Industrial Agglomeration and Wage Inequality in China

This paper estimates nonlinear structural wage equations derived from NEG model with data on 327 cities in China. The estimation results show that the variation, of wage level across cities in China is associated with proximity to large markets. The estimated elasticity of substitution of China is smaller than those of the other countries studied in previous research. It indicates that with the same increase of sub-regional market size, China may suffer more serious regional inequality problems. My estimation shows that although increased agglomeration can increase each city's wage level, it may also increase the wage gap between large and small cities.