Trade liberalization, city size, and urban wage premium: evidence from China’s city and individual micro-data

Abstract

In the context of trade liberalization and new urbanization, it is important to study how urban openness leads to wage premiums and improvements in income distribution. This paper utilizes micro-data from the Chinese Household Income Project and matching data from 144 cities to investigate the relationship between trade liberalization, urban scale, and urban wage premiums. The results indicate that trade liberalization significantly increases urban wage premiums, which is particularly evident during the early stages of China’s accession to the WTO. However, this effect may fluctuate over time. Surprisingly, in China, the urban scale can increase labor wage income, but it does not magnify the wage premium effect of trade liberalization. Heterogeneity tests based on regions, firms, and income groups suggest that the wage premium effect of trade liberalization is higher in eastern and central region cities than in western region cities, labor wage growth in the service sector is more pronounced than in the industrial sector, and the impact of trade liberalization on wage growth for the middle and lower-income groups is greater than for the high-income group, which helps to narrow income disparities among different groups. These findings are of great policy significance for improving income distribution through labor market liberalization. In this context, they highlight the importance of comprehensive openness and new urbanization in China.