Academic journal article Journal of Politics and Law

The Trade-Off between Equity and Efficiency: Evidence from the Reform of China's Wage Policy

Academic journal article Journal of Politics and Law

The Trade-Off between Equity and Efficiency: Evidence from the Reform of China's Wage Policy

Article excerpt


Over the last 35 years, China has transformed from an egalitarian society to a nation that has one of the highest income inequality in the world. The transformation is mainly due to the economic reform carried out in 1978, which abandoned egalitarianism and endeavored to build a market economy system in contemporary China. This study reviews China's wage reform in 1978 to illustrate the trade-off between efficiency and equity that the Chinese government has experienced. The emphasis of equity before 1978, although maintaining social justice, impeded efficiency and led to a common poverty across the nation. The wage reform starting from 1978 shifted the principle of wage distribution from equity to efficiency, which no doubt unleashed productivity and promoted economic development. Yet, it also caused a rise in income inequality, which became a potential threat to the stability of society. Thus, the new Chinese leadership has again reemphasized the importance of equity in wage distribution.

Keywords: wage reform, equality, efficiency, wage inequality

1. Introduction

Wage payment system plays an important role in the development of each country because an appropriate wage system can promote productivity and increase people's income while an inappropriate one may undermine productivity and becomes a potential source of social conflicts (Hicks, 1955). Therefore, it is essential for the government of each nation to implement a proper wage policy that helps to promote economic growth through increasing working efficiency, and achieve social justice through improving the living standard of low-income workers as well as reducing inequality in the distribution of income between various segments of society. The selection and implementation of a proper wage policy require the government to make tradeoffs between efficiency and equity, because too much emphasis on equity in the wage distribution will undermine the economic growth for not releasing productivity thoroughly. Too much emphasis on efficiency will cause social unrest or even wars as it may enlarge wage inequality. Due to contradictions between equity and efficiency, it is not easy for each government to adopt an appropriate wage system to enlarge wage gap enough to stimulate workers but also retain the wage equality at a reasonable level to avoid social instability.

China is a good case of illustrating trade-offs between efficiency and equity in wage distribution for at least three reasons. First, Chinese leaders emphasized equity since the formation of the Republic in 1949. The ideology of egalitarianism was dominated in wage determination with the aim of maintaining social stability and justice. Thus, equity remains strong within the physic of the people. Second, the reforms implemented in 1978 were intended to improve efficiency while their effects on equity were not debated. Since the 1978 economic reform, China has achieved a remarkable annual growth rate of gross domestic product (GDP) over 9.7%, and lifted more than 600 million people out of poverty between 1981 and 2004 (World Bank, 2010). However, the unprecedented surge in productivity and prosperity has unleashed sweeping transformations of many dimensions of economic life such as inequality in China (Brandt, Ma, & Rawski, 2014). According to a national household survey conducted by the Chinese Academy of Social Science in 2002, the highest-income quartile of households enjoys a lion's share of the national total salary and wage earnings, which is 57%. Meanwhile, the bottom 25% accounts for just 6% of capital income. According to data from China Bureau of Statistics, the national income inequality, measured as Gini coefficient, has increased from 0.18 in 1978 to nearly 0.5 today. The rise in income inequality means that China has transformed from a nation with equal distribution of income to one that has one of the most unequal income distributions globally. The rise in income inequality has challenged the Chinese social stability and caused a sharp rise in social unrest. …

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