The dramatic increase in the wage gap between skilled and unskilled workers observed in many developed countries has received much attention from economists in recent years. A similar rise of wage gap has now been observed for some newly developed economies, such as Hong Kong. However, few empirical studies have been carried out to explain the growing wage gap in these newly developed economies. This study uses the time series data to investigate the impact of increased outward processing trade with the Chinese Mainland on the wage inequality of Hong Kong. We found that there is a significant positive association between the volume of outward processing trade and the wage premium of university graduates over primary school graduates and university graduates over secondary school graduates. Moreover, our econometric analysis also shows that it is the increased outward processing trade that causes the widening of skill wage gap not vice versa. Furthermore, the increase of outward processing trade both increases the pay for well-educated people and at the same time decreases the pay for less well-educated people, thereby widening the wage gap in Hong Kong
