Wages, firm profitability and labor market segmentation in urban China

Two representative surveys, relating to 1995 and 1999, are used to analyse the effect of enterprise profitability on wages in urban China. The labor market is still at a rudimentary stage and job mobility remains low, so that wage differences across firms are not necessarily ironed out by labor market competition. There is evidence that, standardising for worker characteristics, profitability raised wages substantially; and that this effect became stronger over time. Moreover, whereas in 1995 the effect of profitability on the wage was closely related to tenure within the firm, in 1999, it occurred across the board. The relationship between profits and wages contributed to a widening of wage inequalities over time. Causation both ways, i.e., both profit-sharing and efficiency wage payments, cannot be ruled out (the two are plausibly intertwined in China) but evidence is adduced in favour of at least some profit-sharing.