Efficiency Wages and Work Incentives in Urban and Rural China

This paper examines incentive-wage effects for production and for managerial/technical workers in both urban and rural Chinese non-agricultural enterprises. We report strong evidence of productivity-enhancing wage behavior among enterprises in all ownership categories. There is also evidence that firms paying higher efficiency wages experience less shirking among their employees. We find that the profit-maximizing potential of incentive-wage setting is not fully exploited, although there is weak evidence that joint ventures come closer to profit-maximizing behavior at this intensive margin of wage/employment behavior than do collectives or state-owned enterprises.