The Trade-off between Equity and Efficiency: Evidence from the Reform of China’s Wage Policy

  •  Qiong Huang    
  •  Satish Chand    


Over the last 35 years, China has transformed from an egalitarian society to a nation that has one of the highest income inequality in the world. The transformation is mainly due to the economic reform carried out in 1978, which abandoned egalitarianism and endeavored to build a market economy system in contemporary China. This study reviews China’s wage reform in 1978 to illustrate the trade-off between efficiency and equity that the Chinese government has experienced. The emphasis of equity before 1978, although maintaining social justice, impeded efficiency and led to a common poverty across the nation. The wage reform starting from 1978 shifted the principle of wage distribution from equity to efficiency, which no doubt unleashed productivity and promoted economic development. Yet, it also caused a rise in income inequality, which became a potential threat to the stability of society. Thus, the new Chinese leadership has again reemphasized the importance of equity in wage distribution.

This work is licensed under a Creative Commons Attribution 4.0 License.