While most studies find evidence of a wage-firm size premium, we find that larger firms in China actually pay lower wages. We also find that the most plausible explanation for this result is that larger firms in China employ a higher ratio of blue-collar workers.wages, firm size, China.

Russell Smyth

Wenshu Gao

English

Research Papers in Economics

 
  
 
 
 
 
 
 
 
 
 
 
 
 
Wenshu Gao
* and Russell Smyth
† 
 
 
 
Asian Business and Economics Research Unit 
Discussion Paper DEVDP 09-05 
 
 
 
 
ABSTRACT 
 
While most studies find evidence of a wage-firm size premium, we find that larger firms in China 
actually pay lower wages. We also find that the most plausible explanation for this result is that 
larger firms in China employ a higher ratio of blue-collar workers. 
 
 
 
Keywords: wages, firm size, China. 
 
 
JEL classification: J21, J30, L25. 
 
 
 
 
 
 
 
 
                                                  
* Institute of Population and Labour Economics, Chinese Academy of Social Sciences 
† Direct correspondence to Russell Smyth, Department of Economics, Monash University 3800, Australia. Fax: +(613) 
9905 5476, Tel: +(613) 9905 1560; E-mail: russell.smyth@buseco.monash.edu.au 
 
 
 
© 2009 Wenshu Gao and Russell Smyth 
All rights reserved. No part of this paper may be reproduced in any form, or stored in a retrieval system, without the prior 
written permission of the author. 
 
FIRM SIZE AND WAGES IN CHINA 
 1.  INTRODUCTION 
A number of studies have found that larger firms pay higher wages in both developed and 
developing countries (Oi & Idson, 1999). In this paper we examine whether a wage-size premium 
exists in the People’s Republic of China (hereafter China) using a unique matched worker-firm data 
set from Shanghai. We find, contrary to existing studies for other countries, that larger firms pay 
lower wages and examine three possible explanations for this result. 
 
2.  DATA AND EMPIRICAL STRATEGY 
We use a matched worker-firm data set from Minhang district in Shanghai collected by the Institute 
of Population and Labour Economics in the Chinese Academy of Social Sciences in 2007. The 
dataset, which contains information on 784 employees from 78 firms, was selected by Probability 
Proportion to Size sampling according to a list of all manufacturing firms in Minhang district whose 
annual sales were at least 5 million RMB. Tables 1 and 2 summarize some of the characteristics of 
the data in small and large firms (defined as less than or greater than 85 employees). Table 1 
suggests that average wages are lower in larger firms  
 
 
Table 1: Summary characteristics of hourly wage rate by firm size (RMB/hour) 
 Small  Firms 
(85 or Less Employees) 
Large Firms 
(More Than 85 Employees) 
Mean 10.52  9.75 
Standard Deviation  3.49  4.19 
5
th Percentile  4.43 4.84 
10
th Percentile  5.23 5.35 
25 Percentile  6.34  6.34 
50
th Percentile  8.72  8.72 
75
th Percentile  11.63 11.63 
90
th Percentile  16.61  14.53 
95
th Percentile  20.35  17.44 
 
 
Table 2: Summary characteristics of workers by firm size 
Sample  All  Small Firms  Large Firms 
Large Firms (%)  50.35  -  - 
Hourly Wage  10.14  10.52 9.75 
Years of Schooling (years)  11.35 11.17 11.71 
Potential Experience (years)  16.49 17.78 14.79 
Male (%)  54.08 59.61 48.63 
Married (%)  74.52 71.43 77.65 
Speak Mandarin Well (%)  67.59 63.23 71.90 
Good Health (%)  30.29 29.53 31.04 
Urban Hukou (%)  58.67 59.38 57.97 
Member of Communist Party (%)  10.71 10.70 10.71 
Member of Trade Union (%)  37.39 30.61 43.94 
Position (%)     
  Ordinary Employee  65.51 64.80 66.21 
  Technical Employee  14.96 13.69 16.21 
  Middle/High Level Manager  19.53 21.51 17.58 
Occupation (%)     
  Professional/Technician  22.92 20.77 25.00   Producer/Transporter  23.80 19.29 28.16 
  Service Worker  15.62 15.43 15.80 
  Equipment Operator  37.66 44.51 31.03 
Professional Certification (%)     
  No Title  78.07 76.97 79.17 
  Elementary Certification  14.39 16.57 12.22 
  Junior/Senior Certification  7.54 6.46 8.61 
Ownership Form of Firm (%)     
State/Collective Own Firms  8.16 8.08 8.24 
Share-holding/Public Firms  34.44 35.93 32.97 
Foreign/Taiwan/HK JV Firms  37.90 27.86 47.80 
Private Firms  19.50 28.13 10.99 
 
 
Our empirical strategy is based on the estimation of a standard Mincer wage equation. We regress 
log of individual gross hourly wages (including bonuses) on the log of firm size - number of workers 
in the firm - and variables to control for employee characteristics and to test alternative theoretical 
explanations.  Regressions are estimated by OLS with White heteroskedasticity-consistent 
standard errors. To account for potential bias stemming from the use of aggregated firm variables 
in an individual wage equation, we applied the correction for common variance components within 
groups suggested by Moulton (1990). 
 
3.  RESULTS 
Table 3 reports the elasticity between wages and firm size, controlling for various employee 
characteristics and ownership of the firm. In each case, the coefficient on firm size is negative and 
statistically significant at the 1 per cent. The results suggest that for each 10 per cent increase in 
the number of employees, the hourly wage rate (RMB/hour) is between 0.46 per cent and 0.57 per 
cent lower. In the full specification (specification V), for a 10 per cent increase in the number of 
employees working in the firm, the hourly wage is 0.55 per cent lower. The results for the control 
variables in specification V of Table 3 are also generally consistent with expectations based on 
previous studies of the Chinese labour market. For example, we find that males, the better 
educated, those with an urban hukou, Communist Party members and middle and senior level 
managers receive higher wages. 
 
 
Table 3: Determinants of hourly wages 
 
 I  II  III  IV  V 
Ln (Number of Employees) 
-0.0463*** 
(0.0159) 
-0.0482*** 
(0.0159) 
-0.0567*** 
(0.0169) 
-0.0482*** 
()0.0169 
-0.0549*** 
(0.0171) 
Years of Schooling 
0.0890*** 
(0.0061)*** 
0.0877*** 
(0.0065) 
0.0751*** 
(0.0081) 
0.0608*** 
()0.0086 
0.0581*** 
(0.0087) 
Experience 
0.0189*** 
(0.0059) 
0.0169*** 
(0.0060) 
0.0122** 
(0.0063) 
0.0106* 
(0.0062) 
0.0106* 
(0.0062) 
Experience
2  -0.0004*** 
(0.0001) 
-0.0003*** 
(0.0001) 
-0.0003** 
(0.0001) 
-0.0003* 
(0.0001) 
-0.0003* 
(0.0001) 
Male 
0.1655*** 
(0.0336) 
0.1701*** 
(0.0337) 
0.1664*** 
(0.0354) 
0.1241*** 
(0.0365) 
0.1321*** 
(0.0365) 
Married 
0.0739 
(0.0492) 
0.0775 
(0.0493) 
0.0899* 
(0.0511) 
0.0888*** 
(0.0503) 
0.1017** 
(0.0503) 
Good Health  No  -0.0684* -0.0632  -0.0767***  -0.0862** (0.0417) (0.0432)  (0.0430) (0.0432) 
Fluent Mandarin  No 
0.0128 
(0.0395) 
0.0071 
(0.0410) 
0.0122 
(0.0403) 
0.0043 
(0.0404) 
Urban Hukou  No  No 
0.0777** 
(0.0423) 
0.1036** 
()0.0422 
0.1047** 
(0.0420) 
Communist Party Member  No No 
0.1490*** 
(0.0577) 
0.1246** 
(0.0585) 
0.1303** 
(0.0587) 
Trade Union Member  No No 
0.0417 
(0.0375) 
0.0144 
(0.0381) 
0.0323 
(0.0392) 
Position 
(Ordinary Employee= 1) 
        
Technical Employee  No No  No 
0.0409 
(0.0511) 
0.0436 
(0.0510) 
Middle/High Manager  No No  No 
0.3610*** 
(0.0498) 
0.3728*** 
(0.0501) 
Occupation 
(Professional/Technician=1) 
        
Producer/Transporter No No  No 
-0.1108** 
(0.0516) 
-0.1214** 
(0.0516) 
Service Worker  No No  No 
-0.0693 
(0.0573) 
-0.0652 
(0.0572) 
Equipment Operators  No No  No 
-0.1005** 
(0.0492) 
-0.0945* 
(0.0490) 
Professional Certification 
(No title=1) 
      
Elementary Certification  No  No  No 
-0.0499 
(0.0498) 
-0.0493 
(0.0497) 
 
We test three possible explanations for this result: 
 
•  Most large firms in China are state-owned enterprises or publically-listed firms with majority 
state control that provide more non-wage benefits (46.67 per cent of large firms in the 
sample fall into these categories). Compensating wage theory predicts that workers 
receiving more generous non-wage benefits will be paid a lower wage than workers who 
receive lower non-wage benefits (Rosen, 1986). 
 
•  An explanation given in previous studies for why larger firms pay higher wages is that they 
have a higher proportion of more mobile white collar workers than small firms and that 
faced with high labour turnover, larger firms have to pay their white collar workers a wage 
premium to retain their services (Belfield & Wei, 2004). In China, larger firms employ a 
higher ratio of blue collar workers than small firms. While Chinese workers now enjoy 
greater job mobility than before, few blue collar workers in large firms, in particular in state-
owned enterprises or publically-listed firms with majority state control, are mobile and these 
workers are paid lower wages. 
 
•  There is some evidence that productivity in large state-owned enterprises or publically-
listed firms with majority state control in China is lower than in smaller non-state firms. If 
productivity in these firms is lower, they may pay lower wages. 
 
Table 4 shows productivity, non-wage benefits (proxied by social insurance contributions per 
capita) and the ratio of blue collar workers by firm size for firms in the sample. There is no statistically significant relationship between firm size and productivity, but larger firms have larger 
non-wage benefits and a higher proportion of blue-collar workers.  
 
 
Table 4 Productivity, non-wage benefits and the ratio of blue collar workers by firm size 
  Small Firms  Large Firms  All Firms 
Value Added per capita 
(10,000RMB/Person)  15.41 14.91  15.19 
Social Insurance Contribution 
(RMB/Person)  3983.38 6109.32***  4858.76 
Ratio of Blue Collar Workers (%)  70.21  75.24***  72.26 
Notes: *** denotes that the correlation between firm size and ratio of blue collar workers and social insurance 
contributions are statistically significant at 1 per cent. 
 
 
Table 5: Productivity, non-wage benefits, blue collar workers and hourly wages 
 I  II  III  IV 
Ln (Number of Employees)  -0.0546*** 
(0.0173) 
-0.0530*** 
(0.0171) 
-0.0226 
(0.0172) 
-0.0650*** 
(0.0176) 
Years of Schooling  0.0560*** 
(0.0091) 
0.0549*** 
(0.0091) 
0.0505*** 
(0.0086) 
0.0586*** 
(0.0092) 
Experience  0.0162** 
(0.0064) 
0.0151** 
(0.0063) 
0.0158*** 
(0.0061) 
0.0153** 
(0.0064) 
Experience
2  -0.0004*** 
(0.0001) 
-0.0005*** 
(0.0001) 
-0.0004*** 
(0.0001) 
-0.0005*** 
(0.0001) 
Male  0.1161*** 
(0.0376) 
0.1237*** 
(0.0374) 
0.1388*** 
(0.0357) 
0.1304*** 
(0.0378) 
Married  0.0695 
(0.0523) 
0.0681 
(0.0508) 
0.0755 
(0.0499) 
0.0740 
(0.0515) 
Fluent Mandarin  0.0077 
(0.0420) 
0.0258 
(0.0413) 
0.0078 
(0.0394) 
0.0197 
(0.0417) 
Health (Ordinary=1)         
 Good Health  -0.1300*** 
(0.0492) 
-0.1295*** 
(0.0489) 
-0.1129** 
(0.0465) 
-0.1329*** 
(0.0495) 
Very Good Health  -0.0679 
(0.0483) 
-0.0698 
(0.0482) 
-0.0475 
(0.0455) 
-0.0756 
(0.0487) 
Urban Hukou  0.1069** 
(0.0431) 
0.0606 
(0.0428) 
0.0773* 
(0.0411) 
0.0676 
(0.0433) 
Communist Party Member  0.1294** 
(0.0598) 
0.1136** 
(0.0577) 
0.1502*** 
(0.0569) 
0.1102** 
(0.0584) 
Trade Union Member  0.0168 
(0.0405) 
-0.0028 
(0.0404) 
0.0402 
(0.0381) 
0.0110 
(0.0409) 
Position 
(Ordinary Employee=1) 
    
Technical Employee  0.0162 
(0.0518) 
0.0425 
(0.0516) 
0.0223 
(0.0500) 
0.0420 
(0.0522) 
Middle/High Manager  0.3804*** 
(0.0518) 
0.4093*** 
(0.0506) 
0.3895*** 
(0.0490) 
0.4053*** 
(0.0512) 
Occupation 
(Professional/Technician=1) 
    
Producer/Transporter  -0.1162** 
(0.0526) 
-0.1355*** 
(0.0518) 
-0.1132** 
(0.0503) 
-0.1338 
(0.0524) 
Service Worker  -0.0943 
(0.0582) 
-0.1271** 
(0.0579) 
-0.0912 
(0.0560) 
-0.1140** 
(0.0584) 
Equipment Operators  -0.1013** 
(0.0506) 
-0.1146** 
(0.0498) 
-0.1178** 
(0.0481) 
-0.1070** 
(0.0504) Professional Certification 
(No title=1) 
    
Elementary Certification  -0.0254 
(0.0528) 
-0.0443 
(0.0492) 
-0.0344 
(0.0482) 
-0.0479 
(0.0498) 
Senior/Junior Cert.  0.0939 
(0.0712) 
0.0215 
(0.0679) 
0.0477 
(0.0664) 
0.0139 
(0.0687) 
Ownership Form of Firm 
(State/Collective Own =1) 
    
Share-holding/Public   -0.0031 
(0.0648) 
0.0166 
(0.0638) 
-0.0288 
(0.0631) 
0.0118 
(0.0646) 
Foreign/Taiwan/HK JV  0.0975 
(0.0694) 
0.0680 
(0.0679) 
0.0550 
(0.0664) 
0.0873 
(0.0687) 
Private  0.0024 
(0.0741) 
0.0379 
(0.0716) 
-0.0629 
(0.0718) 
0.0289 
(0.0724) 
Value added per capita  0.0033*** 
(0.0009) 
No No No 
Social insurance per capita  No  0.1273*** 
(0.0279) 
No No 
Blue Collar Worker Ratio  No No  -0.5727*** 
(0.0912) 
No 
Social insurance per capita 
×ln(no. employees) 
No No No  0.0183*** 
(0.0061) 
_cons.  1.4242*** 
(0.1764) 
1.4733*** 
(0.1772) 
1.8260*** 
(0.1822) 
1.4822*** 
(0.1818) 
No. obs.  536 538 563 538 
F(β=0)  15.94*** 16.19*** 17.59*** 15.33*** 
R
2  0.4172 0.4201 0.4288 0.4069 
Notes: The numbers in parentheses are standard errors. ***, **, * denote significance at the one, five, and 
ten percent levels, respectively. 
 
 
 
Table 6: Regression of productivity on firm size and other variables 
Ln (Number of Employees)  -0.6279 
(2.6508) 
Social Insurance per capita  0.6069 
(3.7403) 
Ratio of Blue Collar Workers  -30.1080** 
(13.6040) 
Fixed Assets  0.0001 
(0.0001) 
Technology Level (Advanced=1)   
 Ordinary Level  -4.9371 
(5.6466) 
Ratio of R&D to Sales  -0.6274 
(1.8289) 
_cons.  40.8168*** 
(13.5992) 
No. obs.  50 
F(β=0) 
1.3 
(Prob > F = 0.2795) 
R
2  0.1531 
Notes: The numbers in parentheses are standard errors. ***, **, * denote significance at the one, five, and 
ten percent levels, respectively. 
 
  
In Table 5, we return to the full specification reported in Table 3 and add variables measuring 
productivity, non-wage benefits and the ratio of blue collar workers. Specification I in Table 5 
indicates that firms with higher productivity pay higher wages, but there continues to be a negative 
relationship between firm size and wages. Specifications II and IV in Table 5 indicate that firms 
which have higher non-wage benefits pay higher wages, suggesting there is no trade-off between 
wage and non-wage benefits. Specification III in Table 5 indicates that firms with a higher ratio of 
blue collar workers pay lower wages. Table 6 examines whether there is a negative relationship 
between productivity and firm size by regressing value added per capita on firm size, non wage 
benefits, the ratio of blue collar workers, fixed assets, technological capabilities and the ratio of 
R&D to sales. The results suggest no relationship between firm size and non-wage benefits or 
productivity, but that firms with a higher ratio of blue collar workers have lower value added per 
capita. 
 
 
4.  CONCLUSION 
In this paper we have investigated the relationship between wages and firm size in China. In 
contrast to existing studies for other countries we found that larger firms pay lower wages. We 
examined three possible explanations for this finding. The most likely explanation is that larger 
firms in China employ more blue-collar workers who are paid lower wages. 
 REFERENCES  
Belfield, C. and Wei, X. 2004, Employer size-wage effects: evidence from matched employer-
employee survey data in the UK, Applied Economics 36, 185-193. 
 
Moulton, B. 1990, An illustration of a pitfall in estimating the effects of aggregate variables on micro 
units, Review of Economics and Statistics 72, 334-338 
 
Oi, W.Y. and Idson, T.L. 1999, Firm size and wages. In Ashenfelter, O. and Card, D. Eds. 
Handbook of Labour Economics, 3, North Holland, Amsterdam, pp. 2166-2244. 
 
Rosen, S. 1986, The theory of equalizing differences. In Ashenfelter, O. and Layard, R. Eds. 
Handbook of Labour Economics, 1, North Holland, Amsterdam, pp. 641-692. 
 
 
 
 
 
 
 

An illustration of a pitfall in estimating the effects of aggregate variables on micro units,

Employer size-wage effects: evidence from matched employeremployee survey data in the UK,

The theory of equalizing differences. In

FIRM SIZE AND WAGES IN CHINA

http://www.buseco.monash.edu.au/units/dru/papers/working-papers-09/09-05firmsizesgaosmyth.pdf

FIRM SIZE AND WAGES IN CHINA

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics