The main purpose of this study is to examine the effect of wage reform on labor allocation and on income distribution in Mainland China. We found that in the new so-called Structural Wage System, workers have large incentives to work harder. Thus, the labor productivity has grown rapidly during the past ten years. However, the new wage system itself does not provide a sophisticated mechanism in the labor market because workers in the Mainland are not allowed to move freely. As far as income distribution is concerned, we found that the distribution-according-to-labor wage policy has not been well implemented. The wage payment inequalities are still often practised.
