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Effects of Economic Development in China on Skill-Biased Technical Change in the US

Chu, Angus C. and Cozzi, Guido and Furukawa, Yuichi (2012): Effects of Economic Development in China on Skill-Biased Technical Change in the US.

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Abstract

In this study, we explore the effects of a change in unskilled labor 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: absent offshoring and lacking intellectual property rights (IPRs) in China - as in the early 1980s - an increase in unskilled labor in China should lead to skill-biased technical change. If instead offshoring is present and/or IPRs are better enforced (as in more recent times), then a decrease in unskilled labor in China should lead to skill-biased technical change. Furthermore, an increase in the per capita stock of capital in China reduces offshoring and also leads to skill-biased technical change. Calibrating the model to China-US data, we find that under a moderate elasticity of substitution between skill-intensive and labor-intensive goods, the decrease in unskilled labor and the increase in capital in China can explain about one-third of the recent increase in the skill premium in China through skill-biased technical change in the US.

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