Xin Meng PAper

Urban Labor Market Reform

Employment and Unemployment
Economic reform changed incentive systems and encouraged labor
mobility, allowing workers to choose where and whether they wanted
to work. See unemployment rate for urban rural hukou drop between
1980s and early 2000s. Perhaps voluntary
Also though there was a huge influx of rural hukou workers into cities
and their unemployment rate is extremely low. The difference in
employment rates between two groups suggests that the
unemployment of urban hukou workers is also somewhat structural
because mismatch between skills and available jobs.
State vs nonstate sectors: Significant reduction in urban hukou
workers who are still state sector employees. As late as 1991, more
than 97%, in 2008 about 56.8%. The state has held on to large firms
with high capital intensity and operated mainly in the production sector
rather than the service sector. General pattern of the state-sector
reforms has been to shift those who are younger and less educated out
of the state to the private sectors.
Wage Structure and Inequality
Between 1988 and 2009, real annual earnings for urban hukou workers
increased fivefold.
This increase accompanied by dramatic change in wage structure
national administrative system to a more market-oriented one.
Now, returns to education have risen significant, while returns to
experience have fallen returns to college-and-above education have
risen from around 16% in the late 1980s to over 50% by 2003, but
since then returns have slipped slightly, which may be related to the
large influx of graduates due to the 1999 university expansion and an
associated decline in quality.
Rural Urban Migration
Single most important labor market change over the past two
decades
World has never seen such a large-scale human movement
within such a short time, in next few decades, more than 300
million rural hukou workers may move to cities to work.

Large scale movement of workers from the low-productivity

agriculture sector to the high-productivity urban sector is one of
the forces driving Chinas unprecedented growth.
However, rural-urban migration in China remains restricted.
Guest worker system places controls over the type of jobs rural
migrants are allowed to have and the social welfare and social
services to which migrants are entitled.
As a result, migrants do not see long-term futures in cities.
In total, 22% of the rural labor force was working in cities in
2009.
Migrant Employment and Occupation
Migrant employment rates extremely high vis--vis urban hukou
counterparts. 94% vs. 63%.
Few migrants employed in state sector. In 2009, 27% of
employed migrants fall into self-employed category, compared
with 8.4% of urban workers. This gap in part due to
discrimination against migrants in salaried sectors.
Compared to urban hukou counterparts, migrants are younger
and less educated. Overwhelmingly male.
Migrant Wage Growth and Labor Market Discrimination
Migrants have always been at lower end of wage distribution.
Paper finds that during the first decade of 2000s, real earnings
for migrant workers rises in real terms, but at a significantly
slower rate than urban hukou counterparts. Falling behind in
relative terms.
Several conjectures as to why this is: 1) labor supply conditions
for two types of workers is very different, currently 70% of the
population of China has a rural hukou, and of the rural hukou
workforce only 22% are working in urban areas. However,
restrictions placed on rural-urban migrants in terms of job access
prevent them from becoming perfect substitutes for urban hukou
workers. The labor markets for urban hukou workers and
migrant workers are segregated. The potential supply of migrant
workers is significant larger than for urban hukou workers, which
should suppress wage growth for migrant workers. 2) if the
economy adopts a skill-biased technology, demand for labor
should be biased toward highly educated, skilled workers and
hence favor predominantly urban hukou workers. These
elements are all related to the long-standing policy of a ruralurban divide: urban workers are protected from competition from
rural labor supply; they are directly protected so they may obtain
good jobs; and indirectly, they receive better-quality education
and hence are able to reap the rewards from skill-biased
technologies.

Migrants who stay longer do experience a weak narrowing of the

gap in earnings. But policies discouraging migrants from staying
in cities longer not only lower migrants earnings but also
disadvantage the economy by not allowing migrants to reach
their potential productivity peak.

The Future of Chinas Labor Force: Quantity and Quality

OCP and Institutional Impediments to Future Labor Supply
OCP was strictly enforced in many urban areas, but in rural areas
much more lenient. As a result, did not significantly reduce the
rural hukou population, but did significantly reduce the urban
hukou population.
Therefore, over coming decades, new entrants to Chinas labor
force will be predominantly from rural hukou population.
Labor shortages in coastal cities perhaps a reflection of
institutional restrictions on internal migration rather than lack of
absolute numbers of potential workers.
Education
Might it be possible to change education system, so that skill set
of future labor force from rural areas can fit Chinas new
industrial structure?
Current rural-urban divide in education is significant, perhaps a
result of economic reforms dissolving of the rural commune
system and, by extension, rural services. Rural opportunity cost
going to school. Central government did not adequately replace
education provision in rural areas. Expansion in university
enrollment overwhelmingly benefitted urban areas.
Has impt. Implications for future Chinese economic growth
patterns. As economy, grows, it will inevitably improve its
technology, which will require a more educated labor force. If
rural education does not catch up, it will place significant
pressure on the quality of Chinas future labor supply and
generate a mismatch between demand and supply for labor.
This situation may be exacerbated if institutional restrictions on
rural-urban migration are not relaxed fast enough. If rural
education investment increasingly lags behind so that rural
workers cannot fill the more-skilled urban job openings, we may
see a slower urbanization process, an increase in rural
underemployment, and a further widening of the income gap.
The increase in the supply of college graduates has slowed down
the increase in the returns to education, which may indicate an
oversupply of college grads in the short run. However in LR, this
increase in the supply of skilled workers might be preparing
China for the upgrading of industries along the value-added
chain. Nonetheless, the shrinking urban hukou population

indicates the the key to Chinas future growth will be how fast
China narrows the rural-urban education divide.
Conclusion
China should adopt labor market reforms on all fronts to enable a
better utilization of its abundant resources and a smooth transition
to a more skill-intensive economies: should reduce rrestrictions on
access of rural migrants to cities and also adjust its educational
investment in rural areas to increase the skill level of rural workers.
Without changes, China may observe a continued or even faster
increase in earnings for urban hukou holders in the next 10-20
years, but the rural urban income divide could become very large.

Hongbin Li Paper End of Cheap Chinese Labor

Cheap labor has played a central role in Chinese model, which has
relied on expanded participation in world trade as main driver of
growth.
In early 1980s, Chinas wage was only 3% of the average U.S. wage
and it was also low relative to productivity.
Wages have risen significantly since economic reforms were put in
place. Chinas wages also increased faster than productivity since the
late 1990s, suggesting that Chinese labor is becoming more expensive
in this sense too.
Rising Wages in China

Little wage growth throughout country until mid- to late-1990s.

For instance, the annual real wage of a Chinese urban worker
increased only slightly from $1004 in 1976 to $1026 in 1997.
This growth rate of Chinas urban wages is significantly lower
than Chinas annual real growth rate of 4% in these two decades.
Wage growth picks up in steam in late 1990s. From 1998 to
2010, the average annual growth rate of real wages was 13.8%,
exceeding the real GDP growth rate of 12.7%.
Paper finds that wage growth is not confined to certain sectors
and wages are increasing for Chinas workers at all skill levels
and in various geographic regions

Some conflicting info here: argues that migrant workers wages

tracks with low-skilled urban workers.

Wages versus Productivity

Must compare growth rate of wages to labor productivity to see if

Chinese labor is becoming more expensive.
To calc gross labor productivity, must deduct the growth rate of
the labor force from the growth rate of real GDP
From 1982 to 1997, Chinas GDP increased in real terms by 5.5%,
and the labor force grew by 1.9%, implying labor productivity
growth of 3.6% per year. This figure almost triples the real wage
growth of 1.3% per year during that period, suggesting that
Chinese labor was becoming cheaper relative to productivity
during this period.
Since 1997 though, wages have increased much more quickly
than productivity. From 1997-2010, Chinas GDP in real terms
increased by 12.7% annually where as labor force growth
decreased to only 1.4%, implying an annual growth rate of 11.3%
for gross labor productivity. This is lower than the real wage
growth for this period of 13.8%. Chinese labor is becoming more
expensive.
Potential Reasons for Rising Wages
Institutional Reforms
Economic reforms meant that wages could begin to reflect
workers productivity. Examples: internal pay incentive system
within SOEs.
External labor market established when many SOEs are
privatized and private firms legalized.
Taken as a whole, these reforms established an external labor
market that helped reallocate workers to productive uses and
helped link wages more closely to productivity.
Demographic Transition and Labor Shortage
Experienced a very rapid and significant demographic transition
from high to low birthrates since late 1970s due to OCP.
This rapid shift created a demographic dividend: a
disproportionate share of the population is in its prime working
years, with relatively few children or elderly. As Chinese baby
boomers entered the labor market, Chinas labor forced swelled
to almost one billion in 2011. The sharply declining fertility of
the baby boomers then leads to a low young dependency ratio
or a large proportion of working-age people. A large proportion
in the work force and low dependency ratio all tend to be
accompanied by a high savings rate, abundant labor, and

abundant working time for labor, which are beneficial for

economic growth.
But Chinas labor force growth has been slowing down.
Coinciding with the faster wage growth after 1997, the growth
rate of Chinas labor force dropped from 1.9% before 1997 to
1.4% since 1997, suggesting that the declining labor force
growth could be one of the reasons behind the fast wage growth
in the last decade.
Without an upward shift of the birth rate, Chinas working
population will decrease significantly from its current level of
about 1 billion to 696 million by 2050.
This will cause labor shortages and help push wages up further.

Slowing Down of Structural Changes

Argues that migration of rural workers to urban areas in recent
decades has helped keep wages low in urban areas.
However this is changing because the growth rate of migrant
workers is slowing down. This is exacerbated too by the major
barriers to increasing migration from rural areas. Those who can
migrate at the lowest cost are already doing so.
Argues that the marginal cost of migration is rising as fewer
young rural laborers become available because of drying up of
demographic dividend. The marginal migrant worker will
become older and have a higher MC of migration. Migrants are
choosing to stay closer to home, which helps reduce migration
costs.
Conclusion
Changes since the late 1990s, including institutional reforms in Chinas
labor markets and demographic transition that have reduced what
used to be a huge amount of slack in labor supply, the underpricing of
Chinese labor appears to be coming to an end. Wages are rising faster
than labor productivity, particularly in labor-intensive exporting
industries, which will likely move out of China.
Authors argue that the end of cheap labor does not have to mean the
end of economic growth. Aggregate labor productivity has been
increasing at a rapid clip (11.3 percent per year for the decade ending
in 2010) and human capital, at least measured in quantity, has risen
dramatically.