City labor supply and firm’s export quality improvement: cost effect or skill effect

TIE Ying1 HE Huanlang2

(1.Institute of International Business, Shanghai University of International Business and Economics)
(2.International Business School, Shanghai University of International Business and Economics)

【Abstract】This paper studied the impact of city labor supply on the export product quality and tried to find how the mechanism was. Against the background of population transformation, improving human capital and realizing the transformation of demographic dividend from cost effect to skill effect was an important way to deal with the adverse impact of the decline of labor supply and the rise of labor cost and promote the upgrading of export product quality. In theory, we introduced city labor supply into the framework of Hallak and Sivadasan (2013) and characterized cost effect and skill effect as the theoretical mechanism. Then, this paper constructed a labor participation rate indicator that covered population mobility on the city level, the rate indicator could be matched with detailed firm-product-destination data, and finally, we could construct a detailed high-dimensional panel data on the city-product-destination level for research. The benchmark results showed that the city labor participation rate had a positive effect on the export product quality of firms; rising labor costs would weaken this positive effect which we defined as cost effect and the rising of urban human capital would strengthen this positive effect which we defined as skill effect. This conclusion remained highly robust after consideration of the processing trade, continuity of export relations, megacities, city’s industrial policy and multi-product firms’ behavior. We further gave the same robust empirical evidence at the firm level. Our conclusion not only explained the paradox of export product quality in China using insufficient investment in human capital with a new perspective, but also implied that in the context of demographic structure transformation, the upgrading of export product quality required more attention to human capital investment and labor skill upgrading.

【Keywords】 demographic structure; city labor participation rate; export quality; cost effect; skill effect;


【Funds】 Program of the Humanities and Social Sciences, Ministry of Education, China (18YJC790152) National Natural Science Fund of China (71403164) Shanghai Philosophy and Social Science Planning Project (2018BJB015) “Dawn Program” of Shanghai Education Development Foundation and Shanghai Municipal Education Commission (18SG51)

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    [1]. ① This setting mainly comes from Schumpeter’s theory of innovation and Rogers’ theory of diffusion of innovations; that is, at the labor productivity level, R&D innovation plays a fundamental “qualitative” role while human capital accumulation has the characteristic of “endogenous production process” and mainly plays the role of “quantity” accumulation. [^Back]

    [2]. ① The export product quality is taken average at the corresponding level and the standard errors in the regressions are also clustered at the corresponding level, which applies below if it is not specified. [^Back]

    [3]. ① It is calculated with the ACF method by GB-2 industry. [^Back]

    [4]. ② It is the ratio of interest expenses to sales income. [^Back]

    [5]. ③ We obtain the former by dividing the sum of foreign capital and the capital of Hong Kong, Macao and Taiwan by the paid-in capital and the latter by dividing the sum of state-owned capital and collective capital by paid-in capital. [^Back]

    [6]. ④ It is expressed with the average annual fixed capital balance divided by the number of employees [^Back]

    [7]. ⑤ Adopting the HS4 dimension is to highlight the firm heterogeneity. [^Back]


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This Article


CN: 11-1692/F

Vol , No. 09, Pages 26-39

September 2019


Article Outline


  • Introduction
  • 1 Theoretical model
  • 2 Data, variable construction and empirical path
  • 3 Empirical Analysis
  • 4 Research extension
  • 5 Conclusion and implication
  • Footnote