Skill sorting and production chains: evidence from India

Asuyama Yoko

No 545, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

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; Labor economics; Labor productivity; Labor market; Wages; Human resources; Economic development; Input quality; Production chains; Return to skill; Skill sorting; Skill wage premium (search for similar items in EconPapers)
JEL-codes: I25 I26 J24 J31 L23 O15 (search for similar items in EconPapers)
Date: 2015-11-01
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Citations: View citations in EconPapers (3)

Published in IDE Discussion Paper = IDE Discussion Paper, No. 545. 2015-11-01

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