Economic Openness And Wage Inequality: An Empirical Analysis From China

Based on the data analysis of typical cases in many countries, a negative correlation between the wage inequality and economic growth is found. China's "Report On The Work of Goverment of 2010" has also pointed out that a reasonable income distribution system is an important manifestation of social equality and justice, and definitely put forward the development thought on improving people's livelihood,and fully reflected our state and government's deep concerns about lifting the people's income levels and narrowing the incomes gaps.At the same time, the economic openness with the characteristics of international trade and FDI has shown a strong correlation with the wage movements at all levels in China.Taking this into consideration, we regard Scientific Outlook on Development as the guiding ideology, and consider narrowing the income gap as the goal, and regard the influence of FDI and trade under open condition on income gap in China as the basic starting point, so we choose the panel data of 12,180 enterprises, including the regional level data of China's 30 provinces and cities from 1997 to 2008, and industrial level data of 37 sub-sectors in China from 2003 to 2008. In the view of globalizaiton, we make an intensive study of the depth and manner of the influence which economy openness makes on changing in wages at different levels in China through three channels including technology spillover, product market competition and the transfer of labor forces. We would mainly answer the following questions.By which channels and methods can economic openness influence the wage changes in theory?Whether there is an obvious wage gap at different levels in China? Did the open economic whose characteristics is of FDI and international trade have an obvious influence on the gap?what impact has been made on wage changes at different levels by economic opening through technology spillover? what impact has been made on wage changes by economic openness through labour market channel? How to reduce the negative impact of the economic liberalization on the wage inequality?In order to find the method of how the economic opening affecting wage changes, through collecting and rearranging some relative theories, and combining our own research review, we have deduced three channels of how the economic opening affecting wage changes,which are as follows:technology spillover, product market competition and transfer of labour forces. For developing countries,in view of technology spillover channel,under the condition that intellectual property rights are fully protected, economic opening is inclined to reduce the income gaps between skilled workers and unskilled workers. However if intellectual rights are not effectively protected,economic openning will raise the wage gaps between them through price effect. As for labour transfer channel, as exports from developing countries are often of low quality overall, in this case, enterprises have more demands on works of low skill than that of high skill,which lead to the increasing of unskilled worker's wages,and the wage inequality between the skilled workers and unskilled skill are narrowed. Seeing from the product market channel, the product market competition caused by economic opening is inclined to lower the wage level on the whole,but it has a greater influence on workers of low skill,so the wage gap between worker of high skill and low skill becomes wider meanwhile.Empirically,by analysing the wage gap among different levels in China, we find that there are obvious wage gaps at regional level, industrial level and enterprise level. The open economic with characteristics of FDI and international trade have strong effects on the emerging of the wage gap. In order to find the effect of open economy on wage changes in a more detailed level, We introduce three channels including technology spillovers channel, product market competition channels and labor transfer channels, through which the economic openness would affect the wage changes in China.Technology spillover channel is a channel about the impact of open economy on wage changes, which has been discussed the most frequently. And we will analyze it from the aspect of region and industry. Comparing with the existing conclusion that advocating FDI has a strong technology spillover on the host country, we have a disagreement. Since FDI enterprise has a high confidentiality in its core technology (similar to intellectual property protection) in order to maintain its high market competitive position, FDI's impact on un-skilled workers is stronger than that of skilled workers, which verifies the limitations of China's strategy of sacrificing the market to get technology. But on the other hand, this impact has the advantage of reducing the wage gap between workers, and FDI technology spillover as a whole can raise the average wage of the workers in the host country.The analysis of the channels of product market competition is the latest perspective in this paper of this field. We well interpret the impact of FDI on wage inequality through the product market competition both in and outside the market by introducing FDI's import and export in the regional level and industrial level. From the perspective of industry, for FDI processing trade's low product quality, it has negative impacts on the overall wage through product market and market-founded enterprises, which reduce the wages of domestic enterprises but do not affect skilled workers'wage and have negative effect on low-skilled workers. In the regional level, the empirical result of FDI's impact on different workers through the domestic and international market also well support our conclusion, which is, FDI expands the wage gap between skilled workers and unskilled workers through product market competition on the whole.Labor transfer channel of economic openness is a weak point of the existing studies. We interpret accurately the labor effects of economic openness through selecting variables related directly to labor market in regional and industry level, which is different from the existing studies whose target selection is too far-fetched. From the perspective of industry, since FDI has a higher relative demand for skilled workers, FDI increases wage inequality through transfer of labor forces. In the regional level, the supply of labor inside a province increases relatively according to the province's labor transfer, thus the impact on wages is significantly negative. Other provinces'factors,such as other provinces'FDI, exports of other provinces'FDI, by moving outside the province, increase,the demand for the province's labor forces, so the impact on wages is significantly positive.When we are analysing the FDI channels, we also examine the impact of import and export trade. In general, different levels of imports and exports of China are all conducive to improving China's wage level and lower the overall level of China's wage inequality between skilled workers and unskilled workers. But since there exists the industry convergence among different provinces in China, exports of other provinces has significantly negative effects on the average wage of the province.