Regional differences in wage inequality across industries in China

Abstract

Using a panel of 29 provinces over the years 1995–2001, we explore the large regional variation in industry wage differentials in China and examine the provincial characteristics that are consistent with greater inequality. We find that the effect of foreign direct investment (FDI) varies by province. One of the reasons that FDI can have differential effects is that the type of FDI (export vs. import-oriented) varies substantially across the provinces. Export-oriented FDI raises the wages of workers in industries that rely more on unskilled workers and lowers the wages of workers in industries that rely more on skilled workers, lowering the industry differential.

Acknowledgements

We are grateful to Derek Jones, Jeffrey Pliskin, Julio Videras and Stephen Wu for helpful comments.

Notes

¹ See Katz and Murphy (1992) for similar treatment.

² Our results are robust to examining a different industry grouping in which we compare wages of workers in the scientific industries to wages of agricultural workers.

³ Wu (2001) develops a model of wage determination in China that emphasizes the type of FDI.

⁴ See Carkovic and Levine (2002) or Borensztein et al. (1998).