Market Access and Individual Wages: Evidence from China

Abstract

Abstract-We consider the effect of geography on wages using individual data from 56 Chinese cities. We present a simple new economic geography model that links wages to individual characteristics and market access. The latter is calculated as a transport cost weighted sum of surrounding locations' market capacity. After controlling for individual skills and local factor endowments, we find that a significant fraction of the interindividual differences in returns to labor can be explained by the geography of market access. We further find greater wage sensitivity to market access for highly skilled workers and for workers in private and, particularly, foreign-owned firms.

Relaxing Hukou: Increased labor mobility and China’s economic geography

“…The estimated wage equation not only empirically establishes the link between a city's wages and its market access (see also Hering and Poncet, 2010); it also provides two key model parameters that are central in our subsequent simulation analysis of the relationship between agglomeration and labor mobility.…”

“…It has been used to verify whether market access (the term between brackets) plays an important role in explaining interregional wage differences. In case of China, Hering and Poncet (2010) for example estimate a similar wage equation as (5). They provide strong evidence in support of NEG's prediction that workers living in regions with better market access than others c.p.…”

“…This other term is frequently referred to as a region's supplier access. We exclude this term from (5), effectively assuming that μ = 0 (see also Hering and Poncet, 2010). As shown and emphasized by Redding and Venables, 2004), including both supplier and market access in the wage equation leads to multi-collinearity problems.…”

“…labor market pooling and knowledge or input sharing. To control for this, and in line with for instance Hering and Poncet (2010), Breinlich (2006) and Bosker and Garretsen (2008), we include population density to (5).…”

“…Yet, in fact China is not a closed economy and market access with respect to the rest of the world may also be relevant. It is easy to incorporate this in the market access term (see also Hering and Poncet, 2010). We make the basic assumption that China trades with the rest of the world mostly by sea and that, for simplicity, the rest of the world consists of the three economic blocs: the USA, Japan and the EU.…”