Induced innovation: evidence from China’s secondary industry

Abstract

We investigate the effect of rising labour costs on induced technological change in China’s secondary industry. Building on insights developed in a rich literature, we propose a model linking changes in labour productivity to changes in labour costs and the predetermined availability of physical capital. Importantly, we derive testable hypotheses to distinguish induced innovation from standard substitution of capital for labour under fixed technology. Our empirical results support the hypothesis that rising wages have induced labour-saving innovation in China, at least in the decade of the 1990s, but less so or not at all after the middle of the next decade.