Equal or Fair: Impacts of Export on Relative Wage Distortion in China

Abstract

ABSTRACT This paper studies the relative wage distortion and income inequality between high and low‐skilled workers, comparing exporters and non‐exporters in China. We develop a model featuring heterogeneity in firm productivity, worker skills, and firms' export decisions. By estimating relative wages and relative marginal productivity, we construct a new indicator that measures relative wage distortion between high‐ and low‐skilled workers and contrast it with income inequality. Using data from Industrial Firms and Customs, we construct tariff‐based instrumental variables from China's accession to the WTO and trading rights reform. Our empirical findings are consistent with the model predictions: compared with non‐exporters, ordinary‐trade exporters have higher wage inequality but lower relative wage distortion, while processing‐trade exporters have lower wage inequality but higher relative wage distortion. We also carry out heterogeneity analysis based on firm ownership, existence of labor unions, and regional market differences.