This paper is devoted to examine the relationship between foreign direct investment (FDI) and wage inequality of skilled labor and unskilled labor in China. A theoretical framework that is developed based on the North-South trade model in Feenstra and Hanson (1997) suggests that, in the short run, foreign capital inflows in China will introduce new production methods that employ a higher ratio of skilled to unskilled labor in production activities. As a result, an aggregate labor demand is created because of such capital flows in the Chinese market. In particular, skilled labor will benefit more from FDI than unskilled labor in the short run, since a Leontief production function is used in the theory, where each type of production activities created by FDI employs a fixed ratio of skilled to unskilled labor. A panel setting consisting 25 Chinese provinces over the period from 1994 to 2003 is used to empirically test how FDI affects wage inequality. Results confirm that FDI increases the relative wage of skilled labor. In addition, test results also suggest there is significant evidence of state own enterprises (SOEs) and urban collectives (UCs) equalizing wages of skilled labor and unskilled labor. However, such an effect disappears in a fixed effects model with first differences.


Warner, James



Publication Date


Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis



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