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

In 1986, China gave a further boost to the foreign-funded sector by enacting national regulations extending extra preferential treatment to export-owned and high-tech businesses set up with foreign capital. Under these regulations, foreign-funded firms could determine the size of their labor force and, more interestingly, had the right to set the form and level of wages.

China also developed an entrepreneurial sector. At the outset of reform in 1978, the central government affirmed the right of the small-scale business sector to exist and expand. In 1981, the State Council issued the first set of comprehensive regulations on individual ventures. In doing so, it declared that the individual economy was an important complement to the state and collective sectors. In 1988, a set of provisional regulations was put into place that allowed large private domestic businesses to determine their own wage and profit distribution systems and to enter into contracts with other economic entities.

This rush of reforms left China with four types of ownership in addition to private, individually owned firms and urban collectives. These are state-owned enterprises, township and village enterprises, joint ventures, and foreign-owned firms. An appreciation of the current labor market structure necessitates an understanding of the characteristics of each.

State-owned enterprises are an historical hybrid. As Dong and Bowles (2002) explain, these capital-intensive enterprises are still under the control of the state and to an extent are a leftover from the era of central planning. Reforms, however, have forced the state-owned enterprises to respond to market-set wages and other market forces. They still recruit workers from the immediate urban environment.

Township and village enterprises are more diverse and comprise a heterogeneous group of firms with various types of relationships to the township and village governments (which often use them for employment maximization objectives). They are staffed by local residents. They are subject to tougher budget constraints than the state-owned enterprises, are more market-oriented, and are not subject to any of the formal planning mechanisms of the public sector.

Joint ventures, while scattered across the country, are most concentrated in the SEZs in the coastal areas. They, too, tend to have greater flexibility than the state-owned enterprises to hire and fire and employ contract labor. Foreign-owned firms are similar to the joint ventures in their reliance on contract labor, especially the young and low-skilled, drawn from both urban and rural sectors. The above-described legislative and regulatory reforms of the 1980s left the foreign firms with more autonomy than the other three types of enterprises.

The existence of these different ownership categories has given rise to a key question about the future of the Chinese labor market: Is there segmentation, where wage determination is predicated on a different set of factors in the four ownership sectors? And, if so, will segmentation give rise to convergence, where wages are set under the rubric of one uniform set of factors for all ownership types? In a well-functioning labor market (one where markets clear so that labor resources are allocated to their most efficient use) wages would be determined in all sectors by factors that affect the productivity of labor. An individual worker would receive the same return for his or her set of productive characteristics in different sectors and only sectoral peculiarities such as hours and other types of working condition issues would matter.