July 2022

IZA DP No. 15423: China's Skill-Biased Imports

Hongbin Li, Lei Li, Hong Ma

China has witnessed rapid increases in the skill premium over the last few decades. In this paper, we study the short-run effect of capital goods imports on skill premium in China. The surge in capital goods imports, which embody advanced technology, can explain the rising demand for skills in China. We exploit regional variations in capital goods import exposure stemming from initial differences in import structure and instrument for the capital goods import growth using exchange rate movements. A city at the 75th percentile of the distribution of capital goods imports growth has a higher skill premium by 5 percentage points (0.38 standard deviation) over the one at the 25th percentile. To explore the underlying mechanism, we provide firm-level evidence and show that imported capital goods are skill-complementary.