Although theory predicts that international trade will decrease the relative demand for skilled
workers in relatively skill-deficit countries, in recent decades many developing countries have
experienced rising wage premiums for skilled workers. We examines this puzzle by
quantifying the relative importance of different supply and demand factors in explaining the
rapid increase in the returns to education experienced by China during the 1990s. Analyzing
Chinese urban household survey and census data for six provinces, we find that although
changes in the structure of demand did reduce the demand for skilled workers, consistent
with trade theory, the magnitude of the effect was modest and more than offset by
institutional reforms and technological changes that increased the relative demand for skill.