Rising Wages and Intra-Country Industry Relocation: Evidence from China

Abstract

We analyze how rising labor costs contribute to economic restructuring in China. In a panel of prefectural cities and industries, spanning the years 1999-2007, we employ instrumental variables to identify the effect of increasing local wage levels. We find adverse effects on performance of (low-skilled) labor intensive industries in China’s advanced regions. Consistent with cost-saving industry relocation, such industries expand in other locations, where wages are comparatively low. Comparing locations where such industries expand to those where they do not, we find that both economic complexity and subsequent per capita income increased faster in the former group.