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

Nonetheless, there was considerable migration from the farm areas as workers (in large part younger workers) came to urban areas, enticed by the prospect of better wages and economic futures. Urban migration arose, in part, from two decades of slow growth in the rural sector.

State monopsony power combined with this large migration to create a worrisome situation for a stability-conscious Chinese government--unemployment. The late 1970s saw an increase in the number of unemployed school graduates as China abandoned its policy of resettling urban youth in the countryside. And, consequently, a large number of these young, unemployed workers began to move back into the cities, threatening urban order. Sabin (1994) cites a figure of 5 million to 6 million urban unemployed in the 1978 to 1980 period, but mentions that other sources which account for returnees from the countryside put the estimates much higher. To prevent urban unrest, China's leadership had to address the growing clamor for jobs. Relying on the state firms was not an option due to the high cost of creating jobs in the highly capitalized government sector.

Another economic aim for reform was the desire to open the economy to the outside world as part of a drive towards modernization and greater efficiency. It was hoped that economic openness would bring new technology infusions. Also, it was thought that private, collective, and foreign-invested ventures would have a greater ability than the state sector to adapt more quickly to consumer tastes and would thus produce needed goods and services (Sabin, 1994, p. 947).

There were political motivations for reform as well. The destruction China suffered during the Cultural Revolution (1966-1976) had diminished the legitimacy of the Chinese Communist Party. By providing a wider range of employment opportunities, the party hoped to improve its public standing.

Sabin explains that early reform-era policy changes came from the city governments which, in 1979, began to encourage job growth outside of the state-owned sector on an experimental basis in order to reduce unemployment. Urban job seekers were allowed to find work in the state, collective, or small-scale private sector through labor bureaus, group employment, or independent efforts. In the years that followed, deliberate steps were taken to encourage the growth of urban collectives. Of all the non-state enterprises, urban collectives had the advantage of having been a component of the old socialist system. Consequently, promoting their development offered the central government an ideologically painless way of attacking the employment problem.

The foreign-funded sector was also strongly targeted with free-market incentives, most notably through the formation of a number of Special Economic Zones (SEZs). In 1980, the central government established four SEZs along the southeast coast. Firms in these areas were given preferential tax treatment and were allowed to form joint ventures with foreign firms. The central government devoted a disproportionate share of investment resources to these regions and gave the provincial governments a high degree of economic policy autonomy.