Abstract
According to the conventional wisdom, foreign direct investment (FDI) can raise relative wages of skilled labor in a host country by bringing in skill-biased technology. This paper proposes an alternative hypothesis that in an economy characterized by labor market segmentation and high labor mobility costs, FDI could increase relative wages of skilled labor even without bringing in skill-biased technology. Chinese urban household survey data are used to test the hypothesis. We first estimate relative wages in Chinese state-owned enterprises (SOEs) and foreign-invested enterprises (FIEs) by correcting for possible sample selectivity caused by employment choice between SOEs and FIEs. Employment choice is then examined to provide evidence of the costs of labor mobility. The research implies that skill premium in a host country with labor market distortions may increase faster than when skill-biased technology is the only force for skill upgrading.
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