1 Introduction

China’s economy grew rapidly in the last three decades. The living standard of the Chinese residents improved significantly as income level increased along with the economy. Meanwhile, income inequality also increased significantly. As a collectivist socialist economy, China was very equal. In the early 1980s, when economic reform was in its early stages, China’s national Gini coefficient for income was around 0.3 (World Bank, 2009). By 2015 the Gini coefficient had reached 0.462 (National Bureau of Statistics of China, 2016).

Because of the dualistic nature of the economy, the rural-urban income gap still contributes in a major way to overall income inequality (Li and Sicular, 2014).1 Meanwhile, urban inequality has become an increasingly important component of China’s overall income inequality as urban income inequality rises and more and more rural residents migrate to urban areas. According to Meng et al. (2013), the urban earnings Gini coefficient was around 0.23 in the late 1980s and reached around 0.37 in 2009.2 As urbanization proceeds, urban inequality will play an even more important role in overall inequality.

As wage income is the major source of income for urban residents, we focus on the evolution of the wage distribution in urban China in this paper. In particular, we ask the following questions. First, what is the growth pattern of the wage levels? Second, how the wage inequality evolves and what are the driving factors? Addressing these questions is important for us to identify factors that determine sustainable and equitable wage growth in China. Such exercises would also have major policy implications.

To do these, we use the China Household Income Project Survey (CHIPS) data for 1995, 2002, 2007, and 2013. As all waves of the survey cover similar regions and are conducted in similar ways (especially for 1995, 2002, and 2013), they are largely comparable, which again allows us to study the evolution of the wage distribution. In the first period of 1995-2002, China initiated a major reform on its state owned enterprises (SOEs), which increased the flexibility and efficiency of the economy, but also caused large amount of unemployed or laid-off workers. In period 2002-2007, China entered the World Trade Organization (WTO) and its integration into the world economy deepened significantly. Due to the differential exposure to trade and preferential regional policies, this period is also characterized by large regional imbalance.

After 2007, several major changes have profound impact on the Chinese labor market. First, China’s export declined sharply due to the global financial crisis, forcing the Chinese economy to undertake structural change. By 2013, many believe that the China entered into a new growth trajectory with significantly lower growth potential after over three decades of high growth (New Normal). Significant changes such as the large inflow of young college graduates and the running off surplus rural migrants also happened in the supply side. As the first two periods of 1995-2002 and 2002-2007 are examined by several studies, we put more emphasize on the changes happened in the period of 2002-2013 or 2007-2013.

We answer the above questions by first looking at the wage growth for different subgroups by period. We then estimate wage equations to investigation how the wage determination mechanism changes, assuming that wages are determined by observable and unobservable personal and job-related characteristics, as well as random factors. Based on these results, several decomposition methods (Oaxaca-Blinder decomposition, for example) are used to determine the driving factors behind the wage growth and the changes in wage inequality.

Several import patterns emerge. First, human capital has become increasingly important for wage levels. Both the increase in education levels and the rising returns contribute to the increase in wage levels. On the other hand, seniority seems to play a less important role. This is a reflection of the Chinese economy transforming from a planned economy to a market oriented one. Second, the returns to education increased significantly and remain high after 2007 despite the large inflow of the highly educated work force. Third, regional inequality first increased between 1995 and 2007, and then declined after 2007. Fourth, we also find residual wage inequality (the wage inequality caused by unobservable characteristics) increased significantly.

We also calculate the extended wage income, which include pension, unemployment insurance, housing funds, and medical insurance. They turn out to constitute a sizable proportion of the wage income, and contribute in an important way to the inequality of wage income.

The paper proceeds as follows. Section 2 introduces briefly the background of the urban labor market in China and related literature. Section 3 introduces and describes the data. Section 4 investigates the wage determination. Section 5 performs decomposition based on the regression results to examine the factors that influence wage growth and wage inequality. Section 6 performs similar exercises for the extended wage income. Section 7 concludes.

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1 The ratio of urban per capita household disposable income to rural per capita net income reached 3.33:1 in 2009. It has declined to 2.92:1 in 2014. ( http://www.ce.cn/xwzx/gnsz/gdxw/201501/20/t20150120_4384230.shtml ; Jan 25, 2016)

2 Other research also show similar trend. See for example Ravillion and Chen (2007) and Li and Sicular (2014).