Does deeper integration enhance spatial advantages? Market access and wage growth in China

New economic geography models predict that costly transport and the spatial distribution of demand affect the profits firms can earn in different locations, leading to higher wages for workers employed in cities with better geographic access to markets. In light of the dramatic embrace of globalization and labor market reforms that occurred in China after 1995, we measure the extent to which the influence of market access on wages strengthened and influenced wage growth over the subsequent period. Using survey data from two waves of the Chinese Household Income Project, we find that urban wages became more strongly influenced by access to markets, including domestic markets, between 1995 and 2002. The estimated elasticity of the wage with respect to market access of the worker’s location more than doubles over the period. We also find that market access influences wages paid to both skilled and unskilled workers. Within provinces, we find no significant relationship between market access and either group’s wages when adjusted for living costs, as expected in the context of internal labor migration. However, across provinces wages net of living costs are positively correlated with the market access of the worker’s location. Consistent with deregulation of wage setting in state enterprises, the influence of market access on wages strengthened most for state-owned firms. A decomposition of the change in the mean wage indicates that market access is an economically important factor explaining the growth in average wages between 1995 and 2002.