The role of intangible capital in wage inequality between skilled and unskilled workers in China

Abstract

Wage inequality between skilled and unskilled workers has increased rapidly in China, right along with its major trading partner-the United States. Trade liberalization and technological improvement have been proposed as causes for the inequality, yet trade liberalization and technological improvement have set the stage for another, possibly more important, cause of the inequality: the movement of intangible capital to China. Intangible capital works synergistically with other inputs to make skilled-workers and tangible capital more valuable. Once the accumulated tangible capital reaches a certain level, its lower unit cost will attract the inflow of intangible capital, which will further expand the demand for skilled workers. As a result, wage inequality becomes larger in China. This paper takes the first step in an attempt to understand the role that the movement of intangible capital plays in the increasing wage inequality in China, and sets out several possible policy prescriptions for China to deal with this inequality.