ID21 - Insights Issue 31

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		For richer, for fairer- poverty reduction and income distribution

		Efficiency versus equity? Wage waves in China

		Seeds of hope? Is the Green Revolution coming for Africa?

		Measuring pro-poor growth in rural India

		Earnings off the farm: magic bullet or myth?

		Ethiopia after reform: why some poor got poorer

		Storm clouds over Asia: signs of a silver lining?

		Sites for Sore Eyes

September 1999 Insights Issue #31

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Efficiency versus equity?

The rise and rise of wage inequality in China

National surveys between 1988 and 1995 indicated that changes in China's urban wage structure were associated with growing inequality. Researchers at the Institute of Economics and Statistics, Oxford, modelled contrasting explanations for such a shift. Did it represent movement of the labour market towards equilibrium and away from extreme disequilibrium? Or did it reflect a move from one state of equilibrium to another that was inherently more unequal? In either case, could the new situation be justified in terms of extra incentives or efficiency, despite the increase in inequality?

The study verified that wage inequality did increase in China over the seven years in question. The Gini coefficient (see box, previous spread) rose from the low value of 0.229 in 1988 to 0.307 in 1995. More to the point, analysis based on a simulated model of actual earnings and employment data and their potential interplay with other factors suggested that:

wages for some types of unskilled worker fell relative to others, a sign of rising abour market competition.

rewards for education and skill-based occupations (or returns on human capital) increased at the same time, consistent with improving incentives and efficiency

examination of wages in relation to worker ages showed greater rises for those in id-range, implying closer linkages between rewards and productivity.

Other apparent changes were harder to explain or justify in terms of greater efficiency. There was a sharp apparent increase in discrimination in the labour market. It became more of a disadvantage to be female, to belong to a minority group or to be a transient urban-rural migrant. By contrast, belonging to the Communist Party conferred a bigger advantage. Liberal enterprise reforms have evidently made it easier for employers in China to discriminate more on such non-economic grounds.

There was a rise in the relative wage advantage of employees in state-owned enterprises and institutions, especially by comparison with the local private sector. Such sharp segmentation suggests that large areas of the urban economy remained immune to labour market forces. Moreover, the spatial dispersion of wages increased considerably. Wage segmentation by province was only partially offset by labour mobility. Potential policy lessons were that:

Some of the new inequalities in China's labour and wages market appear justifiable in terms of greater incentives or efficiency but other emerging biases are harder to justify.

Further development of a modern urban labour market in China is needed to counter these new inefficiencies.

Contributor(s): John Knight

Further information:
John Knight
Institute of Economics and Statistics
University of Oxford
St. Cross Building
Manor Road
Oxford
OX1 3UL
UK

Tel: +44 (0)1865 271069
Fax: +44 (0)1865 271094
Email: john.knight@economics.ox.ac.uk
Institute of Economics and Statistics, University of Oxford

Other related links:
Search Eldis for sources on China.

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