Skill Premium in China : Measurement and Decomposition

China's high growth since the 1990s has been accompanied by the continuous increase in the supply of skilled labor, which naturally makes one question whether China's skill premium has also increased like some developed countries. Due to the lack of official statistics, we first utilize the least square method and least absolute deviation to estimate the skill premium in China based on industry-level data. Our results show that the average aggregate skill premium is 1.54-2.44 during 1995-2019, rising from 1995 to 2009, declining from 2010 to 2014, and rising significantly after 2015. Second, we use census data to estimate the skill premium of each province and municipality. The result indicates that the skill premium of coastal areas is rising rapidly, while that in inland areas is relatively stable. Based on these estimates, we further calculate the substitution elasticity between factors and decompose the skill premium into skill-bias technical change effect and capital-skill complementary effect. The empirical results show that equipment capital is relatively complementary to unskilled labor rather than skilled labor in China. That is to say, the rise of skill premium in China is mainly attributed to biased technological progress