Spatial skill premium along the process of structural transformation

Abstract

Increasing demand for skilled workers induced by the skill-biased structural change, together with the increasing supply of skilled worker driven by educational reform exert an ambiguous impact on the skill premium, the relative price levels, and the resulting labor distribution in China. These bring up the questions: How will the changes in skilled worker demand and supply together affect the wage inequality and the social welfare over time? We develop a tractable general equilibrium framework to quantitatively measure and predict the magnitude of these impacts over the period 2005 to 2024. We find that the simultaneous increase in both skilled worker demand and supply lead to a 38% increase in the skill premium, but 19% decrease in the social welfare.