The effect of the state sector on wage inequality in urban China: 1988–2007

Abstract

This paper examines the effect of the public sector and state-owned enterprises (SOEs) on wage inequality in urban China using China Household Income Project data. It applies quantile regression analysis, the Machado and Mata decomposition to investigate how urban wage inequality was affected by the changes in wage structure and employment shares of the public sector and SOEs. We find that since the radical state sector reforms designed to reduce overstaffing and improve efficiency in the late 1990s, urban wage gaps were narrowed due to the reduction in the employment share of the state sector; the wage premium of the state sector in comparison with the non-state sector increased significantly; and changes in the wage structure of the labour market caused the rise in urban wage inequality.

Keywords:

• China
• public sector
• SOEs
• urban wage inequality
• wage gaps
• quantile regression
• counterfactual analysis

Notes

1. Our wage variable, although fairly comprehensive, does exclude some non-monetary benefits such as pension accruals, health insurance and housing. The contributions of these variables may vary under differing forms of ownership and over time. Nominal wages were converted into real wages by deflating by regional urban CPIs. Besides, there are grey incomes of many forms. Due to the limit of information, we are unable to take the grey incomes into account.

2. In the 1999 survey, the more settled migrants were surveyed and so we can compare their characteristics with those of workers with urban hukou (see Table 1 of Appleton et al. 2004). Over half the migrants were self-employed and so may not be directly competing for jobs with urban residents (only around 1% of whom were self-employed). Migrants tended to be less educated (averaging three fewer years of education), as well as including more young and male workers. Migrants’ distribution across jobs was very different from urban residents, with a large concentration being service or retail workers and relatively few working as highly skilled or industrial workers.

3. The distance between any two quantile points is 0.05.

4. As is well known, there is a potential index number problem with such exercises.

5. According to Machado and Mata (2005), one needs to randomly draw θ_i of sample size n from θ [0, 1]. However, in practice, we only take 999 quantile points with equal distance from the uniform distribution on [0, 1] by following Albrecht, Björklund, and Vroman (2003) and Rica, Dolado, and Llorens (2008). In other words, we estimated 999 quantile regressions for quantile points 0.001, 0.002, 0.003, …, 0.999 on [0, 1] for the earnings function for each of the four years.

6. The ownership variables include public sector, collective enterprise, foreign-owned and joint-venture enterprises, private sector and others with SOEs as the reference variable. Other variables such as workers’ gender, Communist Party membership, ethnicity, occupation, industrial sectors and provincial dummies are the control variables.

7. Because of space limitations, the OLS regression is not reported in this paper, but it is available upon request.

8. The share of bonuses in the annual earnings of SOE workers increased from 2.4% in 1978 to 23.3% in 1993, and that of all other subsidies rose from 6.5 to 25.1% in the same period (Meng 2000, 84).

9. After having produced what the state demanded according to the planned prices, SOEs can sell their products on market according to market price; likewise, after having sold the planned quantity of grain to the state at the state procurement price, the rural household can trade their agricultural products on free market.

10. Roughly 40% of the large and middle-sized SOEs were making loss in 1991 (Zhu 2011, Vol. 1, 15), the number of loss-making SOEs accounted 43% of them and the total losses reached RMB 88.3 billion in 1995 (Zhou 1997), in the middle of 1990s, on the whole, the middle- and small-sized SOEs were making loss (Naughton 2007, 302), in 1996, the share of SOEs profit in China’s GDP is almost zero (Naughton 2007, 304).

11. Due to space limit, the statistical result about this is not reported here, but it is available upon request.

12. The number of rural–urban migrants dramatically soared from 15 million in 1990 to 1998 million in 2003 (News Office of the State Council 2004), and further to 145 million in 2009 (Ministry of Human Resources and Social Security 2010). The reform of the financial and banking sector aimed at solving bad loans resulted in a sharp reduction of financial support to rural industrial activities and hence large-scale closure of rural industrial enterprises, which in turn forced rural surplus labourers migrating to urban areas for employment (Huang 2008).

13. In contrast to the shrinking of the SOE sector, non-state sectors are significantly expanding. For example, the share of employment in urban areas created by the non-state sectors rose from 26% in 1992 to 68% in 2001 and further to 78% in 2007 even without accounting for jobs being brought about by the rural–urban migrants (NSB 1993, 2002, 2008). Therefore, at the turn of the century, China’s labour market had become more competitive than in the late 1980s.

14. Attracted by the huge market, cheap labour and a high economic growth rate, a tremendous amount of foreign direct investment flows to China so that China had replaced America as the top recipient of FDI in 2003 (53 billion US dollars, OECD 2004), the figure climbing to 90 billion US dollars in 2009 (Wen 2010). The foreign-owned enterprises paid the much higher wages than domestic ones to recruit highly skilled and motivated workers (Appleton et al. 2005; Xia, Song, and Appleton 2009).

15. The pay gap between the average wages of SOEs and the non-state sector calculated from the NSB report is somewhat different from that derived using the CHIP urban household surveys. The latter was based on randomly sampled urban household survey data. Therefore, it is closer to reality.

16. In this paper, the Oaxaca–Blinder decomposition based on OLS regression is conducted using the downloadable STATA procedure ‘decomp’.

17. This result is computed from the CHIP data by the authors.

18. Because rural–urban migrants are not covered in the CHIP urban household survey, we use Yue, Li, and Sicular (2010) Oaxaca–Blinder decomposition of the pay gap between monopolistic SOEs and other firms when the rural–urban sample are excluded.

19. The Hu–Wen new deal is referred to as Hu Jingtao and Wen Jiabao’s policy because they took their reign since 2002.