Ebook Profit Sharing And The Earnings Gap Between Urban And Rural-Migrant Workers In Chinese Enterprises
In most countries, migrants earn less than natives and this earnings gap is usually interpreted to be a result of either a lack of relevant skills or discrimination against migrants by employers. Many researchers have investigated the considerable earnings differentials between rural migrants and urban workers in urban Chinese labour markets (Knight, Song, and Jia; 1999; Zhao, 1999; Meng, 2000, Meng and Zhang, 2001). The overwhelming conclusion indicates that a large portion of this earnings gap is due to discrimination against rural migrants, where discrimination is defined as the portion of the earnings gap which cannot be explained by differences in individual productivity related characteristics between urban and rural workers. The question remains unanswered as to why rural migrants are discriminated against?
The first complete economic analysis of discrimination is Becker’s (1957) interpretation of discrimination as a result of personal taste. If a group of workers are paid less than their equally productive counterparts because of gender, race, or resident status, discrimination may be identified. Such discrimination, according to Becker, is due to employers’ or consumers’ dislike (for simplicity it will be stated as employers’ dislike hereafter) of that group. Becker’s discrimination theory would hypothesise that rural migrants are paid less than urban workers because of urban employers’ dislike of rural migrants.
Another important economics explanation of discrimination is statistical discrimination theory (see, for example, Arrow, 1973; Phelps, 1972; Lundberg and Startz, 1983). This theory suggests that if assessing the productivity of potential employees is costly, in the hiring process employers may rely upon indicators, which are cheaper to obtain and are believed to convey reliable information about the expected productivity of potential employees. For example, race or gender may be used to assess the productivity of potential employees. Under these circumstances, employees with certain personal characteristics may earn less purely because of a belief that there is a negative correlation between these characteristics and productivity. In our case, if labour productivity is difficult to assess and employers believe that rural migrants are more likely to be less productive than urban workers then statistical discrimination would be observed.
There is a body of literature, which has not been applied to the issue of discrimination but may shed light on why migrants are paid less. This literature encompasses insider-outsider and profit sharing theories (see, for example, Lindbeck and Snower, 1987; Weitzman, 1985) and labour managed firm theory (Ward, 1958; Domar, 1966; Vanek, 1970). These theories predict that insiders will share in the profits of firms while outsiders will be paid a market-clearing wage. Under these circumstances, a wage differential will be observed between insiders and outsiders. This differential, however, is not due to employers’ personal dislike of outsiders but to the special institutional settings of the labour market that divides labour into two groups and offers profit sharing to one but not to the other.
The importance of the distinction between these interpretations may be two-fold. First, if discrimination is due to special labour market institutions, as the labour market moves towards a competitive environment such discrimination may be eliminated. However, if the personal taste of employers or consumers is the main reason for discrimination, its alleviation may take longer.
Posted in :
