Skill Sorting and Production Chains: Evidence from India

Discussion Papers

No.545

by Yoko ASUYAMA

November 2015

ABSTRACT

This study proposes a new mechanism that explains skill-sorting patterns and skill wage differentials across industries based on the length of the industry’s production chain. A simple simultaneous production model shows that when the quality of intermediate inputs deteriorates rapidly along the production chains, high-skilled individuals choose to work in industries with shorter production chains because of higher returns to skill. I empirically confirm this skill-sorting pattern and these inter-industry skill wage differentials in India, where the quality of intermediate inputs is likely to degrade rapidly because of the high number of unskilled laborers, poor infrastructure, and less-advantaged technology. The results remain robust even when considering selection bias, alternative reasons for inter-industry skill wage differentials, and a different period. The results of this study have important implications when considering countries’ industrial development patterns.

Keywords: India, Input quality, Production chains, Return to skill, Skill sorting, Skill wage premium
JEL classification: I25, I26, J24, J31, L23, O15

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