This paper examines the effects of state sector domination on wage inequality in urban
China. Using Chinese Household Income Project surveys, we conduct two exercises: with
quantile regression analysis, we identify wage gaps across the distribution and over time; and
we employ the Machado and Mata (2005) decomposition to investigate how urban wage
inequality was affected by the changes in wage structure and employment share of the state
sector. We find that since the radical state sector reforms designed to reduce over-staffing
and improve efficiency since the late 1990s, urban wage gaps were narrowed due to the
reduction of employment share in the state sector; the wage premium of the state sector in
comparison with the non-state sector increased significantly; and changes in the wage
structure of the labour market caused the rise in urban wage inequality.