Economic Transition and Wage Differentials Between Public and Private Sectors in China

Abstract

Using the reduced wage function model and decomposition methods, this paper estimated changes in wage structure and determinants of wage differentials between the public and private sectors from 1995 to 2007 in China. The major conclusions are as follows: First, with the progress of the economic system transition, wage differentials between the public sector and collective owned enterprises (COEs) decreased, but wage differentials between the public sector and foreign invested enterprises (FEs)/private enterprises (PEs) increased; second, human capital affected wage level in both the public and private sectors in 1995 and 2007, but differentials of human capital influences between the public and private sectors became narrow from 1995 to 2007; and finally, when wage differentials are decomposed into endowment effect, explained by differences in labor productivity characteristics and price effect, partly caused by institutional factors, the author observed that the former increased, while the latter decreased from 1995 to 2007. These results reveal that with the progress of market-oriented economic reform, labor productivity characteristics based on individual human capital were more highly rewarded. Results demonstrate that market mechanisms began to function and correct the distortion of wage decisions in China during the economic transition period.