Reports
Discussion Papers
No.545 Skill Sorting and Production Chains: Evidence from India
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
Please note that discussion papers are works in various stages of progress and most have not been edited and proofread and may contain errors of fact or judgment. Revised versions of these papers may subsequently appear in more formal publication series. The views expressed in this publication are those of the author(s). The IDE does not guarantee the accuracy of the data included and accepts no responsibility for any consequences arising from its use.