Import Competition, Labor Market Flexibility, and Skill Premium-Evidence from China Based on the Dynamic Threshold Model

This paper examines the impact of import competition on skill premium and the moderating effect of labor market flexibility on it, using panel data from 30 provinces in China from 2010 to 2019. A dynamic panel threshold model with instrumental variables is employed to address the endogeneity problem and to identify the nonlinear moderating effect of labor market flexibility. The results show the following: (1) Import competition has a promoting effect on skill premium, and this effect declines from eastern to western regions in China. (2) The import competition increases the skill premium through the channels of enhancing regional innovation capacity and promoting industrial upgrading and rationalization. (3) There exists a significant threshold effect in the moderating effect of labor market flexibility. When labor market flexibility surpasses the threshold value of 1.330, the enhancing effect of import competition on the skill premium is alleviated, facilitating labor reallocation and wage adjustment. The integration of labor market flexibility into the globalization–inequality debate extends the existing literature for providing a new understanding of the mechanisms behind the skill premium. The policy implications are that targeted labor market reforms are essential for mitigating wage differentials between skilled and unskilled workers arising from intensified import competition.