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 Chinese
cities with available data for 1998 and 2000, we investigate the role of technology
and foreign trade in determining China’s wage inequality. We find evidence that
conditional on the technology deployed, trade reduces wage inequality in exporting
firms. But we also identify an indirect effect where trade increases wage inequality
because it tends to induce exporting firms to deploy more skill-biased technologies.
While the presence of foreign-funded firms operating in China has no distinctive
effect on wage inequality in general, a sharp difference exists between majority and
minority foreign-owned firms. We find evidence that majority foreign-owned firms
experienced skill-biased technical changes that tend to increase wage inequality while
minority foreign-owned firms experienced unskilled-biased technical changes.