Equity, efficiency, and labor-market reforms in urban China: the impact of bonus wages on the distribution of earnings

Economic reforms in China have led to a shift in emphasis away from equity towards greater efficiency with a consequent increase in income inequality. In this paper, we focus on the causes of the rising inequality of individual earnings and the link with the reform program by analyzing the components of individual earnings (i.e. standard and bonus wages) separately. Increasing inequality is seen to reflect a rising share and inequality of bonus wages. This, in turn, predominantly reflects the unequal distribution of enterprise profitability combined with labor immobility across enterprises, rather than increasing returns to personal characteristics, such as human capital or gender. Based on these results, we argue that the future evolution of earnings inequality will be determined by the sequence of reforms in, for example, capital and labor markets. (C) 2001 Elsevier Science Inc. All rights reserved.