Economic Structural Reform and Labor Market Formation in China

MENG Jianjun
Faculty Fellow, RIETI

Since the launch of the open-door policy, Chinese society has been undergoing steady changes from traditional planned economy to market economy. The most significant change brought by the market economy is the explosive mobility of production factors - labor, goods and capital - that were hardly movable under the planned economy. The author of this column has examined the formation of the labor market under the transition to market economy, focusing on the "mobility of production factors." It has been found that China has gone through the following three stages in its formation of a labor market.

Rural Reform and Mobilization of Labor Force

Rural reform from 1978 through 1984, which centered on the introduction of a contract system for agricultural production, marked the first stage of reform. Dissolution of communes across the country resulted in economic growth and social stability in the rural areas and this marked a major achievement for the government. At the same time, however, the long-pending issue of surplus labor in the rural area has surfaced. Massive flow of migrant workers from the inland rural areas to the coastal urban areas began in the mid 1980s, causing a serious social problem.

Population inflows and outflows by regions are shown in Table 1. Seven regions including Guangdong, Shanghai and Beijing recorded net inflows both in 1990 and 1995, whereas 12 regions such as Sichuan, Anhui, and Hunan posted net outflows both in 1990 and 1995. The three regions of Guangdong, Shanghai and Beijing are overwhelming in the scale of population inflows and there is little mobility among the three. Beijing and Shanghai are among the largest cities under the direct rule of the government, while Guangdong is the biggest beneficiary of the economic reform in the recent years. Against this backdrop, it is deemed that these three regions are serving as a major magnet of population flow in China, with population inflows concentrating in the Beijing-Tianjin area, Shanghai-Jiangsu area, and Guangdong area. Analysis of areas with net population outflow shows that population exodus typically takes place from rural areas to neighboring big cities. The Guangdong area, which represents the largest inflow, borders on Hunan, Guangxi and JiangXi, the Shanghai area on Anhui and Zhejiang, and the Beijing area on Henan and Hebei. Meanwhile, a massive exodus is taking place from Sichuan, which marks the largest net outflow, to all the major cities and nearby areas.

What is the driving force for such a cross border exodus of labor forces? According to the China Statistical Yearbook 2001, the latest in a series, per capita disposable income in rural areas stood at 2,253.4 yuan in 2000, roughly 36% of 6,280 yuan in urban areas. Likewise, per capita gross domestic product in Shanghai came to 34,547 yuan, 13 times the 2,662 yuan in Guizhou, an inland province. Such huge gaps in income and economy between urban and rural areas are undoubtedly contributing factors and motivation for the ongoing population exodus. Calculation based on 1995 data shows a high degree of statistical correlation between the ratio of inflowing population and per capita GDP, confirming that population exodus stems from economic gaps. This is an inevitable result of the mobilization of production factors that accompanies the introduction of a market mechanism and the transition from planned economy to market economy.

Urban Reform and Employment

As the second stage of reform, the government embarked on a reform of urban areas in 1985, focusing especially on reform of state-owned companies. Despite a series of challenges, the Chinese economy achieved high economic growth of average 9.5% per annum during the period between 1978 and 2000. During the same period of time, the ratio of primary sector workers dropped from 70.7% to 50%, while the ratio in the secondary sector posted a modest increase from 17.6% to 22.5% and shoot up from 11.7% to 27.5% in the tertiary industry.

Table 2 compares the number of employees by company types since 1990. In the 1990s, employment by state-owned and group-owned companies peaked and began to fall with the reform of state-owned companies and subsequent layoffs. The number of workers at "xiangzhen" companies, group-owned companies in rural areas, increased from 92.65 million in 1990 to 127.04 million in 2000, posting an increase of 30.49 million. In the past two to three years, however, with the Chinese economy going through structural adjustment, the xiangzhen companies, which had served as a driving force from the launch of reform in 1978, have seen employment level off. Despite this, the number of employees at private-owned and foreign capital-owned companies rose 3.9 times from 23.41 million in 1990 to 91.19 million in 1999. This shows that the market mechanism has taken root and brought steady economic growth with the progress of reform policy in China.

The reform of state-owned companies is seen as the core of urban reform. Despite this, the creation of a labor force market-the final phase of the reform of state-owned companies-took place only three to four years ago, thus causing a serious unemployment problem in urban areas.

Creation of a Labor Market

The implementation in 1995 of a government guideline on the inter-regional movement of rural labor and the improvement of rural economy have brought some order to inter-regional labor flow, including that from rural to urban areas. Furthermore, the Chinese economy posted double-digit growth from 1992 to 1995. With the inflation that plagued China for many years finally brought under control, the government in 1996 entered the third stage of reform, shifting its emphasis on population and labor policies to the creation of a nationwide labor market and the establishment of a social security system. The installment of Premier Zhu Rongji in 1998 accelerated this move.

As an important step in its labor market reform launched in 1997, the government has established an outplacement service center. The center, exclusively targeted at laid-off workers, will be in place for five years through 2002, then integrated into an overall job-search and human resources exchange mechanism to create a single nationwide labor market. Labor markets, centering on job-search and human resources exchange, have been rapidly expanding across the country.

The government used to prohibit inter-regional labor mobility, splitting the labor market between urban and rural areas. The situation, however, is rapidly changing as an increasing number of migrant workers have been flowing into urban areas since the launch of reform policy. In particular, progress in the reform of state-owned companies is gradually transforming the labor market into a hunting place for key production factors. "Labor markets" for finding jobs and "human resources markets'' that search out human resources are emerging across the country to fulfill urban labor demands. A distinction between the "labor market" and "human resources market" has been made based on the educational backgrounds of job seekers. Graduates from high schools or lower are expected to look for a job in a "labor market", while university graduates and those with special skills are to look in a "human resources market." On top of these, "manager markets" for recruiting chief executive officers have been created in highly developed areas such as Beijing and Shanghai. Through these markets, many companies, especially state-owned companies, seek top managers on contract.

As long as the reform of state-own companies continues, China will see layoffs in urban areas. At least 150 million of the nearly 500 million rural laborers are considered redundant, and some 60% of such redundant laborers will have to find a job in urban or other areas. The government believes the period between 1997 and 2007 will be the severest for the Chinese employment situation. With massive layoffs in the urban areas and a labor surplus in the rural areas simultaneously occurring during this period of time, the government expects that out-placed workers will exceed the overall labor absorption capacity of Chinese society as a whole. Finding a means to cope with this problem will be China's biggest issue in pressing forward its reform policies.

April 2, 2002

April 2, 2002