exporters. Much of this difference in wages can be explained by the premium the different types of

exporters pay for skills. These results support previous studies which suggest that export destination is

related to product quality which in turn is related to worker quality and therefore wages.

1. Introduction

Firms in middle-income countries, such as South Africa, often face two distinct types

of markets: on the one hand, a regional market protected from competition through

regional trade agreements and/or high transport costs, with similar or lower per capita

income levels to the domestic market; on the other hand, an out-of-region market

with higher levels of competition and also higher per capita income levels.

Differences in per-capita income and tastes between these distinct markets could

mean that these markets require different types or qualities of products. Models of

intra-industry trade, such as Bergstrand (1990) suggest that this type of trade will be

larger between countries with similar per capita income levels and tastes.This implies

that intra-industry trade in middle-income countries will have two components. The

first will be driven by the overlap in tastes with similar or lower per capita income

countries within the region. The second will be the overlap in tastes at the top of the

income distribution in the middle-income country and the bottom of the distribution

in high income countries.

Distinct export markets will also mean that firms participating in these different

markets will have different characteristics and pay different wages. Empirical studies

show that workers in exporting firms are generally paid more even after controlling

for worker characteristics.The firm-level theoretical and empirical literature also indi-

cates that exporters are more productive than non-exporters. These firms are more

profitable in the world market and thus can overcome transport costs and the sunk

* Rankin (corresponding author): Department of Economics, Stellenbosch University, Private Bag X1,

Matieland, 7602, South Africa. Tel: +27 21 808 2247; Fax: +27 21 808 4637; E-mail: Neil.rankin@wits.ac.za.

Schöer: African Micro-Economic Research Unit, University of the Witwatersrand, Private Bag 3, Wits,

2050, South Africa. E-mail: Volker.schoer@wits.ac.za.

This work was carried out with the aid of a grant from the International Development Research Centre,

Ottawa, Canada.The authors thank Lawrence Edwards, Jim Fairburn,Steve Koch, Dori Posel,Edgard Rod-

riguez, Pieter Serneels, Francis Teal and an anonymous referee for useful comments. All errors are the

responsibility of the authors.

Review of Development Economics, 17(1), 64–73, 2013

DOI:10.1111/rode.12015

© 2013 Blackwell Publishing Ltd