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This study provides some of the first empirical evidence on the role of the labour market in determining individual-level wages and the consequent wage inequalities. Unlike traditional earnings equations that focus on human capital factors, this study follows recent wage theory, the Nash bargaining model, and finds that not only human capital but also the labour market are important factors in determining individual-level wages. Further, this study examines wage inequalities between urban-born workers and  permanent  rural migrant workers, who constitute a sizable part of all rural migrants in urban China but have been ignored in previous academic studies. Different from  temporary  rural migrants examined in previous studies,  permanent  rural migrants share the same citizenship rights and social welfare as urban-born workers. However, we still find that these permanent migrants (classified as talent, land, and ‘supported’ migrants) face disadvantages in acquiring high wages. Using a developed version of the two-fold Blinder–Oaxaca decomposition based on our theoretical model, we find that the wage inequalities between permanent rural migrants and urban residents are caused by both the workers’ education and labour market tightness, as well as the father’s employment status, housing prices, and other factors.

Labour market and wage inequalities between permanent rural migrants and urban-born residents in China