China experienced a sharp increase in wage inequality between unskilled and
skilled workers in the late 1990s. Using a sample of 1,500 firms in five cities of China
for 1998-2000, we estimate the role of foreign trade and investment in determining
China’s wage inequality. Our estimation uses a translog wage-share equation derived
from the cost function. We find that exporting had a negative direct effect on wage
inequality, but a positive indirect effect by inducing firms to spend on skill-biased
technologies. While foreign firms as a whole had no distinctive effect on wage inequality,
a sharp difference exists between majority and minority foreign-owned firms.
We find evidence that majority foreign-owned firms adopted skill-biased technologies
while minority foreign-owned firms adopted unskilled-biased technologies.