Wage Flexibility in Chinese Labor Market 1989-2009

This paper analyses wage flexibility in Chinese labor market using the China Health and Nutrition Survey (CHNS) for the period 1989-2009. China has highly coordinated wage-setting institutions which might contribute to higher wage sensitivity of the coordinated workers, but lower sensitivity in the workers with coordination failures. Using micro-data matched to local unemployment rates, we find the reaction of wages to local unemployment varies significantly across different employee groups, suggesting disparate wage setting institutions within China. The highly coordinated big firms and public sector show more significant wage flexibility than the lagging small/medium firms and private sector. Workers with characteristics of weak bargaining power also have less flexible wages. The major wage flexibility occurred in the 1990s when the labor market moved from a centrally-planned system to a market-oriented system. After the public sector retrenchment, the labor market seems recover the rigidity in the 2000s. Moreover, sensitivity test using Heckman selection model really shows significant selectivity effects, but the Heckman adjusted results would not change our basic conclusions.