The Impact Of Vertical Specialization On China’s Wage Inequality

Along with the development of technology and globalization, the volume of international trade has surged, and the pattern changed as well. The trade among countries was firstly inter-industry, gradually, intra-industry trade occurred. Nowadays, the trade based on vertical specialization becomes more and more prevalent, which means the companies could fragment the production process, relocating one or several stages to different countries and regions, then trading in intermediates. Meanwhile, since the middle of 20th century, the inequality within or between countries has become more and more severe. In particular, since the 1980s, some developed countries, such as U.S., the demand and the relative wage of skilled labors ascended, which leaded to the larger wage gap among workers. Afterwards, this phenomenon has been observed in some developing countries as well. Vertical specialization provides us with a new angle of view to analyze the phenomenon.Firstly, by reviewing the literatures, I summed up the concept, causes and the measure of vertical specialization. For the impact of vertical specialization on wage inequality, there are lots articles investigating the cases of developed countries, though the conclusions being not consistent; while for the developing countries, there are fewer articles.Secondly, I calculated the VSS index of China for 33 disaggregated industries from 1995 to 2011 with the data from the WIOD (World Input Output Database), and found that the manufacturing sector has been most deeply involved in the division of labor and then service sector. Besides, after entering the WTO, China reduced the tariff and non-tariff barrier, and had higher degree of vertical specialization; however, after 2007, the trend turned down and then slightly grew up again. For the measure of relative wage, I employed the data from SEA, by taking the low skill labors as referring group, I calculated the relative wage of high skill labor to low skill labor and middle skill labor to low skill labor and found that the inequality of wage increased during recent years.Moreover, I did the empirical analysis of this issue. Overall, vertical specialization has positive impact on the wage gap, and more significantly for the wage gap between high skill labor and low skill labor. At a more disaggregated level, vertical specialization is more influential for agricultural and manufacturing sectors.At last, I gave some suggestions for better involving in the international division of labor as well as justifying the wage inequality.