Economic Integration and Spatial Wage Differences: How Valuable Is Market Access to Workers in China?

Speaker: Mary Lovely

Mary Lovely is a Professor of Economics at Syracuse University’s Maxwell School of Citizenship and Public Affairs, where she combines interests in international economics and public economics.  She was a co-editor of the China Economic Review from 2011-2015.  Her current research projects investigate the pollution content of Chinese exports, market access and cross-city wage variation, the effect of tariff reductions on labor shares of value in Chinese manufacturing firms, and the nature of Chinese trade flows. She has recently completed work on the relationship between employment at American manufacturing firms and outsourcing to low-income countries, and the roles of provincial differences in environmental policy and labor conditions in directing foreign direct investment flows to Chinese provinces.  Dr. Lovely’s earlier work considered the measurement of labor market effects of increased international trade, the distributional effects of industrial policy, the geographic concentration of exporting firms, and the welfare effects of smuggling.

Abstract: 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. Using the gravity-based method of Redding and Venables (2004) to calculate the market access available at each location, we test whether the elasticity of the wage with respect to this locational characteristic 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 in the late 1990s, the estimated wage elasticity doubles between 1995 and 2002 and is stable thereafter. Our estimates indicate that wages of all workers became more responsive to market forces consistent with NEG predictions, both skilled and unskilled and those working for state enterprises as well as private enterprises. We also provide evidence that these results are not driven by 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.  



  • Cornell Institute for China Economic Research (CICER)

  • Cornell Contemporary China Initiative