From China with love: Effects of the Chinese economy on skill-biased technical change in the US

Chu, Angus C. and Cozzi, Guido and Furukawa, Yuichi (2012): From China with love: Effects of the Chinese economy on skill-biased technical change in the US.

Abstract

In this study, we analyze the effects of labor shortage in China on the direction of innovation in the US by incorporating production offshoring into a North-South model of directed technical change. We �find that if offshoring is present (absent) in equilibrium, then a decrease (an increase) in unskilled labor in the South would lead to skill-biased technical change in the North. This fi�nding highlights the different implications of offshoring and conventional trade on innovation. Furthermore, we �find that an increase in the Southern stock of capital reduces offshoring and also leads to skill-biased technical change. Therefore, rapid capital accumulation and labor shortage in China could lead to a rising skill premium in the US. Calibrating the model to China-US data, we �find that a 1% decrease in unskilled labor (1% increase in capital) in China leads to a 0.8% (0.6%) increase in the skill premium in the US under a moderate elasticity of substitution between skill-intensive and labor-intensive goods.

• Item Type: MPRA Paper
• Language: English
• Keywords: economic growth; skill-biased technical change; offshoring
• Subjects: F - International Economics > F1 - Trade > F16 - Trade and Labor Market Interactions; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O33 - Technological Change: Choices and Consequences ; Diffusion Processes; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O14 - Industrialization ; Manufacturing and Service Industries ; Choice of Technology

References

Acemoglu, D., 1998. Why do new technologies complement skills? Directed technical change and wage inequality. Quarterly Journal of Economics, 113, 1055-1089.

Acemoglu, D., 2002. Directed technical change. Review of Economic Studies, 69, 781-809.

Acemoglu, D., 2003. Patterns of skill premia. Review of Economic Studies, 70, 199-230.

Acemoglu, D., Gancia, G., and Zilibotti, F., 2012. Offshoring and directed technical change. manuscript.

Acemoglu, D., and Zilibotti, F., 2001. Productivity differences. Quarterly Journal of Economics, 116, 563-606.

Aghion, P., and Howitt, P., 1992. A model of growth through creative destruction. Econometrica, 60, 323-351.

Bai, C., Hsieh, C., and Qian, Y., 2006. The return to capital in China. Brookings Papers on Economic Activity, 37, 61-102.

Chu, A., 2011. The welfare cost of one-size-fits-all patent protection. Journal of Economic Dynamics and Control, 35, 876-890.

Gancia, G., and Bonfiglioli, A., 2008. North-South trade and directed technical change. Journal of International Economics, 76, 276-295.

Gancia, G., and Zilibotti, F., 2005. Horizontal innovation in the theory of growth and development. In: Aghion, P., Durlauf, S., (Eds.), Handbook of Economic Growth, 1A, 111-170. North-Holland, Amsterdam.

Goh, A.-T., and Olivier, J., 2002. Optimal patent protection in a two-sector economy. International Economic Review, 43, 1191-1214.

Grossman, G., and Helpman, E., 1991. Quality ladders in the theory of growth. Review of Economic Studies, 58, 43-61.

Grossman, G., and Rossi-Hansberg, E., 2008. Trading tasks: a simple theory of offshoring. American Economic Review, 98, 1978-1997.

Iwaisako, T., and Futagami, K., 2012. Patent protection, capital accumulation, and economic growth. Economic Theory, forthcoming.

Li, C.-W., 2001. On the policy implications of endogenous technological progress. Economic Journal, 111, C164-C179.

Park, W., 2008. International patent protection: 1960-2005. Research Policy, 37, 761-766.

Romer, P., 1990. Endogenous technological change. Journal of Political Economy, 98, S71-S102.

Segerstrom, P., Anant, T.C.A. and Dinopoulos, E., 1990. A Schumpeterian model of the product life cycle. American Economic Review, 80, 1077-91.

Xing, Y., 2011. Processing trade, exchange rates and China's bilateral trade balances. GRIPS Discussion Paper 10-30.