Competition in the Labor Market : The Wage Effect of Employer Concentration in China

Competition in the labor market theoretically leads to higher wages, yet empirical evidence tosubstantiate this theory, particularly in developing countries, has been notably sparse. In sharpcontrast to developed economies where markets have increasingly veered towards monopsony,China’s labor market has experienced a surge in competitiveness. This was particularly visible when China embarked on its transformation in 1978, transitioning from a socialist command-economy model to a market-oriented one. At that point, competition was practically nonexistent due to the lack of private enterprises. As China’s economic reform gained momentum after 1993, competition in the labor market increased nationwide. Our study delves into the impact of this increased competition in the labor market on workers’ wages using a panel dataset from Chinese industrial firms spanning 1998 to 2013. Employing panel OLS and IV regressions, which control for labor productivity and unobserved heterogeneity, we demonstrate that a decrease in employerconcentration—indicative of an increase in labor market competition—is significantly linked tohigher wages. The elasticities of employer concentration on wages, as per our preferred estimates,fall within the range of -0.034 and -0.107. Additionally, our findings suggest that state-ownedenterprises gained the most from this upswing in competition, followed by non-state firms andforeign-invested companies. Mechanism analyses propose that China’s decreasing employerconcentration cultivates higher total factor productivity, insinuating that total factor productivityserves as an important channel linking employer concentration to workers’ wages