Market Access, Labor Mobility, and the Wage Skill Premium: New Evidence from Chinese Cities

Abstract

Labor market reforms in developing economies have causes economic regions to open up, providing greater market access to businesses and leading to urban migration. This paper studies what happens to the wage skill premium in this process. Who gains – skilled or unskilled workers? Using data collected from a survey of 331 Chinese cities to construct a new market access index, this paper empirically analyzes the impact of increased market access on the wage skill premium. Using the theoretical framework of new economic geography and the tools of spatial externality, combined with quantile regression techniques, we find that there exists an inverted U-shaped relationship between market access and the wage skill premium. An increase in market access initially attracts high-skilled labor with promises of increased returns that increases the wage skill premium until a threshold is reached, beyond which it starts to decline. The conduit of this relationship is the impact that market access has on returns to education. The observed pattern is robust to alternative tests.