Wage payments and fixed capital investment in imperfect financial and labor markets: the case of China

Abstract

ABSTRACT This paper examines how wage payments and fixed asset investments are determined, and their interrelationship, under China’s imperfect financial and labor markets. We collect aggregate data on wages, the financial market, and fixed asset investments from several statistical yearbooks. The main results are as follows: (1) borrowing constraints hinder wage payments, but this phenomenon is not observed in the state-owned and foreign-funded units; (2) in the nonstate-owned sector, there is a strong reliance on internal reserves that is not observed in the state-owned units, suggesting that the nonstate-owned sector is treated differently in the financial market; and (3) in the state-owned units, wage growth has a positive correlation with fixed asset investments, whereas 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 under financial constraints.