The labor market in post-reform China: history, evidence, and implications; China's labor cost advantages are shifting but will remain formidable

Business Economics, Oct, 2004 by Cliff Waldman

Readers should be aware of the widespread concerns regarding the quality of Chinese economic data, which are not yet up to the standards of the United States or Canada. These problems are well summarized by Dougherty (1997), who sympathizes with those who are confused by official statistical reports from China. He explains that standards often exist for term definition and table compilation, but implementation delays and measurement discontinuities make many figures incomparable and often misleading. While progress is being made, it is clear that in many areas coverage, method, and accuracy are still issues. Except where noted, all of the data for this study are taken from The China Statistical Yearbook 2002, published by the National Bureau of Statistics of China.

The next section reviews the legislative and political history of China's labor market evolution. The discussion then turns to China's wide regional labor market disparities and explains the regional divide as one source of the large pool of subsistence labor. Next, I present both economy-wide and sector-specific data on the wage and employment path of the 1990s. I then survey the limited econometric literature to identify variables that influence the path of wages in China and consider the recent path of these wage drivers. Building on this, I present a forecast of the wage path, discuss its implications, and offer concluding remarks.

The Dawn of Reform

On the whole, the pre-reform Chinese economy (the period prior to 1978) was not favorable to worker advancement. Dong and Putterman (2000) studied this period, noted the capital intensity of industrial growth, and provided the following estimates. Between 1952 and 1977, the annual rate of growth of industrial output (as measured by the net industrial output at 1952 prices of independent accounting units within state industry) was 9.59 percent. Industrial capital assets grew at 11.08 percent. But employment grew at only 5.98 percent, and real wages grew at only 0.1 percent. In the late 1970s, the ratio of China's industrial GDP share to its industrial employment share was 3.2:1, while it was only 1.7:1 for other low-income economies, excluding India.

The authors assert and provide evidence to show that the supply curve of labor to industry rose throughout the pre-reform years. China operated a very comprehensive food allocation system during the 1960s and 1970s. As such, it made efforts to maintain the per-capita food supply of the urban population. Thus, hiring workers from the agricultural cooperatives and increasing the scarcity of farm output required that a higher price be paid for agricultural goods. Further, the movement of agricultural workers into the urban areas required significant public expenditures on housing and various social services.

These labor cost issues motivated the central government to favor the development of highly capital-intensive industries and to use its monopsonistic presence in the labor market to limit hiring. As will be seen, state firms actually found themselves with an excess pool of labor in the 1990s as reforms diminished the monopsonistic power of the state sector, leaving these overcapitalized enterprises with an excess supply of unskilled workers. But in the pre-reform and early reform periods, increments to the state-firm labor pools were minimal with respect to output.