Wage flexibility majorly took place in the 1990s when the labor market saw a transition from a centrally-planned mechanism to a mechanism that was more market-oriented (Peng and Kang, 2013). After retrenchment of the public sector, labor market became rigid in the 2000s.
Gordon and Li’s (1999) theoretical model asserts that the government of China would reduce wage inflexibility in the state sector in response to the growing inter-sector migration of labor. This argument was also empirically supported by Dong and Bowles (2002) who found a convergence in the rate of return to education in four categories of ownership namely township and village enterprises, foreign-invested firms, joint ventures, and state-owned enterprises. This is understandable because the price of a factor is equalized by its mobility between different sectors. Mass layoff of SOE employees, influx of migrants, and increased competition from the foreign and joint ventures as well as private sector are factors likely to increase flexibility of wage determination and labor market in