Human Capital and Wage Determination in Different Ownerships, 1989–97

Abstract

In the 1990s, China experienced far-reaching transition from a central planning system to a market oriented economy, and the coexistence of different types of ownership was one prominent feature of this process. In particular, the role of private economy as an important complementary part of the whole economy was officially recognized at the 14th CCP congress (1992), and the private sector subsequently made enthusiastic progress. In contrast to state-owned enterprises (SOEs), private enterprises are market oriented, and employers have autonomy to set wages according to employees’ productivity. Conversely, SOEs suffer from soft-budget constraints and overstaffing as a by-product (Kornai 1980). In transition economies, SOEs are often the means by which government provides public goods and services (Lin and Tan 1999). While China attempted to improve the financial performance of SOEs through various reforms in the 1990s, the government has been hesitant to relieve SOEs of their traditional role as providers of job security and welfare for their employees. As a result, the SOEs did not have the autonomy to dismiss surplus workers and, consequently, they were unable to set wages according to employee’s productivity (Dong and Putterman 2003). Clearly, the wage-setting mechanism differs between different types of ownership and such differences may translate into different rates of returns to human capital, which in turn imply segmentation of the labour market in China.