Functional specialization and wages in Europe

This paper investigates the relationship between functional specialization (FS) in global value chains (GVCs) and wages. Drawing on the GVC theory and intellectual monopoly capitalism theory, both highlighting asymmetries in international production and knowledge networks, it is postulated that FS in fabrication and FS in research and development (R&D) have differentiated effects on the evolution of wages. To test this hypothesis, we embed measures of FS in a structural wage regression and estimate the relationship for 25 EU countries over the period 2003–2022. We find some evidence for this hypothesis, notably a negative association between FS in fabrication and wages. Furthermore, we obtain partial confirmation of the expected patterns in our instrumental variable regressions, although the findings are not fully robust across all specifications.