Examining Determinants of Foreign Wage Premiums in China

22 Pages Posted: 19 Oct 2017

See all articles by Theresa M. Greaney

Theresa M. Greaney

University of Hawaii - Department of Economics

Yao Li

University of Electronic Science and Technology of China (UESTC) - School of Economics and Management

Date Written: October 2017

Abstract

We estimate foreign wage premiums for every 3‐digit manufacturing industry in China and discover a wide range of premiums both for ‘foreign’ ownership and for overseas Chinese ownership. Foreign ownership generates larger and more prevalent wage premiums than overseas Chinese ownership, but both produce premiums that respond similarly in estimates of determinants. Using the number of computers per worker to measure firms' technology levels, we find evidence consistent with the hypothesis that foreign firms pay higher wages to reduce the risk of worker turnover and the accompanying technology leakage in 76 to 78 per cent of industries. However, this determinant explains only 5 to 6 per cent of the foreign wage premium. We find the most intensive support for the ‘fair wage’ hypothesis that foreign firms pay higher wages because they are more profitable than domestic firms and workers in more profitable firms expect to be paid more, otherwise they will shirk. This hypothesis explains an average of 8 to 9 per cent of the foreign wage premiums, with support found in 72 to 75 per cent of the industries. When we consider the best combination of explanatory variables to include in each industry's wage regression, we find evidence consistent with our combined hypotheses in most industries, but we still find large residual foreign wage premiums.

Suggested Citation

Greaney, Theresa M. and Li, Yao, Examining Determinants of Foreign Wage Premiums in China (October 2017). The World Economy, Vol. 40, Issue 10, pp. 2056-2077, 2017. Available at SSRN: https://ssrn.com/abstract=3055478 or http://dx.doi.org/10.1111/twec.12441

Theresa M. Greaney (Contact Author)

University of Hawaii - Department of Economics ( email )

Honolulu, HI
United States

Yao Li

University of Electronic Science and Technology of China (UESTC) - School of Economics and Management ( email )

No. 4 Section 2
North Jianshe Road
Chengdu, Si Chuan 610054
China

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