Potential Residual and Relative Wages in Chinese Township and Village Enterprises

We examine the role of potential residual revenue in determining the pay of skilled workers and enterprise directors relative to production workers in China's Township and Village Enterprises (TVEs) in the period from 1984 to 1990. The potential residual is proxied negatively by returns to scale and positively by aggregate market conditions. We find that the ratio between the wages both of directors and of technical workers to those of production workers is positively related to the potential residual, while holding constant local unemployment, land per person, and FDI per worker. This evidence is consistent with the hypothesis of de facto residual claimancy