Export quality and wage premium

Abstract

Abstract A growing body of research suggests a positive association between the quality of export products and income per capita, arguing that quality upgrades affect income through changes in the relative demand for skilled labor. This article falls within this literature and intends to shed light on the effect of quality upgrades of export products on average wages at the industry level. The study is conducted on the manufacturing sector over a set of 23 countries for which industry-level wage data are available. Contrary to previous studies which use unit values as an indirect measure of product quality, we rely on the methodology proposed in Khandelwal (Rev Econ Stud 77(4):1450–1476. https://doi.org/10.1111/j.1467-937X.2010.00602.x, 2010) and estimate quality as a residual of a demand equation. To establish a direct causal link between export quality upgrades and changes in wages, we use an instrumental variable strategy. Our results show that ahead of upgrades to export quality within a specific industry, average wages offered within the industry increase. In addition, we observe that the effect is larger for developing countries. Our findings imply that export product quality upgrades require more intensive use of qualified workers, who require higher wages.