Analysis of the theoretical mechanism of intermediate goods imports affecting skill premiums


Published:

2023-04-12

The analysis in this paper focuses on three main channels to explore the mechanism of action of the impact of intermediate goods imports on skill premiums: the labor demand effect, the profit incentive effect, and the capital-skill complementarity effect.

The analysis in this paper focuses on three main channels to explore the mechanism of action of the impact of intermediate goods imports on skill premiums: the labor demand effect, the profit incentive effect, and the capital-skill complementarity effect.

(i) Labor demand effect.

The import of intermediate goods can be regarded as an import of domestic scarce factors, which will, to a certain extent, cause resource shocks to the domestic factor market and replace factors that originally do not have comparative advantage or have high production costs.

This will cause a change in the structure of the domestic factor market, but also cause changes in the demand for factors in the production of final products.

In the face of import competition, enterprises increase the demand for highly qualified labor factors in order to improve their technological level and R&D capabilities.

Given that wages reflect to some extent the demand of enterprises for labor with different skills, with it arises the impact on the remuneration of labor with different skills.

Since imported intermediate goods imply a higher level of technology, they are equivalent to the indirect introduction of advanced foreign technology and equipment.

To occupy a certain share in the competitive market, domestic industries or regions are bound to imitate and learn such technology, thus bringing opportunities for their own technological innovation.

In this learning process, on the one hand, enterprises have a greater ability to learn, with more technology, knowledge of the increased demand for talent.

On the other hand, due to the rapid technological change, a large number of unskilled laborers will face the possibility of being replaced by machines, and the demand for them will gradually decrease, and the wage level will drop accordingly.

Thus, the erosion effect of technological progress on the wages of unskilled labor is more obvious.

With the increasing imports of intermediate goods, workers with low education level and working in labor-intensive industries will mostly flow to enterprises with lower wage levels.

In contrast, workers with high education levels and in capital-intensive industries will choose to work in enterprises with higher wage levels.

As high-tech industries and higher demand for skilled labor will inevitably reduce the demand for unskilled labor, which will widen the wage gap between industries.

(ii) Profit incentive effect.

Generally speaking, the profit level of enterprises is linked to the pay level of employees. Efficiency wage theory suggests that enterprises, in order to increase the level of marginal output of workers, and thus increase the business profit of enterprises.

This measure can guide employees' behavior toward achieving organizational goals.

Thus, efficiency wages achieve the goal of motivation.

Since companies involved in the import trade of intermediate goods operate at a higher level of strength compared to the average company and the elements are concentrated in more efficient and profitable sectors.

As a result, higher profit levels are generated and skilled labor receives higher wages.

Wage bargaining theory suggests that because skilled labor has an irreplaceable core competency.

In the case of higher corporate profits, skilled labor can bargain for higher wage income, making the relationship between skilled labor and wage income stronger.

As inequality between capital and labor increases, union bargaining and workers' bargaining power will gradually expand the skill premium.

In addition, shared wage theory suggests that performance is an important factor affecting labor income, and that the higher the profits of firms importing intermediate goods, the higher the performance wages paid to workers.

(iii) Capital-skill complementarity effect.

The "capital-skill complementarity" refers to the complementarity between the human capital level and skills of the labor force, and the higher the human capital level, the greater the advantage of being a skilled labor force.

The level of human capital of a country is closely related to its trade openness.

Since imports of intermediate goods contain invisible knowledge and technology, they largely stimulate host countries to further improve their own human capital levels through learning and absorption.

In the context of continuous capital deepening, for some jobs that require skilled labor to perform.

Jobs such as R&D technicians are difficult to be replaced and their complementarity with capital is stronger, which will also further widen the wage gap between skilled and unskilled labor.

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