Effects of Economic Development in China on Skill-Biased Technical Change in the US

In this study, we analyze the effects of a decrease in unskilled labor in China on the direction of innovation in the US by incorporating production offshoring into a North-South model of directed technical change. We find that if offshoring is present (absent) in equilibrium, then a decrease in unskilled labor in the South would lead to skill-biased (unskill-biased) technical change in the North. This finding highlights the different implications of offshoring and conventional trade on innovation. Furthermore, we find that an increase in the Southern stock of capital reduces offshoring and also leads to skill-biased technical change. Therefore, rapid capital accumulation and a decrease in unskilled labor in China could both lead to a rising skill premium in the US. Calibrating the model to China-US data, we find that a 1% decrease in unskilled labor (1% increase in capital) in China leads to a 0.8% (0.6%) increase in the skill premium in the US under a moderate elasticity of substitution between skill-intensive and labor-intensive goods.