Location, Market Segmentation, and Returns to Human Capital: The Privatization of China's Labor Markets

Recent years have witnessed significant evolution in the structure and organization of China’s labor markets. While the majority of workers remain employed in public work units (state-owned enterprises and urban collectives), private sector employment in China hasexpanded significantly. Labor market mobility has increased as well, both between those labor market segments and across geographic areas. This study applies new micro-data from a unique survey of urban workers to assess returns to human capital and demographic characteristics among public and private labor market segments in China. The analysis controls as well for systematic variations in nominal earnings among metropolitan areas, which arise due to locational variations in nonpecuniary attributes and amenities as well as local cost of living. The analysis enables computation of quality-adjusted wage differentials between public and private labor market segments in China. Further, the study assesses the role of quality-adjusted earnings differentials, pecuniary and non-pecuniary worker benefits, worker demographic characteristics, and the like in the determination of expected worker mobility. As expected, research findings indicate substantially higher returns to educationalinvestment among workers in the private-sector, relative to those available to workers in the stateowned sector. Further, results indicate only limited returns to worker age and work experience among private-sector workers. Also, all things equal, female earnings remain significantly depressed relative to those of males, even in the socialized state-owned sector. The analysis also reveals the importance of controls for location-specific components of the worker compensation package. Research findings further indicate substantial differentials in quality-adjusted earnings across labor market segments. Those differentials increase with worker educational attainment and serve to significantly elevate the prospects of worker job change. Results of the analysis suggest that damped adjustments in public sector wages and benefits would serve to promote the movement of workers to private employment, consistent with the goals of the newly-revised labor policy. As is apparent, however, such a policy would serve to advance the economic prospects of younger, highly educated, and mobile workers, at the expense of their older, less mobile counterparts.