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

The Regional Divide and Emergence of Subsistence Labor

Post-1978, China's labor market was not only segmented by ownership type but by geography. Researchers have observed that regional income gaps first narrowed and then widened in the years following the beginning of economic reforms. Two factors, according to Cai, Wang, and Du (2002) contributed to the differential economic growth that benefited the eastern regions of China. The first was the decline of agriculture as a share of GDP and the increase in the share of rural industry, which was more pronounced in the eastern coastal areas than in the interior. The second, described in the previous section, was the development of the enterprise zones that were confined to the eastern coastal areas. As Cai, Wang and Du (2002) explain, these policies endowed the eastern coastal areas with an advantage in developing an industrial structure.

The decline of agriculture and the establishment of enterprise zones only exacerbated an already difficult regional situation. In the pre-reform era, barriers were erected to prevent the interregional flow of capital and labor that would normally occur in response to market signals. This was done to make sure that capital and labor would go only to priority sectors. The People's Commune System and Residence Registration System (more commonly known as the hukou system) were implemented to inhibit labor and resource mobility so that the central government, not the market, would be the ultimate arbiter of the economic landscape.

Since the late 1980s, some of these restrictions have been relaxed; and a mass labor exodus from the countryside has resulted as rural workers continue to seek improved wages and employment prospects in the urban economy. While rural workers have been able to move out of their home villages, significant problems still keep migrants from settling into cities. The remaining urban segregated labor market limits migrant access to a variety of jobs. Social service deficiencies prevent migrant workers from obtaining housing, medical care, and children's education. Some migrants have been expelled due simply to stability concerns. As a result of these difficulties, China's emerging labor market is still primarily regional in scope, leading to regional wage disparities.

Figure 5 shows the provincial distribution of the average total wages of individual staff and workers. (3) Figure 6 does the same for manufacturing wages. The figures illustrate the remarkable magnitude of the regional wage disparity. As shown in Figure 5, the average annual wages of staff and workers in 2001 in the lowest ranked province of Anhui was just over 7,900 yuan versus nearly 21,800 yuan in Shanghai, a magnitude of difference of approximately 2.8. The standard deviation of wages for all provinces in 2001 was 3,685 yuan, more than one-third of the countrywide average annual wage figure of 10,870 yuan.

As shown in Figure 6, the picture is much the same when manufacturing wages are considered. Shanghai once again ranks at the top with average wages of staff and workers of 20,406 yuan in 2001 versus 6,664 yuan for Henan. Anhui is fifth from the bottom when manufacturing wages are ranked. Across all ownership sectors for both total wages and average manufacturing wages, Shanghai consistently ranks number one. The regional disparity is quite wide in all sectors for both average total and average manufacturing wages, with standard deviations ranging around one-third of the mean.