Wage effects of global value chains participation and position: An industry-level analysis¹

Abstract

We examine how participation and positioning in global value chains (GVC) affect wages. We also examine whether this relationship is conditioned by a country’s development level and labor market regulation. The results show that participation and upstream specialization in GVCs are associated with higher wages but only in developed countries. In developing countries, while GVC participation is associated with higher wages, upstream specialization exerts downward pressure on wages. For analysis focusing on the role of labor market regulation, we find that GVC participation only exerts a positive effect on wages under stringent labor market regulation. Under flexible labor market conditions, it exerts downward pressure on wages but allows for the effective reallocation of GVC workers into knowledge-intensive and high value added upstream activities in the value chain that are more productive and wage rewarding. Additional analysis on the effects of GVCs along the wage distribution show that participation and upstream specialization in GVCs are associated with higher wages across all wage segments in developed countries. In developing countries, GVC participation only benefits higher wage earners and make low-wage earners worse-off. Even when upstream specialization is associated with lower wages across all wage segments, low wage earners are disproportionately affected.

KEYWORDS:

• Wages
• global value chains
• upstream specialization

Jel Classifications:

• F14
• F16
• J16
• P51

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 We are grateful to Elvis Avenyo, Tilman Altenburg, Clara Brandi, Kasper Vrolijk, and Frederik Stender for their spot-on and insightful comments on the earlier versions of this paper. We also thank the team from the African Chief Economist's Office of the World Bank working on the Bank's flagship report on industrialization in Africa for their valuable data and policy contributions. The usual disclaimer applies.

2 https://www.nytimes.com/2016/12/29/technology/iphone-china-apple-stores.html 02/01/2021.

3 Such caveats largely relate to the differences in the skill structure of labor, which may lead to differential wage premiums between skilled and unskilled labor.

4 Martins and Opromolla (2009) find empirical support for this argument utilizing unique data from Portugal.

5 For an extensive literature review see Franssen (2019).

6 Utilizing an industry-firm matched sample, the authors find evidence of leaning-by-exporting for manufacturing firms in intense GVC participating industries.

7 See Ndubuisi and Owusu (2021) for a detailed discussion on this.

8 For purposes of exposition, time and industry subscripts are omitted.