Although rural labour arrangements have gradually moved towards a market-oriented system and real wages have increased substantially during the economic reforms, one puzzling feature has been that all the available data suggest a persistent and widening wage gap between the rural agricultural and non-agricultural sectors. As mentioned in chapter 4, the rural non-agricultural sector comprises two parts: TVEs and privately-owned, joint venture and wholly foreign-owned enterprises. As data for the latter are not available, figure 5.1 presents the change in the wage level in the TVEs and the agriculture sector. It shows not only a wage gap between the two sectors, but also a widening of this gap over the period 1984–94.

It is important to understand the causes of the widening wage gap, because if firms are efficient there should be an equality between the wage and the value of the marginal productivity of labour. Hence, a wage gap across sectors implies a marginal productivity gap across sectors. Consequently, if labour was reallocated to the high marginal productivity areas (TVEs) from the low labour productivity areas (agriculture) there would be an output gain without the need to utilise more resources. Data presented in figure 5.1 suggest that the size of this potential gain is increasing and, in terms of the reallocation of labour across sectors, the efficiency of the rural labour market seems not to be improving; indeed, it appears to be worsening.