From factories to cubicles : an empirical study of the service off-shoring industry's effect on wage inequality in China

Abstract

This paper seeks to determine if service off-shoring activities directly increases wage inequality, as suggested by the Feenstra-Hanson's off-shoring model. We adopt the empirical framework by Owen & Yu (2003) that was used to study the relationship between foreign direct investment (FDI) and skill premium in wages. Data consisting of 31 provinces and 9 cities in China from year 2003 to 2010 is used to run two separate regressions on the provincial level and city level. Software export value is used as a proxy for service off-shoring activity. Empirical evidence suggests that service off-shoring activity increases skill premium, especially at the city level. Potential policy implications include mechanisms to increase labour productivity for unskilled professions and make higher education more affordable for the average Chinese citizen.