Pre-Reform Industry and State Monopsony in China

This paper concerns employment and wage determination in the state industrial sector in China during the period preceding market-oriented economic reforms. We argue that in that period, the sector as a whole faced an effective cost of labor that was increasing in employment. We present a two-sector model in which the Chinese state acts as a monopsonist maximizing industrial profits (investment) subject to an agricultural production constraint. In two empirical sections, we provide statistical evidence that labor costs were increasing in state employment, and we analyze data providing evidence of a monopsonistic gap between wages and marginal products of labor