Does wage affect unemployment in urban areas in China

This study examines the impact of wages on unemployment rates in urban areas in all the provinces, municipalities, and autonomous regions in China (except Tibet, Taiwan, Hong Kong and Macao) from 1999 to 2004. The study uses one-way fixed effect regression to determine whether much of the variation in unemployment across region was related to inter-regional wage differences or wage differences across years. It finds that differences across years have little effect on unemployment, and that inter-regional differences explain much of the variation in unemployment across regions. Separate linear regressions run for different areas divided by GRP levels indicate a positive and significant impact of wages on unemployment rates in middle-income area, but insignificant results in both the richest and the poorest areas. The results suggest the importance of promoting higher education in mid-income areas. In addition, this study finds that the migration from rural areas does not create much pressure on urban labor markets. Also, the regression results indicate that at both national and regional levels, neither the increase of labor exchanges nor the increase of the vocational training schools has a significant effect reducing unemployment rates. Taken together, the study results support the importance of labor mobility in reducing unemployment in urban areas. They suggest that Chinese policy makers should encourage labor mobility by reducing intervention in the urban job markets, preventing minimum wage policies, and encouraging workforce migration into less developed areas.