Skill Premium, Biased Technological Change and Income Differences

Using 1987-2006 panel data for China, we explore the dynamics of the skill premium. Thepresent paper focuses on the skill premium as an explanation for why income differences areso large in China. Our empirics show that: the rise in the relative supply of skilled laborresults in an increase, instead of a decrease, in the skill premium; domestic investment is notcomplementary with skill formation; the skill premium is higher in more developed provinces;economic openness facilitates an increase in the skill premium; whether foreign directinvestment induces skill-based technology change or not, it drives up the skill premium. Anarray of policy prescriptions for reducing income differences and ensuring sustained economicgrowth are provided.