A Re-examination of Labor Movement and Economic Development in China

MENG Jianjun
Faculty Fellow, RIETI

Under sufficiently competitive market economy conditions, the gap in income among various sectors is the major cause of labor movement, and labor flows from low-income sectors to high-income ones. In line with such flows, the income gap gradually shrinks until it finally disappears. However, gaps in labor productivity and income among various sectors may be maintained for a long period of time if there are institutional barriers, as they block the movement of labor. Even so, if the income gap between the agricultural sector and the nonagricultural sector is too large, then the shift of labor from the agricultural sector to the nonagricultural sector occurs as a result of economic development.

The important issue for China's economic development is how to shift its huge surplus of rural labor to the nonagricultural sector. In understanding this problem, analysis must be conducted in the context of the country's long-term economic history. In this column, I would like to examine the correlation between labor movement and economic development from three aspects.

Labor movement in light of the initial conditions of economic development

The arrangement of economic resources has a decisive impact on economic growth. At the same time, much of the way in which resources are distributed is decided by the initial conditions of economic development. China's economic development after 1949 could be broadly divided into two stages by 1978.
The leading strategy of China's economic development throughout the entire period was one of industrial development, and still is to this day. The important thing is that this industrial development strategy was born out of China's lack of capital and weak industrial base, and the concentration and rapid accumulation of capital was a necessary condition for its implementation. The concentration of capital was realized through socialist conversion and construction, or in other words by an economy of public ownership under socialism, while the rapid accumulation of capital was made through planned measures. What was crucial to completing this mechanism was the restriction of population movement between urban and rural areas by means of the family registration system and the further separation of work in agricultural and nonagricultural sectors. Herein lies the essence of the division of labor between sectors. The initial conditions of the industrial development strategy and the establishment of a public ownership economy have been decisive in shaping much of China's long history since 1949, and as a result, China's arrangement of labor and capital was thrown completely out of balance.

Although China has been gradually moving to a market economy ever since embarking on reforms and market opening, it has preserved the characteristics of a planned economy in its method of resource distribution. Firstly, 56% of fixed capital investment between 1981 and 2000 went to the state-owned economy (sectors under the jurisdiction of the central government) while 15% went to the collective-owned economy (sectors under the jurisdiction of local governments). In addition, development of the industrial sector was supported by the agricultural sector. Under the system of planned prices, the agriculture sector became the capital exporter, while the industrial sector became the capital importer. Furthermore, only 1.6% of total investment between 1979 and 2000 was basic construction investment for primary industries, and there was a serious lack of investment in the agricultural sector. This led to the long-term accumulation of surplus labor in the agricultural sector. At the same time, investment in public-owned sectors was capital-intensive, and returns on investment and employment elasticity were both quite low. Therefore, the huge investments made in the public-owned economy were a factor that prevented the movement of labor from the agricultural sector to the nonagricultural sector. On the other hand, the decline in agricultural income brought about an objective situation where labor movement became inevitable.

Labor movement born as a result of economic development

The restrictions on movement of labor imposed by economic development and the accumulation of capital in the industrial sector at the expense of the agricultural sector led to a gap in income between the urban and the rural areas. This income gap was maintained and expanded under the family registration system. A comparison based on the income gap during the Ninth Five-Year Plan spanning the years 1996 to 2000 shows that while per capita disposable income in an urban household was 2.5 times the average net income of a farmer in 1996, it had risen to 2.9 times by 2000. However, the actual difference is much greater than this. Given such a comparatively large income gap, it is an inevitable consequence of economic development that surplus labor shifts from the agricultural sector to the nonagricultural sector. This mainly leads to two phenomena. Excess farm labor moves either to nonagricultural sectors in the rural or to the urban areas.

During the initial years of reforms and market opening, the development of township enterprises greatly contributed to the cross-sector movement of labor. Industrialization in China's farming villages and the development of other nonagricultural industries in such villages both played important roles in shifting labor between sectors as well as boosting economic growth. However, the township enterprises have moved from the rapid growth stage to the adjustment stage. The rate of increase of workers at such enterprises has declined in recent years, and between 1995 and 2001, the percentage of the population of farming villages employed at township enterprises stabilized at around 26%. According to study results, the percentage of laborers in farming community households who worked at township enterprises remained stable at around 4.3% between 1985 and 1999. However, it is believed that the ratio of those performing "labor outside the home" (migrant labor, including those doing short-term work) had already averaged 10% by the end of 2001. Labor moved from primary industries to secondary and tertiary industries, and caused a marked change in the income structure of farming households. Income from farming comprised 74.4% of total net income in 1990, the same level as in 1985. However, in 2000, this figure had fallen to 50%. In a situation where income from primary industries increases very gradually, work at secondary and tertiary industries plays a large role in increasing a farmer's income. In other words, a farmer's income is decided by the extent to which labor in the agricultural sector can shift to nonagricultural sectors.

In 1999, the average remittance for a migratory laborer from the farming communities was 4,451.8 yuan, while the average net income per farmer was 2,253.42 yuan. This signifies that the movement of labor had an income redistribution effect. The shift in labor from the agricultural sector to the nonagricultural sector can boost the income levels of surplus labor and at the same time help the economy to grow. Because of this, the movement of excess labor from the agricultural sector to the nonagricultural sector is a factor that simultaneously achieves economic growth and fairness in income distribution. According to our calculations, if the average annual movement of labor from the agricultural sector is 1.5 percentage points, then the per capita contribution to economic growth when labor moves from the agricultural sector to the nonagricultural sector is 1.4 percentage points.

The actual state of labor movement in China

China's rural labor is increasing by several million every year, and is clearly in surplus of demand. Because only 35% of this new labor is needed to engage in farming, looking at the bigger picture, this huge amount of surplus labor needs to be moved to nonagricultural sectors. China is currently in the long-term process of moving labor thus.

When we look at the migration of labor between sectors by region, there are major differences. The cross-sector movement in labor is generally greater in the eastern region than the central and western regions, and there is virtually no difference between the central region and the western region. It is only in the regions where economic development from market opening has proceeded comparatively quickly that labor mobility is relatively high. In the three municipalities (Beijing, Shanghai and Tianjin) and the provinces of Zhejiang, Jiangzu, Guangdong and Fujian, movement of labor between sectors had already exceeded 30% by 1999. In regions that are behind in economic development, such as the central and western areas, the movement of labor between sectors is comparatively slow. When we consider the degree of economic development of these regions, it is very unrealistic to expect labor to move among the sectors within them. Owing to this, movement of labor that extends into other regions will be a notable feature of labor migration in China in the future.

Comparing the data of the fourth and fifth population census, we notice three trends. First of all, population movement between regions (provinces, municipalities and autonomous zones) is increasing even further. Interregional population movement rose from 11.102 million in 1990 to 42.419 million in 2000, a figure 3.82 times that in 1990. Secondly, the distribution of population inflow is becoming increasingly concentrated. Over the past decade, the distribution of population inflow has become clearer, and has generally tended to be concentrated in Shanghai, Beijing and Guangdong Province, with the population of Guangdong surging 14.5 times, that of Beijing growing 4.3 times and Shanghai's population increasing 5.6 times. Thirdly, the areas that are seeing a population drain are becoming more diverse. In 1990, the region with the greatest fall in population was Sichuan Province, with its figure being 1.89 times that of the region ranked second and 2.86 times that of the region which was placed third. In 2000, the difference between Sichuan and the region ranked second had dropped to 1.52 times, while the figure had fallen to 1.61 times that of the region that was third. The population drain is basically spreading to more regions. Our analysis shows that there is a much stronger correlation between per capita GDP and the population inflow ratio than between per capita GDP and the population outflow ratio.

The dilemma in policy planning

The circumstances shown above have created a dilemma for policy planners. On the one hand, the relative decline in profit from rural labor and the insufficient input into agriculture is making the movement of labor from the agricultural sector to the nonagricultural sector inevitable. However, on the other hand, there is a side to the issue that makes it necessary to curb huge numbers of surplus laborers from going to the cities through restrictive measures. Above all, there is the fact that at times when there is high unemployment in the urban nonagricultural sector, authorities must restrict surplus labor from the agricultural sector from taking up jobs in the nonagricultural sector in urban areas.
However, the structural movement of labor between industries is not only something born as a result of economic development, but is also a long-term driving force of China's economic development. The focus of policy concerns should shift from the current limited movement of labor to the establishment of a perfect labor market. Promotion of rational labor movement and encouragement of long-term economic growth by changing the labor structure are the dynamic forces that will enable China's economy to maintain even higher growth in the future.

March 9, 2004

March 9, 2004