Trade liberalization and regional labor market dynamics: Evidence from China’s WTO accession

Abstract

We analyze the evolution of the effects of China’s WTO accession on Chinese local labor markets. This is conducted by exploiting the variation in the tariff reductions across industries and the initial differences in the industry specialization of prefecture-level cities. The results reveal that cities facing larger tariff reductions experienced prolonged slower growth in average wages relative to other cities. However, the magnitude of this adverse effects over time form a hump-shape. Cities facing larger tariff reductions experienced growth in informal employment, but only for the short term. For the long term, there was growth in formal employment, which comes from the secondary sector. Higher administrative level cities recovered from the negative impact of trade liberalization on wages earlier than ordinary cities. Our estimation results are robust to various alternative measures, specifications and city samples.