How much between-group wage gaps can be explained by talent allocation frictions in China?

Abstract

What explains huge wage gaps between different hukou and gender groups in China? This paper uses an overlapping generation model with human capital investment and occupational choices to quantify how much wage gaps between these groups can be imputed to two types of talent allocation frictions, labor market discrimination, and human capital accumulation barriers. The calibrated model indicates that the two types of talent allocation frictions can explain a significant proportion (four-fifths, one-third, and three-fifths) of the wage gap between each non-urban-men group (urban women, rural men, and rural women) and urban men in 2013. Our counterfactual exercise also shows that eliminating these two frictions since 1995 would result in about half a percentage point increase in China's economic growth rate between 1995 and 2013.