The Growth Miracle, Institutional Reforms and Employment in China

REVIEW OF LABOUREconomic & Political Weekly EPW may 31, 200847The Growth Miracle, Institutional Reforms and Employment in ChinaAjit K GhoseThe views expressed are the author’s and should not be attributed to the ILO.Ajit K Ghose (ghose@ilo.org) is with the International Labour Office, Geneva. China’s economy has recorded extraordinarily rapid growth for more than two decades. What have been the employment effects of this growth? And to what extent have these effects been conditioned by the institutional reforms? The paper focuses on the period 1990-2005. Rapid economic growth was indeed associated with a high-speed increase in productive employment. Surplus labour declined substantially; many workers moved from lower-productivity to higher-productivity jobs and labour-incomes increased in all types of employment. However, there have been some negative developments too. In particular, given that the formal sector had inherited substantial stocks of surplus labour from the past, economic restructuring and labour market reforms resulted in declining formal employment and growing urban unemployment for a period. The growth performance of China’s economy in the last decade and a half has been extraordinary by any standard. Between 1990 and 2005, per capitaGDP grew at a rate of 8.4 per cent per annum. This phenomenal growth was driven by an industrial revolution that has made China a manufacturing powerhouse; the share of manufactures inGDP increased from 33 per cent in 1990 to 42 per cent in 2005. The industrial revolution, in turn, was driven by China’s huge success in expanding trade with the external world. The share of exports inGDP increased from 19 per cent in 1990 to 37 per cent in 2005 and the share of manufactures in total exports increased from 65 per cent to 84 per cent.1What have been the effects of such rapid industrialisation and economic growth on employment in the country? No widely accepted answer to this question is available from the existing literature. Indeed, there are not many studies that even ask the question. A main explanation for this is that the available statisti-cal data on employment suffer from a number of important limitations. They also are rather difficult to interpret, given the context of rapid structural change and radical labour market reforms. Recent studies, therefore, have been concerned more with judging the reliability of the available statistical data than with using them for analysis.2 Despite the difficulties, however, it is obviously worthwhile to try to understand how China’s extraordinarily rapid economic growth affected employment in the country. This is not just because employment has long been a major concern for China’s policymakers and will remain so in the foreseeable future. It is also because China’s experience is of much interest to other labour-abundant developing economies that face major challenges in the area of employment.The objective of this paper is to assess the employment trends during the period 1990-2005 and to relate these to the structural changes and labour market developments that accompanied the growth process. The paper is organised as follows. In the follow-ing section, the available statistical data are scrutinised so as to develop a usable dataset. The reforms that had a bearing on the evolution of employment conditions, and hence help inter-pretation of the statistical data, are also briefly considered. Given that China’s employment statistics use categories that are not directly comparable to those commonly used in the literature, a methodology for organising the data into standard categories is also developed in this section. The database thus developed is used, in the following section, to analyse the main trends in employment, unemployment and labour productivity. How these

0 5 10 15 20 25 30 35 40 45 0 20 40 60 80 100 120 140 160 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Non-State State

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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 120

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1990 1992 1994 1996 1998 2000 2002 2004

340 350 360 370 380 390 400 620 640 660 680 700 720 740 760 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Actual (Left axis) Quality-adjusted (Right axis)

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50 100 150 200 250 300 350 400 1990 1992 1994 1996 1998 2000 2002 2004 Real wage index Product wage index Output per worker index

0 50 100 150 200 250 0 200 400 600 800 1000 1990 1992 1994 1996 1998 2000 2002 2004 CPI urban (Right axis) Money wage (Left axis)

REVIEW OF LABOURmay 31, 2008 EPW Economic & Political Weekly54Notes 1 The share of manufactures in total merchandise exports increased from 72 per cent to 92 per cent over the same period. 2 Even the scrutiny has often been rather narrowly focused on deriving acceptable estimates of rate of unemployment in urban areas. See, for example, Knight and Xue (2006) and Giles, Park and Zhang (2005). The few studies with a broader focus include Cai (2004), Rawski (2003), Brooks and Tao (2003), Ghose (2005), Tao (2006) and Xiaohe (2007). 3 These surveys were conducted four times a year till 1996 and three times a year from 1996 to 2001. From 2002 onward, they have been conducted twice a year. The data are published on an annual basis. 4 Given the Chinese custom of regarding a new-born baby as one year old, this definition of labour force can be considered as identical to that used in other countries. 5 The survey is conducted four times a year and the data are published on both annual and quarterly basis. 6 Cai (2004) also makes a similar judgment. 7 Rawski (2003) states that the 1995 industrial census revealed very serious overestimation of employment and output by the MOA. 8 The data on “persons employed in various units” include re-employed retirees and persons from outside mainland China while the data on “staff and workers” exclude them.9 Apart from the adjustments mentioned above, a few other minor adjustments were also necessary to ensure full consistency. These adjustments are explained in the notes to the Tables A2.1-A2.8.10 See Ghose (1984), Khan (1984) and Lee (1984) for detailed discussions of work organisation under the commune system.11 See Ghose (1987) for a discussion of the methods of recruitment and remuneration of labour that were used by the TVEs (then called “commune and brigade enterprises”) under the commune system.12 In 1982, the government introduced laws that allowed the establishment of individual busi-nesses, which could employ fewer than eight hired workers. In 1983, the government issued a policy document that encouraged rural house-holds to specialise in non-agricultural activities, including long-distance transport and marketing of commodities. In 1985, another policy document permitted farmers to establish businesses in nearby towns on condition that they had assured supplies of foodgrains for their own consumption. In 1988, the restriction on hiring of labour by pri-vate businesses was removed. Thus emerged the distinction between individual businesses (those employing fewer than eight workers) and private enterprises (those employing eight or more work-ers). See Tao (2006), Fung, Kummer and Shen (2006) and Zhang (2007).13 Discussions of the reforms are available in Brooks and Tao (2003) and Knight and Song (2005).14 See Tao (2006) for discussions and data.15 See Cai (2004), Giles, Park and Fang (2006) and Tao (2006). Subsequently, an unemployment insurance fund for urban workers was established and the RECs were phased out. A “minimum living standard programme” was also introduced to provide subsidies to urban households whose income per capita fell below designated urban poverty lines.16 See Lindbeck (2006) and Dollar (2007).17 There are no real grounds for considering the TVEs as formal sector enterprises. Though in theory, these are supposed to be owned and operated by township and village authorities, in practice, most of them have become private enterprises – partnerships, unincorporated businesses or producers’ cooperatives [Lindbeck 2006]. Most TVEs are small-scale and do not employ advanced machines or skilled workers, and most of the TVE employees do not enjoy job security and are not entitled to pension or insur-ance of any kind [Wang and Zhu 2006].18 In general, rural migrants and urban residents participate in segmented labour markets; the rural migrants take up jobs that the urban workers do not want. Indeed, these jobs are dubbed three-D jobs – jobs that are dirty, dangerous and demeaning; they are common in industries such as construction and mining for males and sanita-tion and textiles for females [Nielsen, Smyth and Zhang 2006].19 The formula used to estimate this is: qae = ae * [(x + y)/2], where qae is quality-adjusted employ-ment, ae is actual (i e, observed) employment, x is the ratio of regular employment to total employ-ment and y is the ratio of formal employment to regular employment. The actual employment is the same as the quality-adjusted employment when [(x + y)/2] assumes the maximum possible value of unity, i e, when all employment is formal. Over time, the rate of growth of quality-adjusted employment is equal to, higher than or lower than the actual rate of employment growth depending upon whether the value of [(x + y)/2] remains constant, rises or falls.20 Some of the urban job-losers did find regular employment in the emerging non-formal enter-prises, some became unemployed and some withdrew from the labour force. 21 Between 1990 and 2005, such employment fell from 8 million to 4 million. See appendix table A2.4.22 Agricultural employment in TVEs has been and remains around 3 million. See appendix table A2.4.23 Some agricultural employment in such enter-prises emerged in the mid-1990s, grew for a few years but then gradually disappeared. See appen-dix table A2.4.24 Within non-agriculture, there was substantial reallocation of employment across sub-sectors, as the following table shows. Employment growth was confined to services and “other industries” (i e,constructuion). Rate of growth (%) of employment, 1990-2005 FormalNon-formalTotal(regular)Manufacturing -5.4 4.6 0.0Other industries -2.6 5.2 1.9Services -1.07.8 4.1No reliable information on the distribution of irregular employment is available. Source: Author’s estimates based on data in appendix tables A2.5-A2.7.25 Here it is defined as the rate of increase in the consumer price index for urban areas.26 A possible reason is a fall in the participation rate of workers with long-term urban residence. Some of the redundant workers in state and collective enterprises were given early retirement; others withdrew from the labour market as “discour-aged workers”, having failed to find jobs within a certain period of time. Cai (2004) notes that the labour force participation rate of urban residents (aged 15 years or more) fell from 72.9 per cent in 1996 to 66.5 per cent in 2002. Giles, Park and Cai (2006) report, on the basis of data from China Urban Labour Survey conducted in five cities (Shanghai, Wuhan, Shenyang, Fuzhou and Xi’an), that the labour force participation rate for urban residents (aged 15-64 years) had declined from 83.3 per cent in 1996 to 74.4 per cent in 2001.27 According to data available from official sources (MOLSS,China Labour Statistics Yearbook, 2006), about 87 per cent of those who lost their jobs because of enterprise restructuring had junior or senior school level education. And 80 per cent of the unemployed also belong to these education categories.28In rural areas, the household responsibility system ensures that each household has access to some land, so that there is underemploy-ment rather than open unemployment. However, rapid expansion of towns and cities has led to conversion of the rural agricultural land into urban real estates, thereby generating landlessness of sizeable sections of the rural population. These persons, who cannot really be called rural migrants, have no option but to join the urban labour force and some of them could conceivably have joined the ranks of the urban unemployed.29 It is to be noted that a new Labour Contracts Law, which is designed precisely to promote contract-based employment, came into effect on January 1, 2008. 30 See Cai (2004).31 See Cai (2004).ReferencesBrooks, Ray and Ran Tao (2003): ‘China’s Labour Market Performance and Challenges’, IMF Working Paper WP/03/210, IMF, Washington DC, Cai, Fang (2004): ‘The Consistency of China Statistics on Employment: Stylised Facts and Implications to Public Policies’, CASS Institute of Population and Labour Economics Working Paper Series No 39.Dollar, D (2007): ‘Poverty, Inequality and Social Disparities during China’s Economic Reform’, Policy Research Working Paper 4253, World Bank, Washington DC.Fung, Hung-Gay, Donald Kummer and Jinjian Shen (2006): ‘China’s Privatisation Reforms: Progress and Challenges’,The Chinese Economy, 39 (2), pp 5-25.Ghose, Ajit K (1984): ‘The New Development Strategy and Rural Reforms in Post-Mao China’ in Keith Griffin (ed), Institutional Reform and Economic Development in the Chinese Countryside, Macmillan, London.– (1987): ‘The People’s Commune, Responsibility Systems and Rural Development in China, 1965-84’ in Ashwani Saith (ed), The Re-emergence of the Chinese Peasantry, Croom Helm, London.– (2005): ‘Employment in China: Recent Trends and Future Challenges’, Employment Strategy Paper 2005/14, International Labour Office, Geneva.Giles, John, Albert Park and Juwei Zhang (2005): ‘What Is China’s True Unemployment Rate?’, China Economic Review, 16 (2), pp 149-70.Giles, John, Albert Park and Fang Cai (2006): ‘How Has Economic Restructuring Affected China’s Urban Workers?’,The China Quarterly, 185 (1), pp 61-95.Khan, A R (1984): ‘The Responsibility System and the Changes in Rural Institutions in Keith Griffin (ed),Institutional Reform and Economic Develop-ment in the Chinese Countryside, Macmillan, London.Knight, John and Lina Song (2005): Towards a Labour Market in China, Oxford University Press, Oxford.Knight, John and J Xue (2006): ‘How High Is Urban Unemployment in China?’,Journal of Chinese Economic and Business Studies, 4 (2), pp 91-107. Lee, E (1984): ‘Employment and Incomes in Rural China: The Impact of Recent Organisational Changes in Keith Griffin (ed), Institutional Reform and Economic Development in the Chinese Country-side, Macmillan, London.Lindbeck, A (2006): ‘An Essay on Economic Reforms and Social Change in China’, Policy Research Working Paper 4057, World Bank, Washington DC. Nielsen, Ingrid, Russell Smyth and Minqiong Zhang (2006): ‘Unemployment within China’s Floating Population: Empirical Evidence from Jiangsu Survey Data’,The Chinese Economy, 39 (4), pp 41-56.

REVIEW OF LABOUREconomic & Political Weekly EPW may 31, 200855Rawski, Thomas G (2003): ‘Recent Developments in China’s Labour Economy’, Integration Working Paper No 11, ILO, Geneva.Tao, Ran (2006): ‘The Labour Market in the People’s Republic of China: Development and Policy Challenges in Economic Transition’ in Felipe, Jesus and Rana Hasan (eds),Labour Markets in Asia: Issues and Perspectives, Palgrave Macmillan, Basingstoke and New York (for the Asian Develop-ment Bank).Wang, Guanghua and Yuchun Zhu (2006): ‘Township and Village Enterprises and Employment Genera-tion in China’ in Guha-Khasnobis, Basudeb and Ravi Kanbur (eds),Informal Labour Markets and Development, Palgrave Macmillan, Basingstoke and New York (for the World Institute for Devel-opment Economics Research).Xiaohe, Zhang (2007): ‘The Impact of Globalisation and Labour Market Reforms in China’ in Burgess, John and Julia Connell (eds),Globalisation and Work in Asia, Chandos Publishing, Oxford.Appendix 1: Discrepancy between the ‘Adjusted’ and the ‘Unadjusted’ EstimatesThe results of the population census of 2000 suggested that the LFS estimates of China’s labour force and employment for the period 1990-2000 were serious underestimates. Evenfor the subsequent years, the results of the annual population sample survey contin-ued to show the LFS estimates to be under-estimates. All this prompted the National Bureau of Statistics (NBS) to produce new “adjusted” estimates of labour force and em-ployment (total and its distribution between urban and rural areas as well as over three broad sectors – agriculture, industry and serv-ices) for the period beginning with 1990. These “adjusted” estimates, of course, are sig-nificantly higher than the “unadjusted” esti-mates directly available from the LFS. Unfor-tunately, the method of adjustment is not known. And it is the “unadjusted” estimates that provide detailed breakdowns by sector of activity and type of enterprise. We are thus left to speculate on the employment status of the “excess workers”. We know of two major changes that occur-red in the period between 1990 and 2000. The first was the change in the employment sys-tem that spurred growth of non-formal and irregular employment. The second was a pro-gressive relaxation of control on rural-to-ur-ban migration in search of work opportuni-ties. In view of these developments, a plausi-ble explanation for the discrepancy between the “adjusted” and the “unadjusted” estimates that suggests itself is that the LFS failed to cover the migrants from rural areas, who find irregular wage employment in urban enter-prises (e g, casual work in construction, in cleaning and maintenance of premises, in re-tail trade, in catering services, etc) or engage in irregular self-employment (such as street vending, domestic service, etc) in towns and cities. This would be the case if the urban sample in the LFS were drawn from the popu-lation officially registered as urban residents and the rural sample were drawn from the population both officially registered and actually resident in rural areas. This explanation does seem to receive some support from the data presented in Table A1.1. These data, which show the positive deviations of the “adjusted” estimates of employment from the “unadjusted” estimates, highlight one strik-ing fact: the deviation for rural employment steadily declined and that for urban employ-ment steadily increased over time. This is what we would expect to observe if we suppose the LFS to have left out of account the rural mi-grants working in towns and cities. For it is plausible to suppose that, initially, rural mi-grants found work mainly in TVEs or private enterprises located in smaller towns, which would have counted as rural areas, and later began to move to large towns and cities, i e, to proper urban areas. The table suggests, more-over, that migration to large towns and cities (i e, urban areas) really began to grow after 1995, which seems quite plausible since it was around 1995 that restrictions on migration began to be officially relaxed. An analysis of data from the 2000 population census has shown that there were 85 million persons who lived and worked in urban areas but had remained registered as rural residents. More recent estimates suggest that the number of such persons reached 100 million by 2004.30 However, the explanation runs into two dif-ficulties. The first difficulty is that if we accept the explanation, we would also have to accept that the total number of rural migrants was already large in 1990, that it declined till 1995 and that it then increased again. However, it is also noticeable that the number of persons in irregular employment in urban areas appar-ently increased very sharply in the period after 1997, when there was a sharp decline in urban formal employment. This suggests that, at least from 1998 onward, not all those in irregular employment were rural migrants. There is some independent evidence to show that some of the workers, laid off by the state-owned and the collective-owned enterprises, also found irreg-ular employment.31 It seems, therefore, that the annual flow of rural migrants may well have been declining, but irregular employment in urban areas nevertheless kept growing because of large-scale lay-offs by state and collective enterprises. However, it remains unclear why the LFS should have failed to cover the laid-off workers, who obviously are registered urban residents. The second difficulty is apparent from the data on sector-level differences between “ad-justed” and “unadjusted” estimates of employ-ment. These seem to suggest that irregular em-ployment in agriculture has been and remains very substantial (it had declined till 1997 and increased thereafter). This, of course, seems highly improbable. Agriculture is the most im-portant reservoir of surplus workers and this indeed is the basic explanation of migration in search of jobs. The most plausible interpreta-tion is that it is the migrant’s registration status rather than the current sector of work that is being recorded.We, therefore, regard the “adjusted” data on employment in sectors – agriculture, industry and services – as unreliable and do not use them. Our working hypothesis in this paper is that the “excess” workers are essentially rural migrants and (from 1998 onwards) urban laid-off workers who have found irregular employ-ment in towns and cities. Table A1.1: Excess of ‘Adjusted’ Estimates of Employment over ‘Unadjusted’ Estimates(millions) RuralUrbanAgricultureIndustryServicesTotal1990 64.9 15.3 47.9 15.516.8 80.21991 57.5 13.7 41.4 13.8 16 71.21992 53 14.1 39 12.615.9 67.11993 43.2 22.6 37.1 13.115.6 65.81994 41.4 18.3 32.4 1215.4 59.81995 39.9 17 25.1 12.1 19.7 56.91996 37.4 23.9 19.1 17.324.9 61.31997 30.9 30.5 17.4 22.121.9 61.41998 25.9 56.8 19.5 38.324.9 82.71999 20.8 68.2 28.6 38.3 27.9 892000 9.781.326.836.427.8 912001 8.391.4 37.135.728.699.72002 3.295.343.826.329.498.52003 0984820.729.3982004 098.742.320.336.198.72005 0 96.9 35.9 194296.9Source: Author’s estimates from the data available in NBS,China Statistical Yearbook, 2004, 2005 and 2006.Table A2.1: Labour Force, Employment and Unemployment LabourEmployment,AdjustedUnemploy-Urban Force, (millions)mentUnemploy- Adjusted Total Rural Urban Rate (%) ment (millions) Rate(%)1990 653.3 647.5 484.8162.7 0.9 3.41991 660.9654.9488.5166.4 0.9 3.51992 667.8 661.5 491.1 170.4 0.9 3.61993 674.7 668.1 486 182.1 1 3.51994 677.3 670.4 488.2 182.2 1 3.61995 684.8 676.8 490.4 186.4 1.2 4.11996 694 685.8 490 195.8 1.2 41997 704.6694.8490.7204.1 1.4 4.61998 717.3 702.9 490.3 212.6 2 6.31999 724.5 710.5 490 220.5 1.9 62000 736.7 717.6 489.6 228 2.6 7.72001 741 726.9 491 235.9 1.9 5.62002 750.5 734489.6244.4 2.2 6.32003 755.9 739.5 487.9 251.6 2.2 6.12004 762.9 746.7 487.2 259.5 2.1 5.92005 773.3 752.7 484.9 267.8 2.7 7.1The estimated employment of persons from Hong Kong, Macao and Taiwan provinces of China, persons from foreign countries, retired persons temporarily re-employed, persons working part-time and persons working as teachers in schools run by the local people (see Table A2.8 for the estimated number of such persons) is subtracted from total labour force and employment as also from urban employment. Also, for the years 1990-93, some adjustments of the “unadjusted” rural and urban employment had to be made in order to make them consistent with the data on employment by type (see Tables A2.4-A2.7). The urban unemployment rate is estimated by assuming that there is no unemployment in rural areas, i e, all unemployed persons are in urban areas.Source: National Bureau of Statistics,China Statistical Yearbook, 2003, 2004, 2005 and 2006.