Economic geography and inequality in China: Did improved market access widen spatial wage differences?

• Published in: China economic review Vol. 54; pp. 306 - 323
• Main Authors: Lovely, Mary E., Liang, Yang, Zhang, Hongsheng
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.04.2019
• Subjects: Chinese inequality; Market access; New economic geography; Wages; Chinese inequality; Market access; Wages; New economic geography; F15 F1
• ISSN: 1043-951X; 1873-7781
• DOI: 10.1016/j.chieco.2019.01.005

New economic geography (NEG) 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 ongoing economic integration and market reforms that occurred in China after 1995, we use three waves of Chinese Household Income Project (CHIP) data to measure the extent to which the influence of market access on wages changed and affected wage dispersion across Chinese cities over the next 12 years. Employing the gravity-based method of Redding and Venables (2004) to calculate the market access available to firms located in each city, we test whether the elasticity of the wage with respect to local market access increased over time. We find that in all three years market access of the worker's location has a positive and significant influence on the wage. Consistent with extensive labor market reforms of the late 1990s, the estimated wage elasticity doubles between 1995 and 2002 and is stable thereafter. Our estimates indicate that wages of all workers become more responsive to market forces in a manner consistent with NEG predictions, both skilled and unskilled and those working for state as well as private enterprises. We also provide evidence that these results are not driven by omission of other forms of agglomeration or by selection bias. Estimated spatial differences in nominal wages are large: a worker moving from an inland location to the coast in 2007 would have doubled his or her nominal wage. Counterfactual analysis indicates that spatial differences in market access contribute to wage inequality, but less so over time. •We estimate the extent to which differences in market access increased wage inequality across Chinese cities.•Estimation provides new insights how internal Chinese trade barriers changed over time in relation to external barriers.•Results show that the value of an attractive location increased markedly between 1995 and 2002 and stabilized thereafter.•In 2007 a Chinese worker could almost double his or her nominal wage by moving from an inland city to Shanghai.•We find that worker location does contribute to wage inequality but that its impact has lessened over time.