Twofish's Blog

November 1, 2006

Notes on Chinese wage controls in 1994/95

Filed under: china, finance — twofish @ 7:37 pm

Thinking outloud about wages in SOE’s….. There was a dual track economy going on in 1994/95 and most households didn’t get all of their income from the SOE’s which were low in comparison with the private economy.

So I wouldn’t describe the 1994/95 policy as wage control since it didn’t extend to the entire economy (and would have been disastrous had it done so). Rather, the SOE wage was something similar to a government rebate check, which the government could raise and lower in response to macroeconomic conditions. Also, the wages in SOE’s *didn’t* come from corporate profits. The company would pay the wage at a fixed amount regardless of what the company was doing. So if you had an unprofitable company that needed to pay “wages” where did the money come from????

The bank, which gives you a huge NPL problem.

I’m trying to fit the report into the monetarist, free market framework that I’m normally use, and surprisely it fits quite well if one notes that the “wage” being talked about isn’t really a “wage.” It’s a government social security payment, and by fixing the amount of the social security payment, the PRC was able to control inflation in 1995.

Wages that aren’t really wages.  Loans that aren’t really loans.  This is why I think the Chinese economy is such fun to study.


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