Global value chains and the skill structure of labor demand

Distinguishing among different types of trade flows, this study conducts empirical analysis on the role of global value chains in the skill structure of labor demand. When examining the effects of global value chains, it is necessary to use a measure that can account for both backward and forward linkages. Therefore, this study adopts an input-output model in order to account for the inter-connectivity of production processes. This study uses data on labor compensation from the Socio-Economic Accounts (SEA) along with industry-level international trade data for the period 1995 to 2009, covering 40 countries from the World Input-Output Database (WIOD). By estimating a system of factor demands and elasticities, this study’s results should illuminate varying trade patterns and their effects on the labor market in different economic regions. Preliminary results for Japan are consistent with the recent literature. That is, demand for middle-skilled labor decreases while demand for the other labor groups is increasing, which hints at the crowding out of the middle-skilled group, compared to low- and high-skilled workers. Estimating the system of cost share of equations by each sector reveals that in manufacturing industries, medium- and high-skilled labor tend to suffer from increase in foreign value-added in exports (FVAiX), while demand for low-skilled labor increases. In the services sector, the cost shares for all three labor groups show a negative effect. Low-skilled labor is found to be affected negatively by increases in FVAiX in the agricultural industries. In order to alleviate the negative effects, workers from each skill group should be able to move along the value chain smoothly.