Work units and income inequality: The effect of market transition in urban China

Abstract

This article analyzes the effect of marketization on personal income inequality in urban China as mediated by three types of work units: Low-profit state firms(LPFs), high-profit state firms (HPFs), and market firm (MFs). Results based on two urban survey data sets show that while the influence of redistributive power declines, returns to human capital do not monotonically increase as a firm's proximity to the market increases. Although returns to human capital are higher in the market sector than in the state sector, the effects of education on earnings are weaker in HPFs than LPFs within the state sector. The inconsistency is attributed to the effects of bonuses that are equally distributed among employees in HPFs.