Evolution of the Interindustry Wage Structure in China Since the 1980s

• Author: Belton M. Fleisher,Simon Chang,Ohyun Kwon
• Date: 01 February 2015
• DOI: http://doi.org/10.1111/1468-0106.12092
• Published date: 01 February 2015

EVOLUTION OF THE INTERINDUSTRY WAGE

STRUCTURE IN CHINA SINCE THE 1980S

OHYUN KWON University of Wisconsin-Madison

SIMON CHANG Central University of Finance and Economics

BELTON M. FLEISHER*Ohio State Universtiy, Central University of Finance

and Economics and IZA

Abstract. Industry mean wages in China have exhibited sharply increased dispersion since the

early1990s. Researchers have attributed this rising inequality within the industrial wage structure to:

(i) increasingly competitive labour markets leading to better matches between worker pay, worker

skills and employer demands; or (ii) residual government control in some industrial sectors that has

generated high wages through monopoly rent sharing. We argue that the rise in China’s industrial

wage dispersion is primarily attributable to increasingly competitive labour markets, which have led

to greater returns to schooling and to efficient redistribution of workers across major industry

groups. We cannot reject the null hypothesis that the level or changes in government monopoly

power has had negligible impact on China’s rising industrial wage dispersion.

1. INTRODUCTION

The evolution of interindustry differences in average wages (the industry wage

structure (IWS)) in China has recently attracted attention from researchers

(Chen et al., 2009; Song, 2011; Yue et al., 2011), and cogent reasons for this

interest include: (i) China’s economic transition provides a laboratory for the

study of the direction in which market forces shape the structure of wages; and

(ii) the industrial wage structure (IWS) has received the attention of economists

for more than 60 years. Researchers have attributed wage differences across

industries that persist even after accounting for the distribution of workers by

level of schooling and experience, for example, to rewards paid for unobserved

productive characteristics, union power, monopoly rent sharing and other

factors, consistent with both competitive and noncompetitive market structures.

Thus, it is not surprising that scholars and commentators have questioned

whether rising wage inequality in China is the result of competitive labour

*Address for Correspondence: Belton M. Fleisher, Department of Economics, Ohio State University

and China Center for Human Capital and Labor Market Research, Central University of Finance

and Economics and IZA, 1945 N High St Room 410 Columbus OH 43210 USA. E-mail: fleisher.1@

osu.edu. We have benefitted from comments made during presentations of this paper at the Chinese

Economists Society Beijing conference in June 2011 at the Second Annual CUHK-Fudan-Tsinghua

Conference on the Chinese Economy, December 2011, and from presentations at the Chinese

Academy of Social Sciences and to the School of Economics and Business at Beijing Normal

University. We are particularly grateful to Quheng Deng and Juan Yang for their advice and to

Steve Davis, Cai Fang, Li Shi, Dennis Yang and Xiaodong Zhu for their suggestions. Suqin Ge and

Chris Taber offered cogent advice for this version of the paper. Seonghoon Kim and Will McGuire

made valuable comments during presentations of earlier drafts at Ohio State University.

bs_bs_banner

Pacific Economic Review, 20: 1 (2015) pp. 17–44

doi: 10.1111/1468-0106.12092

© 2015 Wiley Publishing Asia Pty Ltd

market forces or the result of barriers to competition in industries where gov-

ernment retains a dominant ownership position.

It is well known that wage differentials in planned economies such as China,

Eastern Europe and the Soviet Union were severely compressed relative to the

norm in market economies. Yet, in their transition towards market-based

systems, all of these former planned economies have experienced increased

dispersion in wages. The existing literature has documented the increase in wage

dispersion along various dimensions such as industry, occupation, region and

human capital. (Fleisher et al., 2005)

Regarding China in particular, Xiaowu Song (2011), Vice President of the

China Society of Economic Reform, reports that recent official data suggests

that the average wage in the highest industry in China is approximately 11 to 15

times as high as that in the lowest-paid industry. He argues (as do others) that

this huge wage differential is caused by institutional entry barriers that render

monopoly power to state-owned enterprises (SOEs) clustered in certain indus-

tries and that the SOEs share their monopoly rent with their workers.

Research on the IWS has a long history in part because it has been difficult to

explain differences in mean wages across industry groups as competitive equi-

librium differences in pay for observed worker or job characteristics in the sense

of Rosen (1986). We cannot provide a definitive test of the hypothesis that

industry wage differentials in China approximate a competitive equilibrium,

because we lack the required data matching employer and employee character-

istics.1While we recognize the rent-sharing story as one possible explanation of

the rise of China’s industrial wage dispersion, we show that an increasing

proportion of the dispersion can be accounted for by returns to observed

workers’ characteristics across industries and that these changes can be attrib-

uted to an increasingly competitive labour market.

The standard deviation of average wages across major industry groups in

China tripled between 1988 and 2007. Industry wage dispersion in China is now

greatest among privately-owned units and lowest among state-owned enter-

prises, and we infer that privatization and, implicitly, market competition are

driving forces behind the evolution of China’s IWS. Moreover, there has been a

remarkably consistent pattern of industrial wage differentials across developed

countries over the past century, and China has been converging to this pattern

since the late 1980s. We cannot reject the null hypothesis that the level or

changes in government monopoly power has had negligible impact on China’s

rising industrial wage dispersion.

The rest of this paper proceeds as follows. In Section 2 we illustrate the

evolution of the IWS in China since the beginning of economic reform and

present a brief summary of recent research on the IWS in China. Section 3

contains a brief history of the literature on the IWS. Section 4 presents our

1That the differentials unexplained by observed worker or job characteristics mainly reflect market

disequilibria would appear implausible in the face of their persistence over time and across countries.

Thaler (1989) presents a lucid review and analysis of proposed explanations and their shortcomings.

O. KWON ET AL.

18

© 2015 Wiley Publishing Asia Pty Ltd