Who Gets Money First? Monetary Expansion, Ownership Structure and Wage Inequality in China

With the help of a simple model this paper formulates a hypothesis that a monetary expansion in the Chinese context of a segmented labor market has the effect of widening the wage gap between state and non-state workers. We argue that the reason for the increase in wage differential is that SOEs are in a privileged position to receive new money first which means the wage rate of SOE workers are raised first. It is only after the new money reaches the non-state sector via spending, does the wage rate of non-state workers rise with a delay and probably to a lesser extent. Our empirical analysis based on 10 sectors in China over the period 1990 to 2011 supports our hypothesis.