From China with love: Effects of the Chinese economy on skill-biased technical change in the US

In this study, we analyze the effects of a decrease in unskilled labor in China on
the direction of innovation in the US by incorporating production o¤shoring into a
North-South model of directed technical change. We find that if offshoring is present
(absent) in equilibrium, then a decrease in unskilled labor in the South would lead to
skill-biased (unskill-biased) technical change in the North. This finding highlights the
different implications of o¤shoring and conventional trade on innovation. Furthermore,
we find that an increase in the Southern stock of capital reduces offshoring and also
leads to skill-biased technical change. Therefore, rapid capital accumulation and a
decrease in unskilled labor in China could both lead to a rising skill premium in the
US. Calibrating the model to China-US data, we find that a 1% decrease in unskilled
labor (1% increase in capital) in China leads to a 0.8% (0.6%) increase in the skill
premium in the US under a moderate elasticity of substitution between skill-intensive
and labor-intensive goods.