Offshoring and Wage Inequality : Theory and Evidence from China

We present a global production sharing model that integrates the organizational choices of offshoring into the determination of relative wages in developing countries. The model shows that offshoring through FDI contributes to the demand for skill in the South, thereby increasing the relative wage of skilled workers. By developing an augmented Mincer earnings function, we test the model based on a natural experiment of FDI liberalization in China. Empirical findings using detailed Urban Household Surveys and trade data provide support to our model and shed light on the evolution of wage inequality from 1992 to 2008 in China’s manufacturing sector