The Effect of Market Transition in Urban China

Nee's market transition theory claims that redistributive power will decline and returns to human capital will increase as state socialist economies are transformed into market economies. However, many other scholars have discovered that either the influence of redistributive power persists or returns to human capital decline. In this paper, I analyze the effect of marketization on individuals= income inequality in urban China as mediated by work units, which are classified into three types: Low Profit State Firms (LPFs), High Profit State Firms (HPFs), and Market Firm (MFs). LPFs are farthest from the market, HPFs are closer to the market and MFs have to be completely exposed to market conditions. Results based on two urban survey data sets show that while the influence of redistributive power declines, returns to human capital do not monotonically increase, as market transition theory predicts. Although returns to human capital are higher in the market sector than in the state sector, the effects of education on earnings are weaker in HPFs than LPFs within the state sector. The inconsistency is attributed to the effects of bonuses that are equally distributed among employees in HPFs.