Analyzing the Widening Wage Inequality in China: Temporary or Persistent Phenomena

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Analyzing the Widening Wage Inequality in China: Temporary or
Persistent Phenomena
HU Yongjian
School of Economics, Tianjin University of Finance and Economics
[email protected]
Abstract: During its economic transition period, China has achieved remarkable economic growth.
However, such a growth has accompanied by widening wage inequality which has sparked serious
concerns over the negative impacts of growing wage disparities on the substantiality of China long-term
economic and social development. Based on household survey data, this paper analyzes the increasing
trend of wage inequality over time in China. Our analysis shows that the evolution of labour institutions,
in particular changes in wage policies which enables wage determination to be more market based play a
role in widening the wage gap between different levels of education and skills. Our study in the paper
also reveal that the change in wage policy is not the only factor for the rise in the wage gap, other factors
such as discrimination against female workers and migrant workers, as well as institutional barrier like
‘HuKou System’ were also responsible for the widening of the wage inequality.
Keywords: Labour market, Wage policy, Wage inequality, Discrimination
1 Background
While China has achieved remarkable economic growth during the past several decades, its rising
income inequality has gained huge attention from both domestic and international communities. There is
a growing awareness that the rise of income inequality in China has brought about wide-ranging social
and economic issues, and, hence, could gravely harm the sustainability of China’s economic and social
development in the long-term.
In terms of the relationships between economic growth and inequality, two contrasting schools of
thought can be distinguished. First, the influential neo-liberalist understanding is that inequality is
largely endogenous to economic growth and that “artificial” adjustments to inequality would
compromise the overall economic efficiency and, hence, economic growth. For instance, increasing
inequality at the early stage of industrialization like China and India is seen as an “inevitable” outcome
of labour migration from rural to urban sector, and this trend will be reversed only after the Lewisian
turning point (Lewis, 1954) where labour surplus in the rural sector is exhausted.
Another school of thought considers inequality as an independent variable which, by “non-market”
interventions, can influence economic performances. This view, which can be called the
“interventionist” view in contrast with the laissez-faire interpretation of the Kuznets curve Kuznets
1955 , opens up possibilities for growth-inducing policy interventions. In the case of the second view
which allows for inequality-reducing policies, two important issues need to be noted. First, their
interpretation on the relationship between economic growth and variability of inequality is possible only
if the level of inequality is largely exogenous to market processes and can be determined by non-market
factors. Secondly, the empirical evidence about the negative correlation between growth and inequality
in some developing countries indicates that “unconditionally” low inequality would be counterproductive: in other words, inequality needs to be adjusted along the negative slope of the Kuznets
curve. This is in line with the recent sentiment among the policy makers that both “too high inequality”
and “too low inequality” is detrimental to economic development.
Wages are the main sources of income of ordinary people in China. Since the opening-up policy adopted
by the Chinese government in the late 1970s, Chinese workers’ wages have been on the rise in both
nominal and real terms. The wage increase has played a significant role in the lead-up to the rising
purchasing power in China. On the other hand, however, over time we can also observe the widening of
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the wage differentials between workers with different levels of skill attainment, occupations, sectors,
enterprises, and between men and women. It is fair to say that the increasing trend in wage inequality
has cast a shadow in an effort to create ‘a harmonistic labour relationship during the economic reform’
by the Chinese central government.
The widening wage differentials have echoed dramatic changes in the labour market and the wage
policies which enable wage determination to be more market-based since the late 1970s in China (we
will examine these changes in Part 2). It is not difficult to see that the policy measures towards creating
market mechanisms for the workforce have potentials of widening wage inequality in China.
The main purpose of the paper is to analyze the increasing trend of wage inequality and identify the
main factors for widening wage inequality over the past few decades in China.
The structure of the paper is organized as follows. Part 2 reveals the evolution of wage policies over
time in China. Part 3 examines the widening wage gap based on the findings from econometric analysis
by using household survey data in China (for econometric specification and estimation results, see our
appendix). In particular, we examine growing wage gaps between: (1) workers with different levels of
education; (2) workers with different years of work experience; (3) men and women; (4) regions; (5)
Stated-owned enterprises (SOEs) and foreign-invested enterprises (FIEs). Our analysis will place the
rise of wage inequality in an appropriate institutional background. The final part of the paper will
summarize the findings and make recommendations for policy responses to the growing disparities of
wages in both short-and long-terms.
2 Changes in Wage Policies in China
In the pre-reform era, the level of wages and its adjustment were centrally determined by the
government in China. Under the system of centralized wage determination, the fixing of wages was
based mostly on egalitarian principle. The government adopted a compressed wage structure which
imposed restrictions on the wage differentials within narrow limits across regions, occupations and
industries. Across the country, the major instrument of wage policy was the uniform grade wage system
which was originally introduced from the Soviet model in the 1950s. Although the formation of wages
took account of individual educational achievement, workers’ wage increases primarily depended on
seniority, rather than on productivity and human capital . There were few incentives for work
performance and skill acquisition; bonus payments were deemed to be capitalism and barely used.
Since the late 1970s, when China was set on the path of ‘reform and opening’, the labour market in
China has experienced profound changes. At the initial stage of economic reform, although StateOwned Enterprises (SOEs) still predominated, emergence of domestic private sector and rapid
development of foreign-invested enterprises (FIEs) have considerably affected labour allocation and
increased job mobility in the Chinese urban labour market. In sharp contrast to workers in SOEs, for
those who worked in private and foreign companies, their jobs were not guaranteed for their lifetime any
more. Both employers and workers have rights to terminate the employment contracts at their will.
Meanwhile, private and foreign companies are able to establish their own wage scales and structures
according to the shift of market forces. While FIEs became an attractive destination for considerable
number of graduates and managerial and technical workers due to relatively high wages and flexible
forms of employment, SOEs came under growing competitive pressure to raise the level of wages and
reform wage-fixing system.
Partly as a result of the shock caused by fast-growing non-state enterprises, SOEs have undergone a
series of reforms that initially targeted on improvement of work incentive and enhancement of
productivity since the early of the 1980s. In parallel with the transformation of SOEs, institutional
reforms were gradually implemented in the context of wage-fixing system. Table 1 summarizes different
phases of the reform and identifies major changes in national wage policies and instruments.
Table 1 shows that, during the period of the 1980s, although the centralized wage setting still
predominated in the Chinese urban labour market where an overwhelming majority of labour force was
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employed in SOEs, government’s wage policy instruments have been gradually diversified. Since the
mid-1980s, the Chinese government permitted greater relaxation of the extreme egalitarian wage
policies of the past in order to promote greater efficiency and rapid economic growth. Of the greatest
significance was the establishment of linking wages to SOE profitability. Bonuses and awards were
utilized to enhance workers’ productivity and prevent workers from shirking. With constraint of total
wage bill imposed by the government, SOEs were able to use their profits after tax for bonuses and
temporary wage rises.
The centralized wage setting was further liberalized in the 1990s. The 1994 Labour Law provided a
legal basis for SOEs management to establish their own internal wage structure within the confines of
the overall wage budget established by the government. The introduction of contract-based employment
system gave enterprise managers more autonomy to set up wage scales according to new SOE recruits’
skill and education levels. Regulations on Minimum Wages in Enterprises that came into effect in 1994
marked the beginning of minimum wages fixing on provincial basis in China.
Table 1 Changes in wage policy and wage setting in the post-reform in China
Phases
Wage policy
Wage policy instruments
Centralized
wage
predominated
setting
among
still
SOEs,
but
government gave more freedom to the
1980s
enterprises. Private companies and joint
ventures were allowed to establish their
own wage structures based on the shift
(1)
Quota imposed by the government
for controlling total wage bill (2) profitsharing
arrangement
by
linking
enterprise’s wages to its profitability
of the labour market.
The 1994 Labour Law provides a legal
basis
for
SOE
management
to
independently determine wages on the
basis
1990s
of
education
and
skill
requirements. Ministry of Labour issued
Regulations on Minimum Wages in
Enterprises
standards
and
of
begun
to
minimum
set up
wages
at
provincial levels in 1994.
2000-present
(1) Quota imposed by the government
for controlling large-scale SOEs; (2)
development of incentive pay scheme
linked
to
labour
performance
and
enterprise profitability; bonuses became
a significant part of workers’ earnings;
(3) efforts to guide wage level based on
the shift of labour market
Government intensified efforts to guide
(1) Labour market wage rate guidance
wage levels based on the shift of labour
(2) modification of the law of minimum
market
wages; (3) promotion of collective
situation
and
to
promote
collective negotiation over wages
negotiation over wages.
In recent years the Chinese government has intensified its efforts to formulate and announce reference
wage rates in guiding both the employer and employee. Published reference wage rates, which were
collected through enterprise surveys, were claimed to reflect prevailing market prices for major
professions and jobs, and can used as a reference base for both the employer and employee when
making employment contracts and negotiating collectively over a pay rise. According to the Chinese
government, ‘labour market wage rate guidance policy ‘is an important step toward establishing market
determination mechanism of wages.
Faced with the possibilities of losing control over rapid wage increases, the Chinese government also
put limits on some types of enterprises especially on monopolistic SOE sectors. For those industries and
enterprises with slow wage growth over time, the government promoted collective negotiations in which
the representatives of employers and workers bargain over pay rises. Diversified employment
relationship has also called for the government to take concert measures for protecting workers in
vulnerable positions such as part-timers, migrant workers and women. The modified Regulations on
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Minimum Wages in Enterprises in 2004 stipulates that the minimum hourly pay rate need to be fixed for
part-time workers.
3 Developments in Wage Inequality: Persistent Increases
3.1 Data source for the analysis
In order to analyze the rise in the wage inequality in China, we use the data from China Economic,
Population, Nutrition and Health Survey (CHNS). The CHNS is a longitudinal dataset collected by the
Carolina Population Centre at the University of North Carolina in collaboration with the National
Institute of Nutrition and Food Safety at the Chinese Centre for Disease Control and Prevention. The
first survey took place in 1989. From 1989 onward, there are six more surveys, conducted in
1991,1993,1997,2000, 2004 and 2006 respectively. The first survey drew a sample of about 4400
households with a total of 19,000 individuals in nine provinces. Additional samples including newlyformed households were added in the subsequent waves.
The CHNS was designed to examine how the social and economic transformation of Chinese society is
affecting the health and nutritional status of its population; it contains a considerable number of
questions reflecting respondents’ social and economic status such as education, occupation and monthly
wages. We utilize these variables to examine the rise of wage inequality in China, explore factors
affecting the widening wage gap, and investigate the relationship between wage inequality and
economic development over the past 20 years.
It is worth noting several points: first, the data only cover a number of provinces including Liaoning,
Heilongjiang, Shandong, Jiangsu, Henan, Hubei, Huanna, Guangxi and Guizhou1. Therefore, our study
and observations are based on these provinces for which data are available. Secondly, resources of
longitudinal data are scarce in China. There are no official nationwide household or labour force surveys.
Compared to other existing data used for empirical research on the labour market, the CHNS covers
more years, yet it is open to public use. A number of authors (e.g. Chen and Hamori, 2008; Ding and
Wang, 2008) have used the CHNS to analyze changes in income inequality in China. It is fair to say that
the quality of the data is reliable.
3.2 Changes in wage distribution
In this section, we first use Kernel density graph to examine overall changes of wage distribution
between 1989 and 2006. We then analyze changes in wage inequality by exploring the growth curves of
wage decile ratios2.
1
Jiangsu and Shandong are costal provinces; Guangxi and Guizhou are inland provinces ; Henan,
Hunan and Hubei are central provinces in China; Liaoning and Heilongjiang are located in northeastern part of China
2
Other measures of wage inequality such as GINI coefficient or Theil index can also be used, but the
conclusions remain the same.
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.5
0
Kernel density
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0
2
4
6
8
Daily wages(log)
Kernel density:1989
kernel density:1991
kernel density:1993
kernel density:1997
kernel density: 2000
kernel density:2004
kernel density:2006
Figure 1 Trends in wage distributions in China (1989-2006)
Source: Authors’ estimates from CHNS
It is clear in Figure 1 that distribution curves of wages have shifted considerably from left to right on the
horizontal axis, indicating that over time, mean wages have increased significantly. However, we can
also observe that the distribution around the means has become flatten over time. The most significant
change in the distribution occurred between 1991 and 1993. Also noticeable is that the kernel density
curves had high peaks in the years 1989 and 1991 but became shorten and fatten afterwards. The curve’s
shape transformation provides us with a profile displaying dramatic changes from relatively compressed
wage structure to widening wage gaps over time in China.
5
Wage ratios(daily wages)
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1989
1991
1993
1997
2000
2004
Year
D9/D1
D9/D5
D5/D1
Figure 2 Trends in decile ratios in China (1989-2006)
Source: Authors’ estimates from CHNS.
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The widening wage gaps can also be verified by examining dynamic trajectory of wage deciles. As
revealed in Figure 2, overall wage inequality, which is commonly measured by D9/D1 ratio, was on a
sustained upward trend over the period 1989-2006. It is apparent that there was a big jump between
1991 and 1993, which conforms to our findings in Figure 1. During the period 2000-2006, overall wage
inequality continued to show a tendency to increase, without any sign of sharp downturn. As
hypothesized in the previous section, it is important to note that this continued increase inequality is
mainly due to the worsening position of the bottom wage group compared to the median group. Figure 2
shows that the D5/D1 ratio displayed an upward trend, while moderate fluctuations can be found in the
values of D9/D5 ratio.
3.3 Factors for widening wage inequality
This increasing trend in wage inequality, as indicated earlier, is the outcome of numerous factors. In this
section, we explore these factors, focusing on education, working experience, gender, region and
ownership types. Our analyses below are based on the results of the Mincerian wage regression. Details
about model specification and regression results are provided in Appendix.
3.3.1Rising returns to education
As shown in Figure 3, return to education experienced dramatic changes over time. By the end of 1980s,
the return to each additional year of schooling was about 1.29 %. In 1993, the return rose to 3.39 %.
Over the period 2000-2006, the reward to educational attainment continued to show an upward trend,
with the returns of 4.85 % and 6.09 % for the years 2004 and 2006, respectively. Between 1989 and
2006, the return to education increased by 4.8 percentage points.
Chinese economic reform has entailed moving to market determination of the valuation of productivity
endowments. A fundamental change was the abolition of free education and the introduction of the
system under which university students have to pay fee and cover their own living expenses. In a sharp
contrast to pre-reform period, achievement was once again accepted as the basis for admission and
promotion in education by the end of 1970s.
7
6.09
Return to schooling (%)
6
4.85
5
4
3.73
3.39
3
2.18
2.05
2
1.29
1
0
1989
1991
1993
1997
2000
Year
Figure 3 Returns to education
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Like other emerging economies, education has now become an expensive ‘goods’ in China; individual
investment in education accounts for a relatively large proportion of household income expenditure. It is
plausible that, coincided with rapid economic and technical development and rising demand for skilled
workers, market forces have dramatically changed the returns and the rewards to education over time in
China.
3.3.2 Decreasing returns to work experiences
Compared to the dramatic increase in the rewards to schooling, the value of work experience did not
change that much over time. In this paper, we use variable ‘work experience3’ to measure seniority and
to proxy workers’ on-the-job training. Judging from the figures in column 1 of Table 2, we found that
there was no significant upward trend in the values of return to work experience; yet dispersions in
experience rewards were minor. In the years 1989-2006, the average experience premium rate was 2.4
%.
In column 2 of Table 2 are the years of work experience at which workers’ wages begun to decline4.
There is undoubtedly a tendency that overtime workers’ wages begun to fall at earlier years of work.
This observation is also confirmed by the changing experience-earnings profiles displayed in Figure 4.
Figure 4 consists of the graphs for the years 1989, 1993, 2000 and 2006, respectively. It is apparent that
experience-earnings profiles became steeper over time; and as a result of this, workers’ wages started
falling much earlier. For example, the 1989’s earnings profile was less steep, indicating that workers’
wages rose at a slower pace. In fact, workers’ wages continued to rise until 50 years of work and then
gradually declined. However, from the year 1989 onward the profiles have changed considerably and
peaked much earlier. As can be observed from Figure 4, the 2000’s curve begun to bend down after 40
years of work, 10 years earlier compared to that of 1989. The 2006’s profile peaked at 32 years of work
and fell steeply afterwards.
Year
1989
1991
1993
1997
2000
2004
2006
Table 2 Return to working experience
Working years at which wages begun
Return to working experience (%)
to decline
(1)
(2)
2.05
50
2.64
46
2.53
42
3.00
33
2.02
39
2.33
28
2.31
32
Admittedly, interpretations could be diverse with regard to the deteriorating role of work experience and
seniority in wage determination over time in China. One plausible explanation is that rapid economic
development and technology advances might have shortened the time duration that individuals can
benefit from their previous education and skills. In other words, the depreciation of the value of
education and skills has accelerated over time.
3
Potential working experience is calculated by using the following formula: respondent’s age - his (her)
schooling - 6.
4
We utilized the estimated Mincerian wage regressions to calculate the years of work experience at
which wages begun to decline.
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1993
1.8
1.6
1.2
1.4
1
0
20
40
60
0
20
40
60
40
60
2006
3.6
4.5
3.7
4.6
3.8
4.7
2000
4.3
3.5
4.4
Predicted daily wages (log)
1.4
2
1.6
1989
0
20
40
60
0
20
Working experience (years)
Figure 4 Changes in experience-earning profiles
Another possible explanation lies in the fact that the collapse of life time employment in China has led
to increased job motilities. In this context, both employers and workers are reluctant to make long-term
investment in firm-specific training. The behaviour of both employers and employees became shortsighted, and accordingly, the important contribution of on-the-job training has turned into a diluted
factor in individual wage determination.
It is important to note that, while there have been an increased number of educated young labour
entrants; elder workers are likely to be discriminated in terms of employment opportunities and firmspecific training. Indeed, a high risk of being redundancy or enforced early retirement has turned
experienced workers into an extreme vulnerable position. Without any effective protections from the
government and labour inspection authorities, it is hardly surprising to see falling premium rate of work
experience and shortened working life.
3.3.3 Widening of the gender wage gap
Figure 5 demonstrates the adjusted gender wage gaps, showing the extents to which women on average
earn less than men’s even after taking into account factors such as education, work experience,
occupations and regional differentials.
As demonstrated in Figure 6, men were paid about 12 % higher than women’s in 1989. During the
1990s, the gender wage gaps narrowed somewhat and fluctuated around the average level of 10.27 %.
However, the gender wage gaps became larger and increased since 2000. For example, women’s wages
averaged 17.94 % lower than men’s in 2006, as compared to 14.39 % in 2000.
In most Chinese urban areas, the rates of female labour participation are considerably high. With
intensified competition, we anticipate that new female labour entrants were more inclined to accept the
positions available in the labour markets where they received substantially lower pay rate than their
male counterparts. In workplaces, severe employment challenges might make women become
vulnerable to the layoffs. Other forms of discrimination also likely contributed to the drop in the ratio of
women’s wages to men’s. For example, lack of the opportunities of participation in training and
promotion would further widen disparities in wages between men and women.
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Year
2006
17.94
2004
14.53
2000
14.39
1997
9.73
1993
11.54
1991
9.54
1989
0.00
12.23
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
The gender wage gap (%)
Figure 5 Gender wage gap (adjusted)
In China, as elsewhere in East Asia, there is a strong historical tradition of male dominance and female
subordinance. Against the background of China’s huge and dynamic labour market, it is extremely
important to understand the size and trend of gender-based wage disparities across the country, and to
evaluate the extent to which such disparities can be explained by sex-based discrimination favouring
male employees. To this end, we expect that further studies will be required based on a large nationwide
dataset which covers broader wage information on both formal and informal employment sectors.
3.3.4 Growing regional wage disparities
A number of studies have been conducted on the rising geographical wage differentials in China. The
general conclusion was that workers in costal cities and provinces earned higher than inland workers.
Indeed, the figure below clearly illustrated fast growing wage gaps over the period 1989-2004 across the
sample provinces for which data are available. As can be seen in Figure 6, the costal-inland wage gap
widened from 3.82 % in 1989 to 16.05 % in 2004
The inland-costal wage gap mirrors the fact that there has been uneven economic development across
the country over time. From historical perspectives, the costal regions used to be the most developed
areas in China. Coupled with its relatively well-established infrastructure and economic base, costal
regions attracted much more domestic and foreign investment in the early stage of economic reform. In
the course of transformation into market-based economy, costal cities and provinces took the lead in
instituting the government’s policies to foster their economic development.
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18
16.56
16.05
16
Wage differentials (%)
14
11.31
12
10.42
10
8
6.67
6
4
3.82
2
0.99
0
1989
1991
1993
1997
2000
2004
2006
Year
Figure 6 Regional inequalities
While regional inequality of economic development is very real, it seems reasonable to expect that the
closing of the gap will take time. There has been an increasing awareness of the importance of
stimulating inland’s economies, and the government seemed to be committed to balancing costal-inland
differences, which will help narrow cross-region wage disparities in China.
3.3.5 Narrowing wage gap between SOEs and FIEs
Economic reform has led to a breakdown of single ownership and brought about a diversified structure
of ownership in China. Restructuring SOEs and fast-growing foreign direct investment had subtle
effects on labour allocation and wage structure in the Chinese urban labour market. Given that the
evolving national wage policy over the past 30 years, and that differences in wage determination among
different types of enterprises, we expect wages to be non-uniform among urban workers. In this section,
we focus on the wage gap between SOEs and FIEs, because this is where the wage gap is most detected
between different types of enterprises.
Our regression results (see Table A1 in Appendix) show that in 1989, controlling for other factors, FIEs
workers earned almost 37 % higher than SOEs workers. However, such wage differentials were
narrowing over time, as those employed by FIEs on average were paid only 11.18 % and 5.13 % higher
than workers in SOEs for years 2000 and 2006, respectively.
With regard to the wage premium received by FIE workers, some authors (see, e.g. Aitken et al 1996;
Feliciano and Lipsey, 1999) attributed it to the increased demands for skilled labour due to skill-biased
technology brought by foreign investors. Others focused on analyzing motivations of foreign investors.
Chen et al (2005) argued that facing difficulties in supervision due to language and cultural barriers,
FIEs have incentives to pay higher wages in exchange for workers’ cooperation and intensified efforts.
This explanation is in line with efficiency wage theory. However, higher wages can also be seen as a
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part of compensation scheme used to make up for the loss of job security and social benefits 5 .
Commuting time is likely to be another important consideration for the workers asking for higher wages
as most of FIEs are located in special economic development zones which are normally on the outskirts
of the cities.
Entering the 21st century, what happened to the wage gap between SOEs and FIEs? Our regression
estimates have demonstrated a closing trend, though the results were not statistically significant, which
might be caused by the small sample size of workers in FIEs. Indeed, we expect the erosion of spill-over
effects of FIEs on wages over time, and thus closing the wage gap between different types of
ownerships in China. In the course of economic reform, an incentive structure has been created, which
greatly facilitated the generation of a platform similar to FIEs of linking workers’ pay to their
performance. Yet various kinds of tax privileges enjoyed by FIEs have been gradually reduced and
withdrawn over time. Increasing labour costs have caused huge pressures for FIEs who found it more
difficult to maintain their wage payment above market-clearing prices. In fact, statistics show that in
recent years the growth rates of wages in SOEs were higher than other types of enterprises6. Therefore,
we were expecting that the narrowing of wage gap between SOE and FIE workers would contribute to
the declining of overall wage inequality.
4 Conclusions and Policy Implications
Since the late 1970s when China set out to the opening-up policy, the labour market in China
experienced dramatic changes characterised by moving toward market based employment and wage
determination systems. Such changes have brought about significant impacts on the labour market
outcomes. On the one hand, workers’ wages rose in both nominal and real terms, leading up to rise in
purchasing power; on the other hand, the disparities of wages among workers have been significantly
widened, sparking serious concerns over the negative impacts of growing wage inequality on China’s
long term economic and social development.
In this paper, our analysis confirmed the increased trend of wage differentials over the past few decades
in China. It is not difficult to see that the policy measures towards creating market mechanisms for the
workforce have potentials of widening wage inequality in China: the collapse of centralized wagesetting mechanism and the establishment of contract-based employment coupled with diversification of
ownerships made it possible for those with higher levels of education and skills to acquire higher wages.
In this context, the changes in wage differentials among workers would help improve economy’s overall
efficiency and reflect real market rates to human capital investments including education and training.
It is obvious that the change in wage policy is not the only factor for the rise in wage inequality during
China’s economic transition. The analysis in this paper demonstrated that discrimination also played a
role in widening the gaps between the wages of men and women. In workplaces, severe employment
challenges made women become vulnerable to wage bargaining. Women’s lack of the opportunities of
participation in training and promotion further widened disparities in wages between men and women.
Discrimination occurs not only against women, but also migrant workers. Due to the lack of data, this
paper does include the analysis of the wage gap between migrant and local workers. Other studies and
surveys show that, compared to their local counterparts, migrant men and women worked much longer
hours but earned lower wages without fringe benefits. Segmented labour markets created by
institutional barrier such as ‘HuKou System ‘ in China and some corporate owners motivations to purse
higher profits deprived migrant workers of the rights of gaining social security benefits. Recent events
5
According to Zhao’s analysis, no portable pension, housing benefits and other social benefit are the
critical constraints for workers’ decisions to shift employment.
6
Wage growth in SOEs and other public sectors may not necessarily reflect the improvement of
productivity. The government, due to changes in economic situations (e.g. current global financial
crisis), or domestic pressure, might also decree the growth of wages in SOEs and other public sectors.
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such as FOXCOM incident’ and ‘HONDA strike’ have revealed that new generation of migrant workers
tend to become less tolerable to poor working conditions and low wages.
Some policy options might help prevent wage and income inequality from further rising which could
lead to severe working class discontentment or even fierce social conflict (Cai 2008, p. 12). In the shortterm, improvement of labour market institutions should be given priority. In particular, labour inspection
should be strengthened to wipe out ‘sweating workshops’ and eradicate extreme low-paid jobs. Labour
inspection administration should also closely monitor wage increases of monopolistic enterprises like
public utilities and telecommunication departments, as evidence suggested that in recent years extreme
monopolistic wages were largely responsible for widening the gap of the wages between workers in
monopolistic and other types of enterprises.
Effectively implementing minimum wage laws is another important tool to cut down the widening wage
gap in the short term. China adopted compulsory minimum wage standards since 1994. There has been
a growing awareness that the law of minimum wages have played a role in protecting vulnerable groups
of workers. However, in practice, some firms in particular private firms failed to pay minimum wages.
Hence, enforcement of minimum wage standards should be tightened by increasing frequency of routine
inspection
Form a long-term perspective, the government should cultivate real system of collective wage
bargaining. Collective wage bargaining has been seen as an effective way to raise workers’ wages and
reduce the wage gap between sectors. Tripartite social dialogue should be encouraged to balance the
requirements between employees and employers and reduce the labour conflicts. In economic transition
period with enormous employment pressure, social dialogue with governments being a mediator is an
effective way to build up ‘harmonic labour relation’.
HuKou system has become an institutional barrier that prevents migrants from settling down in the cities
with legal rights, and make their working and living in the cities insecure and discriminatory. In some
sense, the effective reduction of the widening wage gap, in particular growing urban-rural income gap
largely depends on the eventual abolition of HuKou system. The abolition of HuKou system will make
workers earn their wages and gain social security benefits depending on their skills and employment
records instead of depending on where they come from. We expect that there is still a long way to go
before liberalizing HuKou system, but it is right time for the government to make decision to reform
current system.
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Appendix
1 Data and the Definitions of Variables
Data used for empirical analysis in this chapter were taken from China Economic, Population, Nutrition
and Health Survey (CHNS). The CHNS is a longitudinal dataset collected by the Carolina Population
Centre at the University of North Carolina in collaboration with the National Institute of Nutrition and
Food Safety at the Chinese Centre for Disease Control and Prevention; it was designed to examine how
the social and economic transformation of Chinese society is affecting the health and nutritional status
of its population.
The first survey was conducted in 1989 and had a sample of about 4400 households with a total of
19,000 individuals in eight provinces including Guangxi, Guizhou, Henan, Hubei, Hunan, Jiangsu,
Liaoning and Shangdong. A multistage cluster process was used to draw the sample surveyed in each of
province. From the year of 1989 onward, there were six more surveys, in 1991, 1993,1997,2000,2004
and 2006 respectively. It has to be noted that in CHNS 1997 Heilongjiang province replaced Liaoning
province which returned to study from CHNS 2000.
Although the CHNS targets on reflecting changes in disease patterns and health service accompanying
Chinese economic reform, it contains a considerable number of questions reflecting respondents’ social
and economic status such as education, employment status and monthly wages. We utilized these
variables to examine the rise of wage inequality in China and explore factors affecting the widening
wage gap over the past 20 years. Variables and their coding in our regression analysis are shown as
follows.
Variable Name
Wages
Gender
Studyyear
Experience
Experience_squ
Inland
Firmtype
Table A1 Variables and their codings
Variable Description and Coding
Daily wages in logarithmic form and were calculated by
using respondents’ monthly wages divided by their
respective monthly working days.
1=females, 0=males
Level of education, continuous variable in years
Working experience, continuous variable in years.
Working experience is calculated by using respondent’s
age to minus his(her) schooling and minus 6
Working experience in squared terms
Inland province=1, costal province=0; inland provinces
include Guangxi, Guizhou, Henan, Hubei, Hunan,
Heilongjiang ,while costal provinces are Jiangsu, Liaoning
and Shangdong
1=public sectors and SOEs (reference),2=private
sectors ,3=joint ventures(FIEs);public sectors and SOEs as
reference group
2 Model Specification and Regression Results
We estimated wage equations for each survey year. The wages earned by CHNS respondents in
employment are specified as follows.
W = b0 +b1 gender + b2 studyyear + b3 exp erience + b4 exp_ squ + b5 inland + b6 firmtype + ε
where W is daily wages in logarithmic forms, schooling represents level of respondents’ levels of
education; experience and its squared terms are proxies for respondents’ on-the-job-training. Gender
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and inland are binary variables, indicating the extent to which females earn less than males and wage
differences between inland and costal provinces. Variable firmtype is added to identify wage dispersions
across different types of firms. ε is a random disturbance.
Table A1 below shows the results of wage regression. It is worth noting that when interpreting the
regression results of dichotomous variables like gender, inland and firmtype in Table A1, we followed
Gujarati’s suggestion and calculated the impacts of these variables on CHNS respondents’ wages by
using 1 minus the antilogs of their respective coefficients. For more detailed technical explanations on
how to correctly interpret dichotomous variables in regression analysis, please refer to Basic
Econometrics by Damondar N.Gujarati(1995).
Table A1 Results of wage regression by using CHNS
Variable Name
1989
1991
1993
1997
Coeff.
Std
Coeff.
Std
Coeff.
Std
Coeff.
Std
Constant
0.872
0.092
0.884
0.062
0.994
0.114
3.768
0.107
Gender
-0.130
0.028
-0.100
0.018
-0.122
0.030
-0.102
0.029
Studyyear
0.013
0.005
0.021
0.003
0.034
0.007
0.022
0.006
Experience
0.021
0.003
0.026
0.003
0.025
0.004
0.030
0.004
Experience_squ
-0.002
0.001
-0.003
0.001
-0.003
0.001
-0.004
0.001
Inland
-0.039
0.026
-0.010
0.018
-0.120
0.030
-0.110
0.030
Private
-0.007
0.029
0.056
0.02
0.153
0.032
-0.139
0.033
FIEs
0.313
0.091
0.359
0.054
0.304
0.066
0.296
0.052
Firmtype
Observation No
Adjusted R2
Variable Name
2250
0.069
1797
0.2076
1300
0.1649
2000
2004
2006
1354
0.1232
Coeff.
Std
Coeff.
Std
Coeff.
Std
Constant
4.285
0.139
3.261
0.140
3.240
0.150
Gender
-0.155
0.033
-0.157
0.032
-0.198
0.033
Studyyear
0.037
0.007
0.049
0.007
0.061
0.007
Experience
0.020
0.006
0.023
0.006
0.023
0.006
Experience_squ
-0.003
0.001
-0.004
0.001
-0.004
0.001
Inland
-0.181
0.033
-0.175
0.031
-0.069
0.033
Private
-0.06
0.043
-0.121
0.049
-0.075
0.057
FIEs
0.106
0.117
0.089
0.092
0.05
0.033
Firmtype
Observation No
Adjusted R2
1322
0.1128
1190
0.2600
237
1224
0.2624