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How Labor Market Develops in
Transition China?
Fang Cai
Institute of Population and Labor Economics
Chinese Academy of Social Sciences
Erroneous Pics about LM in China
1. labor market reform lags behind others
2. zero growth of emplm’t since late 90s
3. reform is responsible for massive layoff
and unemployment
4. emphasize on difficulties but not
progress in labor market develm’t
5. unexhausted rural surplus labor force
There mustn’t be “lagging-behind”
• Notion that labor market reform lags behind
fails to explain how overall reform has reached
fast growth, TFP increase and living standard
improvement. Given system is endogenously
formed, with high degree of intrinsic unity,
inseparability among components, adaptability
of each component to the whole, the reform
process is not arbitrary, but intrinsically logical
Trinity of institutions
• State monopoly of agricultural products trade:
procurement in rural area and distribution in
urban area
• People’s Commune preventing factors of
production from quitting from unprofitable
agriculture
• Hukou system poses a particular restriction on
labor mobility
Annals of LM Reform
Time First 80s Second 80s First 90s Second 90s 21st
HRS release Long distance Migration Mass Local
Rural labor, TVE trading, tide, relax of migration, autonomy for
area reallocate bring staple hukou three ways of reform,
labor food for city reforming efforts
stay hukou improving
migration
conditions
The Reform of Jump into sea, Breaking Employment
Urban sent-down permanent abolition of iron-rice-bowl diversified
area return, three SOE workers rationing , social and
channels of security informalized,
emp’t rebuilding pilot program
combined of SSS
Transformation of Rural
Surplus Labor
Changing Distribution of Rural Labor
700
TVEs Private Individual Migrants Others
600
500
million
400
300
200
100
0
85
87
89
91
93
95
97
99
01
03
05
19
19
19
19
19
19
19
19
20
20
20
How Many Surplus Rural Laborers?
"surplus" transfered
22% 41%
agriculture
37%
Age Structure of Surplus Labor
Urban Employment Growth
Reform Drives, not Restrains Emp’t Growth
• Since reform, strong economic growth has
spurred rapid increase in urban employment.
The trend not diminished even after labor
market experienced severe shock, during
which govt’s active pro-employment policy
and labor market development help
employment growth and diversification, while
social security system is being re-established
Growth and Structural Change
Urban Labor Market Indicators (%)
Surveyed Registered Labor force
unemployment rate unemployment rate participation rate
1995 4.0 2.9 75.9
1996 3.9 3.0 72.9
1997 4.5 3.1 72.1
1998 6.3 3.1 71.2
1999 5.9 3.1 72.9
2000 7.6 3.1 66.1
2001 5.6 3.6 67.3
2002 6.1 4.0 66.5
2003 6.0 4.3 63.4
2004 5.8 4.2 64.0
2005 5.2 4.2 64. 6
Labor Market Integration
Examining Wage Convergence
• Wage converge between regions implies
a trend of labor market integration that is
similar to the integration of the product
market, reflected by the law of one price
Two Approaches to LM Reform
• Non-public sectors absorb workforce from
labor market (migrant workers and reemployed
workers)
• Public sector (i. e. SOEs) deregulates
pressured by competition from non-public
sectors (gradually breaking iron-rice-bowl)
Why Migrants’ Wage?
• In Cai and Du (2004), we already found a
trend of convergence of manufacturing wage
among Chinese regions
• Migrants are more mobile and their wage is
more market-determined
• Long complaints about stagnation of migrant
wage
• Migrants represent unskilled workers, shortage
of which shows Lewis turning point
Wage Inequality Measures
2003 2004 2005 2006
Percentile ratios
p90/p10 4.469 4.444 4.436 4.232
p90/p50 2.083 2.222 2.096 2.081
p10/p50 0.466 0.500 0.472 0.492
p75/p25 2.143 2.143 2.013 2.083
General entropy
GE(-1) 0.299 0.285 0.236 0.232
GE(0) 0.240 0.226 0.192 0.189
Theil 0.270 0.246 0.204 0.196
GE(2) 0.436 0.377 0.282 0.258
Gini 0.374 0.360 0.334 0.332
Atkinson indices
A(0.5) 0.119 0.110 0.093 0.091
A(1) 0.214 0.202 0.175 0.172
A(2) 0.374 0.363 0.321 0.317
Decomposition by Province: General Entropy
2003 2004 2005 2006
GE(-1) 0.299 0.285 0.236 0.232
Within 0.275 0.258 0.223 0.219
between 0.024 0.027 0.012 0.013
GE(0) 0.240 0.226 0.192 0.189
Within 0.215 0.197 0.18 0.176
between 0.025 0.029 0.012 0.013
Theil 0.270 0.246 0.204 0.196
Within 0.244 0.215 0.191 0.183
between 0.027 0.031 0.013 0.013
GE(2) 0.436 0.377 0.279 0.258
Within 0.407 0.342 0.268 0.245
between 0.029 0.035 0.011 0.013
Theil Decomposition Based on Regression
Components of inequality 2003 2004 2005 2006
Theil Entropy 0.270 0.246 0.204 0.196
Regional factors (%) 28.08 26.10 22.84 20.31
Individual factors (%) -63.88 -52.92 -33.03 -44.49
Constant (%) -11.16 -26.22 -60.89 -41.06
Residual (%) 146.96 153.04 171.08 165.24
Total (%) 100 100 100 100
Lewisian Turning Point
Indications of Turning Point?
• Dramatic decline in share of working age
population
• Labor shortage spread nation-wide
• There are not many rural laborers in surplus
• Urban unemployment rate declined
• Wages in both formal and informal sectors
increase rapidly
Dependence ratio (%)
0
10
20
30
40
50
60
70
80
90
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
2013
2017
2021
2025
2029
Youth Dep.
2033
2037
2041
Diminishing Demographic Dividend
2045
Old dep.
2049
Predicted Labor Supply & Demand
Increase in Wage Rate
Comparative Changes in Manuf. Wages
Increase in Migrants’ Wage
14
11.5
12
Wage increase (%)
10
8
6.5
6
4
2.8
2
0
2004 2005 2006
Conclusions
• Economic growth and labor market
development spurred employment
expansion and structural diversification
• Growth benefited from demographic
transition, but the dividend is diminishing
• Forthcoming Lewisian turning point
challenges sustainability of growth and
growth pattern
Challenges Facing China
• Transition of growth pattern to PFT-
driven economic growth
• Hukou system and related reforms
• Public services coverage of migrants
• New Countryside Campaign encourage
laborers’ mobility instead of keeping
them in land
Thank you!
