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Journal of Economic Integration 2008 March;23(1) :183-203.
Relative Prices and Wages in China: Evidence from a Panel of Provincial Data

Jun Nagayasu Ying Liu 

University of Tsukuba
ShanDong University
Copyright ©2008 Journal of Economic Integration

Using Chinese provincial data, we examine the relationship between relative prices and wages, which can be derived on the basis of the Balassa-Samuelson theorem. First, considering cross sectional dependency in our data, we implement recently developed panel unit root tests. We report strong evidence of non-divergence in the prices of provinces vis-a-vis those of the benchmark (Beijing) and weaker evidence in wages. In the latter case, the results seem sector-specific, suggesting that wages in some industries are not following the trend in Beijing. Secondly, using sectorlevel data, we find evidence that relative prices can be explained by relative wages.

JEL classification: E300, F300

Keywords: Purchasing power parity | the Balassa-Samuelson effect | panel unit root tests | convergence speed | Chinese provincial data | bootstrap methods
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2. Bai, J. and Ng, X. (2004) A PANIC attack on unit roots and cointegration. Econometrica 72(4), 1127-1177.
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