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Wage determination and fixed capital investment in an imperfect financial market: the case of China

Gu, Tao (2019): Wage determination and fixed capital investment in an imperfect financial market: the case of China.

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Abstract

The purpose of this paper is to examine how wage decisions and fixed asset investments are determined under China’s imperfect financial market. In addition, we also investigate what kind of interrelationship exists between wage determination and fixed asset investment. To test the hypothesis, we collect aggregate data on wages, the financial market, and fixed asset investment by province, sector, and ownership type from several statistical yearbooks. The main results are (1) while the rise in financial market maturity has led to rising wage levels for state-owned enterprises, this phenomenon is not observed in the private sector, (2) retained earnings are positively correlated with capital investment, indicating that China’s financial market is incomplete. Furthermore, in the private sector, there is a strong reliance on internal reserves that is not observed in the state-owned sector, suggesting that the private sector is differentially treated in the financial market. (3) In the state-owned sector, wage growth has a positive correlation with fixed assets, while in the nonstate-owned sector this relationship is not observed. This implies that in the nonstate-owned sector the underpayment of wages may be used as a survival strategy to conduct business if under financial constraints.

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