Returns To Skills, Economic Transition And The Rising Wage Inequality-Studies On Urban China: 1988-2003

This thesis analyzes the skill premium in wages and wage structure in the economic transition of urban China. The purpose of this thesis can be sorted into three parts. Firstly, this study analyzes the changes in the wage structure, classifying the workers into different groups and discussing the between-group and within-group changes in wage structure. Secondly, the skill premiums of wages are documented, in particular the effect of institutional changes on skill premiums. At last, this thesis integrates the skill premium, economic transition, and the changing of wage structure, and decomposes the rise in wage inequality into factors with the latest methodologies, which is tightly connected with the focus of the thesis.This thesis reviews the labor market transition in urban China and related literatures in skill premium and wage structure. Then it compares the existing methodologies and describes the data in use, reporting the data characteristics of those important variables.With the gradual transition in the urban labor market, the wage structure has changed a great deal: the wage dispersion has been widened, and the rising wage inequality had been accelerated (The main changes had taken place between 1992 and 1994). The study discusses the observable changes and residual changes in wage structure, and analyzes how the wage structure has changed between groups and within groups.In order to examine how the skill premium has changed during economic transition, this paper presents the estimation results on returns to education and experience, applying the OLS and Heckman methodologies to the Mincer equation. The results show that the returns to education have increased greatly: from 4.0% in 1988 to 11.5% in 2003. During the same period, the returns to experience have declined from 2.3% in 1988 to 1.3% in 2003.Three strictly comparable cross-section household dataset, relating to 1988, 1995 and 2001, are used to analyze the rapid growth of wage inequality and the sharp widening of wage structure. Earnings functions are compared and the increase in both the level and the inequality of wages are decomposed into their constituent elements. Distinctions are made between the variables likely to represent human capital, discrimination, and segmentation. The evidence suggests that productive characteristics were increasingly rewarded as marketization occurred, but the relative contribution of institutional factors is decreasing dramatically.The Gini coefficient of earnings rose by 10.7 percentage points over the first seven years. Whereas the mean wage increased by 67 percent, the pay of the 10th percentile rose by only 22 percent, and that of the 90th percentile rose by 97 percent. These changes are much larger than those of the second phase. Moreover, the returns to education rose sharply, as did the returns to occupation-specific skills. The initially slight inverse-U shape of the age-earnings profile became more pronounced - a change consistent with human capital theory. Thus the productive characteristics of workers were increasingly rewarded in the labour market. However, there were also signs of greater wage discrimination against women. Moreover, the market forces operating in the growing private sector and the relative immunity of the state sector from those forces generated greater wage segmentation among types of ownership, and provincial differences in the pace of reform and in economic growth created spatial segmentation in wages that could not be removed by the equilibrating movement of labour.Decomposition analyses were conducted in order to examine the contribution of particular characteristics to the rise in the Gini coefficient. Only a third of earnings inequality and its increase could be explained: the unobserved determinants are clearly important to the increase in earnings dispersion. The discrimination variables accounted for only a small part of the increase. The segmentation variables made the most important contribution, and that was mainly due to growing wage dispersion among provinces. This result is supported by other evidence of powerful divergence in mean earnings among provinces (Knight, Li and Zhao, 2001). Some but not all components of human capital were disequalizing. These particular changes are likely to represent the stirring of labour market forces.Using the Quantile-JMP decomposition technique proposed by Machado and Mata (2005) and extended by Autor, Katz and Kearney (2005) to evaluate the role of changing labor force composition (in terms of education and experience) and changing labor market prices to the expansion of upper- and lower-tail inequality over the period 1988-2002. We show that the Q-JMP decomposition corrects shortcomings of the original Juhn-Murphy-Pierce (1993) full distribution accounting method. Our analysis reveals that shifts in labor force composition have primarily operated on the lower half of the wage distribution by muting a contemporaneous, countervailing lower-tail price expansion. The steady rise of upper tail inequality appears almost entirely explained by rising between-group and within group prices. The contribution of changing labor force composition to rising upper tail inequality is quite small. Overall, the analysis shows a small role for composition (though larger for lower-tail than upper-tail) and a predominant role for rising between and within-group prices in explaining the parallel growth of upper and lower tail inequality.