Wage Inequality and Input Trade Liberalization: Firm-Level Evidence from China
Bo Chen
Shanghai University of Finance and Economics
Miaojie Yu
Peking University
Zhihao Yu
Carleton University
10/14/2013 1:06:22 AM
Abstract:
This paper investigates how input trade liberalization affects firm-level wage inequality between skilled and unskilled labor. A fall in input tariffs generates increased firm profits, which, in turn, widens wage inequality since skilled labor enjoys a larger proportion of the incremental profits. In the paper we analyze this type of channel with an augmented Amiti-Davis(2012) model. Using Chinese firm-level production data, we first estimate and calculate firm-level wage inequality. We find that, in China, wage inequality is much greater than it is in the U.S. After controlling for possible endogeneity, we find empirical evidence consistent with our theoretical prediction that input trade liberalization widens firm-level wage inequality. Reductions in input tariffs are found to increase firm-level wage inequality by approximately 23% during the period under study.
Keyword: 
Wage Inequality, Input Trade Liberalization, Firm Evidence