Chinese Research Perspectives on Population and Labor, Volume 3 : Policy Changes for the Goals Of 2020 [1 ed.] 9789004342156, 9789004342149

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Chinese Research Perspectives on Population and Labor, Volume 3

Chinese Research Perspectives on Population and Labor International Series Advisors Cai Fang, Kam Wing Chan, and William Lavely

VOLUME 3

The titles published in this series are listed at brill.com/crpo

Chinese Research Perspectives on Population and Labor, Volume 3 Policy Changes for the Goals of 2020 Chief Editor

Cai Fang Associate Editor

Wang Meiyan

LEIDEN | BOSTON

This book is the result of a co-publication agreement between Social Sciences Academic Press and Koninklijke Brill NV. These articles were selected and translated into English from the original 《中国人 口与劳动问题报告 2014 》(Zhongguo renkou yu laodong wenti baogao 2014) with financial support from the Innovation Project of the Chinese Academy of Social Sciences.

Typeface for the Latin, Greek, and Cyrillic scripts: “Brill”. See and download: brill.com/brill-typeface. isSn 2212-7518 isbn 978-90-04-34214-9 (hardback) isbn 978-90-04-34215-6 (e-book) Copyright 2017 by Koninklijke Brill NV, Leiden, The Netherlands. Koninklijke Brill NV incorporates the imprints Brill, Brill Hes & De Graaf, Brill Nijhoff, Brill Rodopi and Hotei Publishing. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill NV provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, MA 01923, USA. Fees are subject to change. This book is printed on acid-free paper and produced in a sustainable manner.

Contents List of Figures and Tables viii

Part 1 Population, Employment, and Income Distribution 1 Monitoring Survey Report on Migrant Workers in 2013 3 Household Survey Office, National Bureau of Statistics 1 Size of the Migrant Worker Population 3 2 Distribution of the Migrant Worker Population by Destination of Work 5 3 The Employment Situation Concerning the Migrant Workers 7 4 Income and Consumption of Outgoing Migrant Workers 10 5 The Living Arrangements of Outgoing Migrant Workers 12 6 The Situation Concerning Rights and Benefits Protection for Migrant Workers 15 7 The Characteristics of New-Generation Migrant Workers 18

Part 2 Transition from the Demographic Dividend to the Reform Dividend 2 The Impact of the “Reform Dividend” on China’s Potential Growth Rates 23 Cai Fang and Lu Yang 1 Introduction 23 2 The Economic Basis for the Reform Dividend 26 3 The Growth Effect of the “Reform Dividend” 27 4 Establishing the Priority Areas of Reform 37 3 The Benefits of Comprehensively Deepening Household Registration System Reform 46 Du Yang, Cai Fang, Qu Xiaobo, and Cheng Jie 1 The Substance of Household Registration System Reform 46 2 How Deepening Household Registration System Reform Can Bring Growth Dividends 49

vi

CONTENTS

3

Empirical Analysis of the Benefits of Household Registration System Reform 52 4 How Much Dividend Can Household Registration System Reform Bring? 58 5 Conclusion 65 4 Extending Compulsory Education: Accumulating Human Capital for China’s Transition to the High-Income Stage 69 Du Yang 1 Greater Human Capital Accumulation Needed to Escape the MiddleIncome Trap 70 2 Extending Compulsory Education is a Natural Continuation of the Educational Development Strategy 78 3 It is Feasible to Make Senior Middle School Education Compulsory during the Period of the “13th Five Year Plan” 80 4 The Timeline and Roadmap for Extending Compulsory Education 82

Part 3 Building a Better Social Security Network 5 The Urban and Rural Old-Age and Medical Insurance Systems: Current State, Challenges, and Countermeasures 89 Cai Fang and Wang Meiyan 1 Introduction 89 2 The Current State of China’s Urban Old-Age and Medical Insurance Systems 90 3 The Current State of China’s Rural Old-Age and Medical Insurance Systems 93 4 Sustainability Challenges Faced by the Urban and Rural Old-Age and Medical Insurance Systems 97 5 Policies to Optimize the Old-Age and Medical Insurance Systems: Debates, Suggestions, and Trends 101 6 Conclusion 105 6 An Investigation on Equal Access to Basic Public Services for Rural Migrants 107 Gao Wenshu and Cheng Jie 1 New Developments in Providing Equal Access to Basic Public Services 108

CONTENTS

2 3

vii

Problems and Challenges in Providing Equal Access to Public Services 113 Suggestions to Accelerate the Provision of Equal Access to Basic Public Services 117

Part 4 Promoting the Development of Labor Market Institutions 7 Ushering in the Long-Awaited: Starting with the Disclosure of the Surveyed Unemployment Rate 125 Cai Fang 1 Facts Concerning the Unemployment Rate and Clarifying Some Misperceptions 125 2 Separating Developmental Phenomena from Cyclical Phenomena: An Observation of China’s Labor Market 133 3 Understanding the New Norm of China’s Economy from the Current State of the Labor Market 144 4 The Reform Dividend: Increasing Labor Supply to Raise Potential Growth Rates 147 8 Labor Relations in China: Current State, Problems, and Policy Suggestions 154 Zhou Xiaoguang and Wang Meiyan 1 Introduction 154 2 The Current State of China’s Labor Relations 155 3 Changes in the State of Labor Relations: Causes and Problems 170 4 Developmental Trends and Policy Suggestions 191 Index 195

List of Figures and Tables Figures 1.1 1.2 1.3 1.4 1.5 2.1 2.2 2.3 2.4 2.5 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 7.1 7.2 7.3 7.4 7.5

Growth rates of total migrant worker and outgoing migrant worker populations (2010–2013) 4 Composition of the migrant worker population by region in 2013 5 Average monthly incomes and growth rates for outgoing migrant workers (2010–2013) 11 Proportions of migrant workers offered free accommodation or housing allowance (2012–2013) 14 Situation concerning rights and benefits protection for migrant workers by region in 2013 18 China’s long-term potential growth rate under different TFRs 29 Potential economic growth rate generated by raising the labor force participation rate (baseline scenario: TFR=1.6) 31 The impact of raising TFP on China’s long-term potential growth rates (baseline scenario: TFR=1.6) 32 The impact of raising human capital on China’s potential growth rates (baseline scenario TFR=1.6) 34 The impact of a combination of policies on China’s long-term potential growth rate (baseline scenario TFR=1.6) 36 Distribution of rural labor resources in 2009 60 TFP and capital-output ratio and the migrant worker ratio 62 Employment distribution of non-agricultural jobs by job-quality decile 74 Demands on human capital by job-quality decile 75 Returns to senior middle school education and college education and beyond relative to nine years of compulsory education 76 Average number of years spent in education by the population aged between 15 and 64 79 Population of potential senior middle school students (15–17 years old) as a proportion of total population 81 Changes in the senior middle school gross enrollment rate 84 Changing trends in some urban unemployment rate indicators 126 Recalculation of the sectoral distribution of labor 136 Composition of urban employment and its changes 138 Ratio of job vacancies to job seekers by educational attainment 141 Relationship between the PMI output index and employment index 143

list of figures and tables

7.6 7.7 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 8.11

ix

Potential and actual economic growth rates of the Chinese economy 146 Simulation of the reform dividend 150 Number and incidence rate of labor dispute cases from 1999–2013 157 Causes of labor disputes 158 Ways to manage labor disputes cases 159 Labor dispute resolution outcomes 160 Year in which labor disputes were initiated 161 Distribution of mass incidents triggered by labor conflict over time 166 The scale of mass incidents triggered by labor conflict 166 Causes of mass incidents triggered by labor conflict 167 Regional distribution of mass incidents triggered by labor conflict 168 Distribution of parties involved in mass incidents triggered by labor conflict by ownership structure 169 Methods of managing mass incidents triggered by labor conflict 170

Tables 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11

The size of the migrant worker population (2008–2013) 4 Numbers and composition of outgoing migrant workers by region in 2013 6 Numbers and composition of outgoing migrant workers flowing into the various types of cities in 2013 7 Proportions of migrant workers who received skills training 8 Sectoral distribution of migrant workers in 2013 9 Composition of migrant workers by nature of employment and sectoral distribution in 2013 9 Composition of migrant workers by region and sectoral distribution in 2013 10 Average monthly incomes of migrant workers by sector in 2013 11 Composition of outgoing migrant workers by accommodation type in 2013 12 Composition of outgoing migrant workers by city and accommodation type in 2013 13 Average monthly living and housing expenses of outgoing migrant workers (2012–2013) 14

x 1.12 1.13 1.14 1.15 3.1 3.2 3.3 3.4 4.1 5.1 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 8.11 8.12 8.13 8.14 8.15

list of figures and tables

Duration and intensity of work for outgoing migrant workers (2012–2013) 15 Situation concerning migrant workers signing labor contracts in 2013 16 Social insurance participation rates of migrant workers in 2012 and 2013 17 Social insurance participation rates of migrant workers by sector 18 Descriptive statistics of the main variables 56 Main regression results 58 Sources of the change in average weekly urban working hours 2005–2010 63 Net benefit of comprehensive household registration system reform 65 The contribution of the reallocation of labor to economic growth 73 Usage rates of “new rural cooperative scheme” funds 95 Main reasons for initiating labor disputes 162 The outcomes of labor dispute resolution 163 Degree of satisfaction with the outcome of labor dispute resolution 163 Most important reason for being dissatisfied 163 Comparison of the basic characteristics of workers who had initiated labor disputes and those who had not 165 Workers’ understanding of the Labor Contract Law 176 Workers’ understanding of the Labor Contract Law across different cities 178 Glossary of variables used in the model 179 Regression equation (Generalized Least Squares) of the Z value of workers’ understanding of the Labor Contract Law 181 Ratios of workers who had signed labor contracts and those who had not 183 Ratios of workers signing the different types of labor contracts 184 Ratios of workers signing labor contracts of different durations 185 Hourly wages of workers who had signed labor contracts and those who had not 186 Workers’ evaluations of their employers’ compliance with the Labor Contract Law 186 Ordered logit model for workers’ evaluations of their employers’ compliance with the Labor Contract Law 188

Part 1 Population, Employment, and Income Distribution

∵

CHAPTER 1

Monitoring Survey Report on Migrant Workers in 2013 Household Survey Office, National Bureau of Statistics According to a rural labor survey conducted in 235,000 villages across 31 provinces by the nationwide monitoring survey report on migrant workers, the total migrant worker and outgoing migrant worker populations continued to grow in 2013, albeit at falling rates. Although average monthly incomes were still rising fairly quickly, the financial burden of living away from home was also growing for these workers, and more needs to be done to protect their rights. 1

Size of the Migrant Worker Population

1.1 Migrant Workers Comprised 49.7% of the Total Rural Workforce The size of the migrant worker (nongmingong) population hit 268.94 million in 2013, up by 6.33 million or 2.4% from the previous year, and they comprised 49.7% of the rural workforce. Of these, 125.28 million were new-generation migrant workers born in 1980 and after, comprising 46.6% of the total migrant worker population and 65.5% of the rural workforce born in the same period. 1.2 61.8% were Outgoing Migrant Workers There were 166.1 million outgoing migrant workers (rural workers working outside the place of their household registration [hukou] for at least half a year), up by 2.74 million from the previous year, or an increase of 1.7%, and comprising 61.8% of the total migrant worker population. The local migrant worker population (those working in the place of their household registration) was 102.84 million, an increase of 3.59 million or 3.6%, and comprising 38.2% of the total migrant worker population. 130.85 million or 78.8% of outgoing migrant workers left on their own to work outside, while 35.23 million or 21.2% left with their entire families (Table 1.1).

*  Authors: Yang Junxiong and Hao Yanhong.

© koninklijke brill nv, leiden, ���7 | doi ��.��63/9789004342156_002

4

household survey office, national bureau of statistics

Table 1.1

The size of the migrant worker population (2008–2013)

Unit: million

Indicators

2008

2009

2010

2011

2012

2013

Total migrant worker population I. Outgoing migrant workers 1) who left on their own 2) who left with their families II. Local migrant workers

225.42

229.78

242.23

252.78

262.61

268.94

140.41

145.33

153.35

158.63

163.36

166.10

111.82

115.67

122.64

125.84

129.61

130.85

28.59

29.66

30.71

32.79

33.75

35.25

85.01

84.45

88.88

94.15

99.25

102.84

(%) 6

Rural workers

Migrant rural workers

5 4 3 2 1 0

2010 2011 2012 2013 (Year) Figure 1.1 Growth rates of total migrant worker and outgoing migrant worker populations (2010–2013).

The Growth Rates of the Total Migrant Worker and the Outgoing Migrant Worker Populations Continued to Fall The total migrant worker population grew 5.4% in 2010, 4.4% in 2011, 3.9% in 2012, and 2.4% in 2013, with the growth rates in 2011, 2012, and 2013 decreasing by 1.0, 0.5, and 1.5 percentage points respectively from the previous year. The outgoing migrant worker population grew 5.5% in 2010, 3.4% in 2011, 3.0% in 2012, and 1.7% in 2013, with growth rates in 2011, 2012, and 2013 decreasing by 2.1, 0.4, and 1.3 percentage points respectively (Figure 1.1). 1.3

monitoring survey report on migrant workers in 2013

Western region 26.4%

5

Eastern region 38.9%

Central region 34.7%

Figure 1.2 Composition of the migrant worker population by region in 2013.

57% of the Rural Workforce in the Eastern Region were Migrant Workers In terms of the place of origin, 104.54 million migrant workers came from the eastern region and accounted for 57% of the rural workforce in that region and 38.9% of the total migrant worker population nationwide; 93.35 million originated from the central region and comprised 49.2% of the rural workforce in that region and 34.7% of the total migrant worker population nationwide; 71.05 million were from the western region, and they comprised 42.4% of the rural workforce in that region and 26.4% of the total migrant worker population nationwide (Figure 1.2). 1.4

2

Distribution of the Migrant Worker Population by Destination of Work

46.6% of Outgoing Migrant Workers Worked outside Their Home Province 77.39 million outgoing migrant workers left their home province to work while 88.71 million found work within their home province. Migrant workers from the eastern region mainly worked within their home province while those from the central and western regions mainly found work in other provinces (Table 1.2). 2.1

6 Table 1.2

household survey office, national bureau of statistics Numbers and composition of outgoing migrant workers by region in 2013

Indicator

Eastern region Central region Western region Total

Numbers (million)

Composition (%)

Outgoing Working migrant outside workers home province

Working within home province

Outgoing migrant workers

Working Working outside within home home province province

 49.36  64.24  52.50 166.10

40.54 24.07 24.10 88.71

100.0 100.0 100.0 100.0

17.9 62.5 54.1 46.6

 8.82 40.17 28.40 77.39

82.1 37.5 45.9 53.4

Inter-Provincial Migrant Worker Flows were Mainly from the Central and Western Regions to the Eastern Region The inter-provincial outflow of migrant workers from the eastern region was 8.82 million, while 72.6% were moving within the eastern provinces; the interprovincial outflow of migrant workers from the central region was 40.17 million, with 89.9% flowing into the eastern region; the inter-provincial outflow of migrant workers from the western region was 28.40 million, with 82.7% flowing into the eastern region. Of the migrant workers who headed to other provinces to work, 66.02 million or 85.3% went to the eastern region, while 10.68 million or 13.8% went to the central and western regions. 2.2

Inter-Provincial Flows of Migrant Workers Went Mainly into Big or Medium-Sized Cities Of the migrant workers who headed to other provinces to work, 59.28 million or 76.6% worked in big or medium-sized cities at the prefectural level or higher, of which 11.15 million or 14.4% worked in municipalities (directly controlled by the central government); 17.49 million or 22.6% worked in provincial capitals; and 30.64 million or 39.6% worked in prefectural cities (including sub-provincial cities) (Table 1.3). 2.3

Intra-Provincial Flows of Migrant Workers Went Mainly into Small Towns and Cities 88.71 million or 53.4% of outgoing migrant workers worked in their home provinces, of which 2.95 million or 3.3% worked in municipalities, 19.08 million 2.4

7

monitoring survey report on migrant workers in 2013 Table 1.3

Numbers and composition of outgoing migrant workers flowing into the various types of cities in 2013 Unit: million

Indicator

Total

Municipalities Provincial cities

Prefectural cities

Small towns and cities

Number of outgoing migrant workers Of which: Inter-provincial flow Intra-provincial flow Composition of outgoing migrant workers (%) Of which: Inter-provincial flow (%) Intra-provincial flow (%)

166.10

14.10

36.57

55.53

59.90

 77.39

11.15

17.49

30.64

18.11

 88.71

 2.95

19.08

24.89

41.79

100.0

 8.5

22.0

33.4

36.1

100.0

14.4

22.6

39.6

23.4

100.0

 3.3

21.5

28.1

47.1

or 21.5% worked in provincial capitals, 24.89 million or 28.1% worked in prefectural cities, and 41.79 million or 47.1% worked in small towns and cities (Table 1.3) 3

The Employment Situation Concerning the Migrant Workers

Sustained Increase in the Number of Migrant Workers Receiving Skills Training 32.7% of migrant workers received skills training in 2013, an increase of 1.9 percentage points over the previous year. Among them, 29.9% received nonagricultural skills training while 9.3% received agricultural skills training. 6.4% received both agricultural and non-agricultural skills training. In terms of age, a significantly higher proportion of migrant workers aged 50 and below had received training compared to those above the age of 50 (Table 1.4). 3.1

8 Table 1.4

household survey office, national bureau of statistics Proportions of migrant workers who received skills training

Indicator

20 years old and below 21–30 31–40 41–50 Above 50 years old Total

Unit: %

Received agricultural skills training

Received non-agricultural skills training

Received skills training

2012

2013

2012

2013

2012

2013

 4.0  6.2 11.0 14.9 14.5 10.7

 5.0  5.5  9.1 12.7 12.4  9.3

22.3 31.6 26.7 23.1 16.9 25.6

29.9 34.6 31.8 27.8 21.2 29.9

24.0 34.0 32.0 30.5 25.5 30.8

31.0 35.9 34.1 32.1 25.9 32.7

Outgoing Migrant Workers were Mainly Working in the Industrial Sector, while a Higher Proportion of Local Migrant Workers were Working in the Service Sector 61.8% of outgoing migrant workers worked in the industrial sector, of which 35% were in manufacturing and 23.5% were in construction; 48.6% of local migrant workers worked in the service sector, of which 14.8% were in wholesale and retail while 11.9% were engaged in providing residential services, repair services, and other services (Table 1.5). 3.2

Migrant Workers under Employment Mainly Worked in the Industrial Sector while Self-Employed Migrant Workers Mainly Worked in the Service Sector 83.5% of migrant workers worked under employment while 16.5% were selfemployed. Among those under employment, 65% worked in the industrial sector with 35.8% in manufacturing and 25.6% in construction. 82.1% of selfemployed migrant workers worked in the service sector, with 39.6% in wholesale and retail, 15.1% in transportation, shipping, warehousing, and postal services, 13.1% in residential services, repair services, and other services, and 8.5% in accommodation and Food and Beverage (F&B) (Table 1.6). 3.3

9

monitoring survey report on migrant workers in 2013 Table 1.5

Sectoral distribution of migrant workers in 2013

Unit: %

Indicator

Total

Outgoing migrant Local migrant workers workers

Manufacturing Construction Wholesale and retail Transportation, shipping, warehousing, and postal services Accommodation and F&B Residential, repair, and other services Others

31.4 22.2 11.3  6.3

35.0 23.5  8.1  4.6

27.5 20.8 14.8  8.1

 5.9 10.6 12.3

 7.0  9.4 12.4

 4.7 11.9 12.2

Table 1.6

Composition of migrant workers by nature of employment and sectoral distribution in 2013 Unit: %

Indicator

Employment

Self-employment

Manufacturing Construction Wholesale and retail Transportation, shipping, warehousing, and postal services Accommodation and F&B Residential, repair, and other services Others

35.8 25.6  5.5  4.5

10.7  5.9 39.6 15.1

 5.3 10.0 13.3

 8.5 13.1  7.1

Migrant Workers Working in the Eastern Region were Mainly Engaged in Manufacturing, while Comparable Proportions were Engaged in Construction and Manufacturing in the Central Region, and Those Working in the Western Region were Mainly Engaged in Construction 43.1% of migrant workers working in the eastern region were engaged in manufacturing, while 17.5% worked in construction; in the central region, 28.5% worked in construction and 20.1% in manufacturing; while in the western 3.4

10

household survey office, national bureau of statistics

Table 1.7

Composition of migrant workers by region and sectoral distribution in 2013

Unit: %

Indicator

Eastern region

Central region

Western region

Manufacturing Construction Wholesale and retail Transportation, shipping, warehousing, and postal services Accommodation and F&B Residential, repair, and other services Others

43.1 17.5 10.2  5.3

20.1 28.5 12.9  7.3

13.2 30.0 13.2  8.2

 5.0  9.9  9.0

 6.2 11.1 13.9

 8.1 12.2 15.1

region, 30% worked in construction, 13.2% in manufacturing, and 13.2% in wholesale and retail (Table 1.7). 4

Income and Consumption of Outgoing Migrant Workers

4.1 Average Monthly Income Continues to Grow Relatively Quickly The average monthly income of migrant workers heading out to work was 2,609 yuan in 2013, an increase of 319 yuan or 13.9% over the previous year. This figure has been growing by double digits for the last four years (Figure 1.3). Those Working in Transportation, Shipping, Warehousing, and Postal Services had the Highest Income, while the Incomes of Manufacturing Workers Grew the Fastest The average monthly income of migrant workers working in transportation, shipping, warehousing, and postal services was 3,133 yuan, an increase of 398 yuan or 14.6% over the previous year; while those in manufacturing had an average monthly income of 2,537 yuan, up by 407 yuan or 19.1% from the previous year (Table 1.8). 4.2

4.3 Huge Increase in Living Expenses The monthly living expenses of outgoing migrant workers was 892 yuan per capita, an increase of 159 yuan or 21.7% over the previous year and 7.8 percentage points higher than the growth in wages. Those working within their home

11

monitoring survey report on migrant workers in 2013 Average monthly income

3000

(Yuan per capita)

2500 2000 1500

19.3

Growth rate

25 (%)

2609

21.2

2290

2049 1690

20 15

13.9

11.8

10

1000

5

500 0

2010

2011

2012

2013

0 (Year)

Figure 1.3 Average monthly incomes and growth rates for outgoing migrant workers (2010–2013).

Table 1.8

Average monthly incomes of migrant workers by sector in 2013

Indicator

Average monthly Increase over income (yuan per the previous capita) year (yuan)

Growth (%)

Manufacturing Construction Wholesale and retail Transportation, shipping, warehousing, and postal services Accommodation and F&B Residential, repair, and other services

2,537 2,965 2,432

407 311 190

19.1 11.7  8.5

3,133 2,366 2,297

398 266 239

14.6 12.6 11.6

province spent an average of 830 yuan per month, an increase of 21.2% over the previous year, while those working outside their home province spent an average of 965 yuan per month, an increase of 22.5%. The Living Expenses of those Working in the Big Cities Grew the Fastest When comparing the living expenses of migrant workers working in different types of cities, we found that those working in the municipalities and provincial capitals spent an average of 972 yuan per month, an increase of 23.4% 4.4

12

household survey office, national bureau of statistics

over the previous year; while those working in the prefectural cities spent an average of 911 yuan per month, an increase of 20.1%. Those working in small towns and cities spent an average of 807 per month, an increase of 21.5%. 5

The Living Arrangements of Outgoing Migrant Workers

5.1 Mainly Living in Rented Accommodation 28.6% of outgoing migrant workers lived in dormitories provided by their work units, while 11.9% lived in work sheds on worksites. 5.8% were housed at sites of production and operation, while 18.5% co-rented accommodation with others, and 18.2% rented accommodation on their own. 13% worked outside but commuted home daily, while 0.9% bought their own home at their place of work. 36.7% of migrant workers were living in rented accommodation, up by 3.5 percentage points from the previous year, and this was the dominant living arrangement for such workers. The proportion of migrant workers living in dormitories provided by work units dropped 3.7 percentage points when compared with the previous year (Table 1.9). The Bigger the Size of the City, the Greater the Proportion of Migrant Workers Living in Rented Accommodation Looking at the living arrangements of migrant workers working in different types of cities, we found that 42% of those working in the municipalities and 5.2

Table 1.9

Composition of outgoing migrant workers by accommodation type in 2013

Unit: %

Indicator

2008

2009

2010

2011

2012

2013

Work dormitories Work sheds on worksites Sites of production and operation Co-rented accommodation Individually-rented accommodation Bought a house at the place of work Commuted home daily Others

35.1 10.0  6.8 16.7

33.9 10.3  7.6 17.5

33.8 10.7  7.5 18.0

32.4 10.2  5.9 19.3

32.3 10.4  6.1 19.7

28.6 11.9  5.8 18.5

18.8

17.1

16.0

14.3

13.5

18.2

 0.9  8.5  3.2

 0.8  9.3  3.5

 0.9  9.6  3.5

 0.7 13.2  4.0

 0.6 13.8  3.6

 0.9 13.0  3.1

13

monitoring survey report on migrant workers in 2013

provincial capitals lived in rented accommodation, while this was 40.4% for those working in the prefectural cities. The proportion of those working and living in rented accommodation in the small towns and cities was 28.8%. The bigger the size of the city in which they worked, the more dependent migrant workers were on rented accommodation (Table 1.10). Declining Proportions of Migrant Workers Offered Free Accommodation or Housing Allowance by Employer or Work Unit 46.9% of migrant workers were offered free accommodation by their employers or work units, a decrease of 2.6 percentage points over the previous year; 8.2% of migrant workers obtained housing allowance from their employers or work units, down by 1 percentage point from the previous year (Figure 1.4). 5.3

5.4 Significant Increase in Housing Expenditure Outgoing migrant workers spent an average of 453 yuan per month on accommodation, an increase of 27% over the previous year, 5.3 percentage points more than the increase in living expenses. Housing expenditure accounted for 50.7% of total living expenses, an increase of 2.1 percentage points over the previous year. When looking at the different types of cities, we found that migrant workers working in the municipalities and provincial capitals spent 51.5% of their total living expenses on housing, an increase of 1.2 percentage points over the previous year, while those in prefectural cities spent 47.5% of Table 1.10 Composition of outgoing migrant workers by city and accommodation type in 2013 Unit: % Indicator

Municipalities and provincial capitals

Prefectural cities

Small towns and cities

Work dormitories Work sheds on worksites Sites of production and operation Co-rented accommodation Individually-rented accommodation Bought a house at the place of work Commuted home daily Others

30.4 14.9  5.9 21.6 20.4  0.7  3.2  3.0

33.0 10.9  5.8 20.5 19.9  0.9  6.4  2.7

23.0 10.4  5.6 13.9 14.9  1.2 27.3  3.8

14

household survey office, national bureau of statistics

(%) 60 50

2012 49.5

2013 46.9

41.3

40

44.9

30 20 9.2

10 0

Offered free accommodation

8.2

Not offered free accommodation but offered housing allowance

Offered neither free accommodation nor housing allowance Figure 1.4 Proportions of migrant workers offered free accommodation or housing allowance (2012–2013).

Table 1.11 Average monthly living and housing expenses of outgoing migrant workers (2012–2013) Indicator

Municipalities and provincial capitals Prefectural cities Small towns and cities Total

Living expenses (yuan per capita) 2012

2013

Housing expenses (yuan per capita) 2012 2013

788 758 664 733

972 911 807 892

397 322 354 356

500 432 430 453

Housing expenses as a ratio of living expenses (%) 2012 2013

50.3 42.5 53.3 48.6

51.5 47.5 53.2 50.7

their total living expenses on housing, an increase of five percentage points over the previous year. Those in small towns and cities spent 53.2% of their total living expenses on housing, basically remaining the same as the previous year (Table 1.11).

15

monitoring survey report on migrant workers in 2013

6

The Situation Concerning Rights and Benefits Protection for Migrant Workers

6.1 Overtime Work Relatively Common Outgoing migrant workers worked an average of 9.9 months per year, 25.2 days per month, and 8.8 hours daily. 41% of migrant workers worked for more than 8 hours a day, and 84.7% worked for more than 44 hours per week. The proportion of outgoing migrant workers who worked for more than 8 hours a day grew 1.4 percentage points over the previous year (Table 1.12). 6.2 Incidences of Unpaid Wages on the Rise 1% of migrant workers were owed wages in 2013, an increase of half a percentage point over the previous year. 0.8% of outgoing migrant workers were owed wages in 2013, an increase of 0.3 percentage points over the previous year; while 1.2% of local migrant workers were owed wages in the same year, up by 0.7 percentage points from the previous year. 6.3 Decreased Proportion of Migrant Workers Signing Labor Contracts 38.1% of migrant workers signed a labor contract with their employers or work units in 2013, a decrease of 2.8 percentage points over the previous year. The proportion of outgoing migrant workers who had signed a labor contract was 41.3%, decreasing by 2.6 percentage points over the previous year; while 33.2% of local migrant workers did so, decreasing by 3.5 percentage points over the previous year. The proportion of local migrant workers signing a labor contract with their employers or work units was significantly lower than that of outgoing migrant workers, by 8.1 percentage points (Table 1.13). Table 1.12 Duration and intensity of work for outgoing migrant workers (2012–2013) Indicator

2010

2011

2012

2013

Duration of work in a year (months) Average work days per month (days) Average working hours per day (hours) Ratio of workers working more than 8 hours a day (%) Ratio of workers working more than 44 hours a week (%)

9.8 26.2 9.0

9.8 25.4 8.8

9.9 25.3 8.7

9.9 25.2 8.8

49.3

42.4

39.6

41.0

90.7

84.5

84.4

84.7

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household survey office, national bureau of statistics

Table 1.13 Situation concerning migrant workers signing labor contracts in 2013 Indicator

Total migrant worker population in 2013 Of which: Outgoing migrant workers Local migrant workers Total migrant worker population in 2012 Of which: Outgoing migrant workers Local migrant workers

Unit: %

Labor contract with no fixed duration

Labor contract of less than one year

Labor contract of one year or longer

No labor contract

13.7

3.2

21.2

61.9

14.3

3.9

23.2

58.7

12.9

2.1

18.2

66.8

16.7

3.0

21.2

59.1

17.8 15.1

3.9 1.9

22.2 19.7

56.1 63.3

Proportion of Outgoing Migrant Workers with Insurance Coverage Increased while Proportion of Local Migrant Workers with Insurance Coverage Decreased The participation rates of migrant workers in various forms of social insurance in 2013 were as follows: work injury insurance 25%, medical insurance 17.1%, old-age insurance 16.2%, unemployment insurance 9.8%, and maternity insurance 7.2%. The proportion of outgoing migrant workers participating in the “five types of insurance” (wuxian) had all increased but as local migrant worker numbers in the central and western regions grew, the proportion of local migrant workers participating in the “five types of insurance” had all dipped (Table 1.14). 6.4

Highest Social Insurance Participation Rates among Migrant Workers in Manufacturing Looking at the different sectors, employers or work units in manufacturing fared the best in terms of contributing to social insurance for migrant workers. The social insurance participation rates of migrant workers in manufacturing were as follows: old-age insurance 20.9%, work injury insurance 32.8%, medical insurance 21.7%, unemployment insurance 12.2%, and maternity insurance 6.5

17

monitoring survey report on migrant workers in 2013 Table 1.14 Social insurance participation rates of migrant workers in 2012 and 2013 Indicator

Total social insurance participation rates in 2013 Of which: Outgoing migrant workers Local migrant workers Total social insurance participation rates in 2012 Of which: Outgoing migrant workers Local migrant workers

Unit: %

Old-Age insurance

Work injury Medical Unemployment insurance insurance insurance

16.2

25.0

17.1

 9.8

7.2

15.7 16.9

28.5 20.1

17.6 16.4

 9.1 10.6

6.6 7.9

16.6

23.1

17.9

10.1

7.3

14.3 20.1

24.0 21.8

16.9 19.4

 8.4

6.1 9.1

12.5

Maternity insurance

8.8%. Employers or work units in construction fared the worst in contributing to social insurance for migrant workers. Migrant workers engaged in construction had the following social insurance participation rates: old-age insurance 3.7%, work injury insurance 14.4%, medical insurance 5.2%, unemployment insurance 2%, and maternity insurance 1.3% (Table 1.15). Better Rights and Benefits Protection for Migrant Workers in the Eastern Compared to the Central and Western Regions When compared with migrant workers working in the central and western regions, the proportion of those working in the eastern region with unpaid wages was 0.3 percentage points lower; the proportion who had signed a labor contract with their employers or work units was 11.1 percentage points higher; the proportion who had old-age insurance coverage was 9.3 percentage points higher; the proportion who had work injury insurance coverage was 10.2 percentage points higher; the proportion who had medical insurance coverage was 8.7 percentage points higher; the proportion who had unemployment insurance coverage was 5.5 percentage points higher; and the proportion who had maternity insurance coverage was 4.1 percentage points higher (Figure 1.5). 6.6

18

household survey office, national bureau of statistics

Table 1.15 Social insurance participation rates of migrant workers by sector

Unit: %

Indicators

Old-Age insurance

Work injury insurance

Medical insurance

Unemployment Maternity insurance insurance

Manufacturing Construction Wholesale and retail Transportation, shipping, warehousing, and postal services Accommodation and F&B Residential, repair, and other services

20.9  3.7 13.5

32.8 14.4 17.0

21.7  5.2 14.2

12.2  2.0  8.9

8.8 1.3 7.0

15.6

25.5

17.4

10.5

7.6

10.6

17.1

11.9

 6.6

3.9

11.3

15.9

11.6

 6.2

4.8

Eastern region

(%) 45

Central and western regions

42.0

40 35

30.9

28.8

30 20

19.6

18.6

15

11.6

10.3

10

Old-age insurance

11.7 6.2

5 0

20.3

Workplace injury insurance

8.7

4.6

0.9 1.2

Medical Unemployment Maternity Signing of Old-age insurance insurance care labor contract insurance insurance

Figure 1.5 Situation concerning rights and benefits protection for migrant workers by region in 2013.

7

The Characteristics of New-Generation Migrant Workers

7.1 Higher Educational Attainment in General A mere 6.1% of new-generation migrant workers received less than a junior middle school education, while 60.6% had completed junior middle school, 20.5% had completed senior middle school, and 12.8% had received a college

monitoring survey report on migrant workers in 2013

19

education or more. Among the older-generation migrant workers, 24.7% received less than a junior middle school education, while 61.2% had completed junior middle school, 12.3% had completed senior middle school, and only 1.8% had received a college education or more. A third of new-generation migrant workers had at least completed senior middle school, which was 19.2 percentage points higher than that of older-generation migrant workers. Mainly Working in the Eastern Region and in Big and Medium-Sized Cities In terms of the geographical distribution of new-generation migrant workers, there were 81.18 million of them working in the eastern region, accounting for 64.8% of all new-generation migrant workers; while 22.17 million or 17.7% were working in the central region; and 21.55 million or 17.2% were working in the western region. In terms of the type of city they worked in, 68.72 million or 54.9% were working in big or medium-sized cities at the prefectural level or higher, while the proportion of older-generation migrant workers working in such cities was 26%. New-generation workers were more inclined to work in big and medium-sized cities. 7.2

7.3 More than 80% Left Home to Work 100.61 million or 80.3% of new-generation migrant workers left home to work while 24.67 million or 19.7% chose to work locally. The average age of newgeneration migrant workers leaving home to work for the first time was 21.7 years old, while the average age of older-generation migrant workers who did so for the first time was 35.9 years old. When compared with the older workers, these younger workers were 14.2 years younger on average when leaving home to work for the first time. In 2013, 87.3% of new-generation migrant workers had never engaged in any form of agricultural work. 7.4 Almost 40% Engaged in Manufacturing 39% of new-generation migrant workers were engaged in manufacturing, 14.5% in construction, 10.1% in wholesale and retail, and 10% in providing residential services, repair services, and other services. Among the older-generation migrant workers, 29.5% were engaged in construction, 26.5% in manufacturing, 10.9% in wholesale and retail, and 10.6% in providing residential services, repair services, and other services. The top choice of work for older workers was in construction, followed by manufacturing while the top choice for new-generation workers was in manufacturing, followed by construction. However, the proportion of new-generation workers working in construction dropped sharply and was less than half of the proportion of older-generation workers in the same industry.

20

household survey office, national bureau of statistics

7.5 Greater Propensity to Spend at Place of Work New-generation migrant workers spent an average of 939 yuan per month on living expenses while working outside, 19.3% higher than the amount spent by older-generation migrant workers. New-generation migrant workers sent or brought home an average of 12,802 yuan in 2013, 29.6% less than that of oldergeneration migrant workers. New-generation migrant workers working outside were more willing to stay in rented accommodation, with 40.4% choosing to rent a place on their own or co-rent accommodation with others, while 34.1% lived in employer-provided dormitories, and 7.3% lived in work sheds on worksites. Their average housing expenditure per capita was 567 yuan, which accounted for 60.4% of their average monthly living expenses.

Part 2 Transition from the Demographic Dividend to the Reform Dividend

∵

CHAPTER 2

The Impact of the “Reform Dividend” on China’s Potential Growth Rates Cai Fang and Lu Yang 1 Introduction The term “demographic dividend” refers to the positive effects that particular characteristics of demographic structure have on economic growth. In particular, the demographic dividend for economic growth is generated when a country has a decreasing dependency ratio and an increasing working-age population, and when supply factors needed for economic growth such as labor grow rapidly and there is a higher rate of return on capital, while labor transfer enables resources to be more efficiently reallocated. In fact, population growth goes through three stages in economic development: 1) Stage One: “high fertility rate, high mortality rate, low growth rate”; 2) Stage Two: “High fertility rate, low mortality rate, and high growth rate; 3) Stage Three: “low fertility rate, low mortality rate, and low growth rate.” The demographic dividend (or changes in the demographic structure) often appears in the transition from the second stage to the third stage and this has been confirmed by the historical experiences of many countries.1 For instance, when Japan’s demographic dividend disappeared around 1990 due to a shrinking working-age population and arising dependency ratio, economic growth fell from 4–5% to less than 2%. Although Japan attributed its long-term depression to the 1990 economic bubble, it is obvious that a short-term economic bubble could not have caused the long-term slowdown. Without a correct understanding of the real reason for economic slowdown, a government is unable to take targeted measures to change the status quo. That is also the main reason why Abenomics is still wrongly focused on “demand” instead of trying to unleash the “supply” of factors through reform. In fact, the experiences of various countries in economic development tell us that demographic transition is unavoidable as the population enters the period of low fertility rates. For instance, advanced economies commonly 1  Jeffrey Williamson, “Growth, Distribution and Demography: Some Lessons from History,” NBER Working Paper Series, No. 6244, 1997.

© koninklijke brill nv, leiden, ���7 | doi ��.��63/9789004342156_003

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face the problem of an aging and shrinking population, something that is also beginning to affect developing countries. The subsequent problem is that it causes the dependency ratio to rise and the working-age population to decline in absolute terms. If total factor productivity (TFP) is unchanged, annual output increases will decline with less labor input, with fewer producers supporting more non-producers (the young and old). Thus, an ever-growing proportion of annual output increases (GDP) has to be devoted to consumption, and this causes both the savings rate and capital formation rate to fall, leading to gradual decreases in the new capital input for each subsequent year. We know that economic growth is mainly dependent on factors such as labor and capital. When the abovementioned demographic transition occurs, labor and capital supply are affected, and this eventually impacts the potential growth rate of a country. China is now experiencing the abovementioned demographic transition. Its working-age population between the ages of 15 and 59 began to decline in 2011, while those between the ages of 15 and 64 also began shrinking in 2013, with the dependency ratio rising at the same time. There is empirical evidence that the disappearing “demographic dividend” is impacting China’s potential growth rate. For instance, although he did not place any particular emphasis on the role of demographic factors in his study, Louis Kuijs2 projected that China’s potential growth rate would fall from 9.9% during the period 1978–1994 to 9.6% during the period 1995–2009, and further to 8.4% during the period 2010–2015. Taking changes in the demographic structure into account, Cai Fang and Lu Yang3 argued that as the end of the demographic dividend approaches, China’s potential growth rate would fall from 10% previously to 7.3% during the period of its “12th Five-Year Plan.” If we take into account the role of human capital, the impact of the dependency ratio on capital formation, and the impact of demographics on the labor force participation rate and the natural unemployment rate, China’s average potential growth rate may decrease to 7.75% during the period of the “12th Five-Year Plan.”4

2  Louis Kuijs, “China through 2020—A Macroeconomic Scenario,” World Bank China Research Working Paper, No. 9, 2010. 3  Cai Fang and Lu Yang, “Population Change and Resulting Slowdown in Potential Growth in China,” China and World Economy, 21(2) (2013): 1–14. 4  Lu Yang and Cai Fang 陆旸、蔡昉, “Renkou jiegou bianhua dui qianzai zengzhang lü de yingxiang: Zhongguo he Riben de bijiao《人口结构变化对潜在增长率的影响：中国和 日本的比较》 [The Impact of Changes in the Demographic Structure on Potential Growth Rates: Comparing China and Japan],” Shijie jingji 《世界经济》 Vol. 1 (2014): 3–29.

the impact of the “ reform dividend ”

25

The impact of the “demographic dividend” on potential growth rates is not a phenomenon unique to China. According to a multi-country empirical data analysis conducted by Eichengreen et al.5 when income per capita reaches US$17,000 (in 2005 constant international prices, PWT 6.3 data), the actual economic growth rate drops by at least 2 percentage points. This means China’s economy may slow down sometime around 2015. However, their study also pointed out that some economic factors might cause this to happen later or sooner. For instance, a higher old-age dependency ratio increases the likelihood of an economic slowdown as it is generally associated with lower savings and labor force participation rates. The phenomenon of “growing old before growing rich” will undoubtedly cause China’s economic slowdown to happen sooner. But Eichengreen et al.6 also emphasized: There is no iron law of slowdowns. There is unlikely to be a mechanical relationship between per capita incomes and growth slowdowns. How long rapid growth is successfully maintained depends also on economic policy. For instance, for the economies of Argentina, Singapore, Ireland, Israel, Norway, Portugal, and Hong Kong, economic reforms have led to another period of rapid growth, except that this was followed by another round of economic slowdown for some. In fact, Cai Fang and Lu Yang7 based their estimates on two basic assumptions: 1) a continual slowdown in labor supply; 2) a constant TFP growth rate. In other words, possible changes in the future potential growth rate due to the disappearing “demographic dividend” under the assumption that institutional barriers still exist. Some institutional factors have blocked increases in the supply of production factors and TFP, and removing them through reform can help raise the potential growth rate. In fact, the greater the existing institutional barriers and the more far-reaching the reform, the more obvious its impact on raising the potential growth rate, i.e. the said “reform dividend.” This chapter simulates the growth effects that various institutional reforms might bring, i.e. using the growth accounting equation to simulate how much 5  Barry Eichengreen, Park Donghyun, and Shin Kwanho, “When Fast Growing Economies Slow Down: International Evidence and Implications for China,” NBER Working Paper. No. 16919, 2011. 6  Ibid. 7  Cai and Lu, “Population Change and Resulting Slowdown,” 1–14. Lu and Cai, “Renkou jiegou bianhua,” 3–29.

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potential growth rates can be raised by implementing reform measures and seeing which are more effective under short-term and long-term conditions. Ultimately, we want to know how China can move away from harnessing the “demographic dividend” and work toward generating the “reform dividend” as the former disappears, so that we can unleash our growth potential and guarantee sustainable economic development in the long term. 2

The Economic Basis for the Reform Dividend

In discussing the issue of China’s reform, many are of the view that there is an inevitable trade-off between reform and economic growth, i.e. for reform to happen, there has to be reasonable tradeoffs in economic growth rates. Many scholars who say so are obviously looking at the possible short-term negative effects of reform on economic growth through a static lens, while neglecting its dynamic positive effects in the long-term. Contrary to the dominant view, we believe that reform facilitates economic growth. This has its economic basis in the theory of institutional change. The theory of institutional change suggests that change occurs only when the benefits outweighs the costs, i.e. when net benefit is greater than zero. This refers to the considerations of decision-makers about the political costs and benefits of reform, i.e. whether political support (benefit) generated by reform exceeds political opposition (costs). But in general, if the gains exceed the losses in economic terms, it is reason enough to convince decision-makers to pursue reform. Relevant reforms in China can be said to have rather similar effects. For instance, reform measures by the government to raise the efficiency of resource allocation, improve income distribution, and enhance the provision of equal access to basic public services are not simply aimed at promoting social equity but are also targeted to benefit from both direct (and indirect) reform dividends. This is also in accordance with what Premier Li Keqiang called “the need for impetus in deepening reform”. In fact, if we understand the real reason for China’s current economic slowdown, this enables us to predict which areas of reform might bring direct and indirect reform dividends. A correct understanding of the reform benefits or dividends is not just important for achieving and strengthening consensus for reform, it also gives us more options in reform methods and strategies as well as strengthens the impetus for reform. Despite generating net benefits, the costs and benefits of reform are unevenly distributed among those involved. We can generally maximize the incentive compatibility of reform in two ways: one is the “Pareto Improvement” approach, which is about implementing

the impact of the “ reform dividend ”

27

reform without making vested interests worse off; the other is the “KaldorHicks Improvement” approach, in which some stakeholders may lose out, but because the overall benefits of reform are relatively huge, a part of it can be used to compensate the losers. There is very little room for using the “Pareto Improvement” approach in the current reforms that China needs to undertake. But if we can recognize and seize the benefits that reform brings, we can make use the “Kaldor-Hicks” approach to lessen the resistance to reform. This chapter builds on the basic model estimates of Lu Yang and Cai Fang8 to simulate the various reform dividends so as to highlight China’s possible future areas of reform. The simulation results show that reform can generally bring benefits and directly increase the potential growth rate. For China, reform and economic growth mutually reinforce rather than substitute each other. 3

The Growth Effect of the “Reform Dividend”

There are generally two categories of reform measures that the Chinese government can undertake: 1) Reforms aimed at increasing labor supply, including direct measures such as relaxing population control policy (to increase labor supply in the long term) and raising the labor force participation rate, and indirect measures such as enhancing human capital (raising graduation rates or providing more training); 2) Raising TFP. We will simulate the “growth effects” of these few types of reform measures below. Through a comparison of the “growth effects,” the government can directly assess the costs and benefits of reform from the perspective of growth rates and establish the ultimate “order of priority” for reform through cost-benefit analysis. 3.1 Relaxing Population Control Policy To project China’s potential growth rates for 2011–2050, we first assumed that TFP remains constant, while other factors of production (including capital, labor and human capital) will change in tandem with a changing demographic structure. For the specification and estimation of the model, we referred to Lu Yang and Cai Fang.9 In fact, population projections are also known as “the future that can be seen from reality.” This means that apart from the assumptions made about TFP, changes in other production factors are all endogenous to changes in the demographic structure. Population projections by age and gender are mainly affected by the “total fertility rate” (TFR). For instance, under 8  Ibid. 9  Ibid.

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the current policy of “two children for only-child parents,” the TFR will not exceed two (replacement level fertility) in theory. This chapter uses population projection data from Guo Zhigang,10 who used data from China’s sixth national population census to project its population “by age and gender” from 2011–2050 on the assumption that future TFR can be maintained at 1.6, 1.77, or even 1.94. The TFR not only affects the forecast value of the population by age and gender but also the forecast value of the potential growth rate that is based on population projection data. Theoretically, relaxing population control policy should increase the TFR, for instance moving from a policy of “two children for only-child parents” to “two children for all,” but we are unclear about the magnitude of the increase in TFR and how this will change thereafter, as measures to relax population controls only affect couples who are both not the only offspring in their families and who wish to give birth. However, we can compare the impact on the potential growth rate of raising TFR from 1.6 to 1.77 (and even to 1.94) in order to estimate the “reform dividend” generated by “relaxing population control policy.” In theory, the impact of relaxing population controls will have both shortterm and long-term impact on potential growth rates. Babies born as a result of the influence of population policies can only form the dependent population in the short term and increase the dependency ratio instead of the working-age population. This causes the savings rate to fall in the short term, while the consumption rate will rise and the capital formation rate will drop. When compared with the baseline scenario, relaxing population control policy causes potential growth rates to fall in the short term by affecting capital supply. However, these new additions to the population will eventually reach working age (in 15 years) in the long-term, thus reducing the dependency ratio and boosting labor supply. From a long-term perspective, relaxing population control policies can then help raise the potential growth rate by increasing both capital and labor supply. In fact, this is the so-called “baby boom” effect on the potential growth rate. Figure 2.1 shows changes in potential growth rates under different TFRs. The simulation results accord with the economic theory. If the Chinese government further tweaks its population control policy and moves from a policy of “two children for only-child parents” to a policy of “two children for all” as soon as possible, this will allow China’s future demographic structure to change in time and boost long-term potential economic growth. From what we can tell, relaxing population control policy (with TFR increasing 10  Guo Zhigang 郭志刚, “2011–2050 nian Zhongguo renkou yuce《2011–2050 年中国人口 预测》 [China’s Population Forecast 2011–2050],” Working paper, 2014.

29

the impact of the “ reform dividend ” (%) 10 9

Base Line

8 7 tfr=1.94

6

tfr=1.94

5

tfr=1.6

4 3 2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055 (Year)

Figure 2.1 China’s long-term potential growth rate under different TFRs. Source: Lu Yang and Cai Fang (2014).11

from 1.6 to 1.94) will have a negative effect on growth before 2030, but this will be rather contained with the greatest impact in a given year not exceeding 0.2 percentage points, while in the long term, China’s potential growth rate can increase by 0.4–0.5 percentage points. 3.2 Raising the Labor Force Participation Rate While relaxing population control policy can boost China’s long-term labor supply, raising the labor force participation rate is another means of stimulating labor supply. Although labor force participation is to some extent endogenous to economic growth and China’s labor force participation rate has always been relatively high when compared with other countries, it is also a function of the age of the population. As China’s population ages further, its future labor force participation rate will also drop. Thus, the problem of how to encourage more of the population to participate in economic activity is something that the Chinese government needs to resolve in the future. The first solution that comes to mind is to “defer the retirement age.” Whether the human capital of the old-age population meets the needs of the labor market is another matter. If we disregard such concerns, deferring the retirement age can theoretically 11  Lu, Yang and Fang Cai 陆旸、蔡昉, “Renkou jiegou bianhua dui qianzai zengzhang lü de yingxiang: Zhongguo he Riben de bijiao 《人口结构变化对潜在增长率的影响：中 国和日本的比较》 [The Impact of Changes in the Demographic Structure on Potential Growth Rates: Comparing China and Japan],” Shijie jingji 《世界经济》 Vol. 1 (2014): 3–29.

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prolong the working life of those who should have retired and delay their entry into the old-age security system. In comparison with the baseline scenario, this lowers the dependency ratio and increases labor supply. This is similar to the long-term effect of relaxing population controls, just that deferring the retirement age will obviously have a more immediate effect in the short term. To cite an example, Japan raised the retirement age for men from 60 to 65 years old when facing the double whammy of an aging population and labor shortage. Scenario 2.1 of Annex 2.1 shows the simulated changes in China’s potential growth rate with TFR=1.6 as the baseline scenario, and by assuming that the labor force participation rate increases by one, two, and five percentage points yearly from 2011 to 2050. The results show that raising the labor force participation rate can cause the potential growth rate to rise. If the labor force participation rate can increase by one percentage point every year from the original basis, then the average potential growth rate during the period of the “12th Five-Year Plan” (2011–2015) will increase by 0.2 percentage points; if the labor force participation rate can increase by five percentage points every year, the average potential growth rate during the period of the “12th Five-Year Plan” will rise by nearly one percentage point. But we also discover that although the future potential growth rate can be increased by stimulating labor supply through raising the labor force participation rate, the “growth effect” declines yearly (see Annex 2.2). For instance, assuming that China can increase its annual labor force participation rate by five percentage points from the original basis from 2011–2050, China’s potential growth rate can increase by 0.18 percentage points for the period of the “13th Five-Year Plan” (2016–2020) when compared with the baseline scenario; but by the period of 2045–2050, the increase in potential growth rate over the baseline scenario will only be 0.06 percentage points. By then, the “growth effect” generated by the labor force participation rate is one-third of what it was before. The same degree of “treatment” resulted in a declining “growth effect” (Figure 2.2). The simulation results show that policy reform involving the labor force participation rate does not generate the long-term “reform dividend” that we can depend on. 3.3 Raising Total Factor Productivity (TFP) In neoclassical theory, Total Factor Productivity (TFP) is the portion of economic growth not explained by the conventional input of production factors. TFP comes from improvements such as technological advances, better resource allocation, and system innovation. In mainstream studies on neoclassical growth theory, vast amounts of literature conclude from an empirical perspective that TFP can largely explain the differences in growth achieved by

31

the impact of the “ reform dividend ” (%) 0.30 0.25

lfpr=5

0.20 0.15 lfpr=2

0.10 0.05 0 2005

lfpr=1 2010

2015

2020

2025

2030

2035

2040

2045

2050

2055 (Year)

Figure 2.2 Potential economic growth rate generated by raising the labor force participation rate (baseline scenario: TFR=1.6). Source: Lu and Cai (2014).12

various countries.13 The fact is that China still has much room to raise its TFP. First, it can continue to leverage its latecomer advantage and strive to catch up with the technological progress of other countries. Second, it can urbanize its migrant workers through household registration system reform. This helps to stabilize labor supply in the cities and promote agricultural modernization as surplus agricultural labor leaves the countryside, which then leads to technological progress. Finally, China can further increase its productive efficiency by innovating its systems and institutions. Scenario 3.1 in Annex 2.1 shows the simulated changes in China’s potential growth rate with TFR=1.6 as the baseline scenario, and assumes that TFR increases by 0.5 and 1 percentage points respectively from 2011 to 2050, ceteris paribus (Scenario 3.2 uses TFR=1.77 as the baseline scenario). We can see that very obvious “growth effects” generated by the TFP (Figure 2.3). Taking the period of the “12th Five-Year Plan” as an example, by assuming that TFP increases by 0.5 percentage points yearly from the original basis, the potential growth rate increases by 0.568 percentage points over the baseline scenario; if TFP increases by one percentage point yearly over the same period, then China’s potential growth rate increases by 1.136 percentage points over the baseline scenario. It is worth noting that unlike the steadily declining “growth effect” generated by raising the labor force participation rate, the “growth effect” of 12  Ibid. 13  Cai Fang 蔡昉, Pojie Zhongguo jingji fazhan zhimi 《破解中国经济发展之谜》 [Solving China’s Economic Development Puzzle], Beijing: Social Sciences Academic Press, 2014.

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(%) 12 10

tfr=1

8

tfr=0.5

6 4 2 2005

Baseline scenario 2010

2015

2020

2025

2030

2035

2040

2045

2050

2055 (Year)

2050

2055 (Year)

(a) Trend in potential growth rate (%)2.0 1.6 1.2

tfp=1

0.8 tfp=0.5

0.4 0 2005

2010

2015

2020

2025

2030

2035

2040

2045

(b) Growth effect

Figure 2.3 The impact of raising TFP on China’s long-term potential growth rates (baseline scenario: TFR=1.6). Source: Lu and Cai (2014).14

raising TFP progressively increases. Under the two different assumed TFP scenarios, China’s potential growth rate for the period 2045–2050 turns out to be 0.869 and 1.751 percentage points higher respectively when compared with the baseline scenario, while the growth effect generated by TFP during the period of the “12th Five-Year Plan” should be 0.568 and 1.136 percentage points respectively. The simulation results show that reform measures focused on raising TFP produce the “reform dividend” that China can depend on in the long term.

14  Lu and Cai 陆旸、蔡昉, “Renkou jiegou bianhua dui qianzai zengzhang lü de yingxiang: Zhongguo he Riben de bijiao,” 2014.

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Enhancing Human Capital: Raising Graduation Rate versus Providing more Training Human capital refers to the accumulation of knowledge and skills by the workforce through education, training, or practical experience, etc. These are also known as “non-material capital.” As knowledge and skills can bring wage returns to individuals and also contribute to economic growth as another form of capital, given similar labor force sizes and material capital, differences inhuman capital become the critical factor in accounting for differences in economic growth among countries. For instance, one of the main contributions of new growth theory is to broaden the definition of “labor” to include human capital investment. There are generally two ways of accumulating human capital: through education and training. However, these two methods of accruing human capital require different mechanisms and lengths of time to form, thus there are certain differences in the potential growth effect that they generate. 3.4

3.4.1 The Impact of Raising Graduation Rates on Growth Rates An individual typically receives formal education before the age of 30 and enters the labor market upon reaching a certain age. From then on, human capital that is measured by the number of years spent in education will no longer increase with age. For instance, those who enter the labor market after completing six years of primary school education would have received six years of education (excluding special cases); while those who had completed their doctoral education before entering the labor market would generally have spent 22 years in education. However, if we use educational attainment as a measure of human capital, we risk putting a fixed value on an individual’s human capital at the time he or she completes a particular phase of education and enters the labor market. In theory, human capital that is measured by educational attainment is accumulated between the ages of zero and 22. Therefore, the government can raise the level of human capital by extending the number of years that an individual spends in education by raising school enrollment rates or graduation rates. However, this process may be a lengthy one. Education policies aimed at the younger population may take a few years to more than a decade to have any effect on the labor market. By assuming a scenario with no training, we simulated the effects of raising the school enrollment rate or graduation rate on China’s potential growth rate. The model assumed that the average number of years spent in education remains unchanged for those aged above 25 and that by 2050, China’s child enrollment rate and the graduation rates for primary school, junior middle school, and senior middle school would increase from 99%, 99%, 95%, and 90% respectively to 99%, 99%, 98%, and 95% respectively. The simulation results show that increasing human capital

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(%)0.20 0.15 Increase in potential growth rate 0.10 0.05 0 2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055 (Year)

(a) Raising graduation rates and enrollment rates (%) 0.5 0.4 0.3

Increase in potential growth rate

0.2 0.1 2005

2030 2035 2040 2045 2050 2055 (Year) (b) Increasing training Figure 2.4 The impact of raising human capital on China’s potential growth rates (baseline scenario TFR=1.6). Source: Lu and Cai (2014). 2010

2015

2020

2025

through raising educational attainment produces a positive effect on China’s potential growth rate, but the growth effect is one that is progressively decreasing (Figure 2.4a). 3.4.2 The Impact of Increasing Training on the Potential Growth Rate Increasing training may have a more immediate impact on raising human capital. Training does not just target the young; even the elderly may benefit. If training is used to resolve the problem of a skills mismatch created by 15  Ibid.

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deferring the retirement age, then its contributions to human capital may be even more obvious. The government or firms themselves can provide such training. First, the government can provide specialized skills training for individuals who are seeking employment, for instance, in computer skills and foreign languages; it can also provide specific skills training for those who are in the labor market, for instance, new skills generated by new technologies. Targeted training programs offered by the government not only benefit the accumulation of human capital but can also reduce structural unemployment. Second, firms should regularly provide employees with opportunities for training and advanced study. The allocation of specific training funds for employees may incur greater operating costs for firms in the short term, but in the long term, this will raise productive efficiency and help firms to innovate their products and even their management practices. The eventual long-term returns are far greater than the short-term investments. Many European and American firms have widely adopted such methods. However, when compared with their counterparts in developed countries, Chinese firms do not invest enough in employee training. This is also precisely why more training should help China significantly increase its human capital and eventually boost the potential growth rate. To verify this point, we will make the simple assumption that individuals in the labor market can receive an average of 1.2 months of training per year. Thus, for every 10 individual workers in the labor market or for every 10 years that an individual works, the average number of years spent in education will increase by one year. This is on the assumption that workers of different ages will have the same odds of receiving training, but this is not the case in reality. We made this assumption to simplify the problem in our estimation of the average number of years spent in education in China for the period of 2011–2050. The implicit assumption is that training and education are the same, thus the time spent in training is equivalent to the time spent in education. The simulation results show that when compared with the method of increasing human capital by raising graduation rates, increasing training in the labor market will have a more obvious effect in boosting human capital and the potential growth rate. Using the period of the “12th Five-Year Plan” as an example, if each worker in the labor market receives up to 1.2 months of training per year, the potential growth rate can be raised by 0.404 percentage points (the baseline scenario did not take into account the issue of training, thus the training time per year is zero months). It is worth noting that as the training that an individual worker receives in the year t increases his/her human capital, the additional human capital that training generates can be substituted into year t+1 and various periods thereafter.

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It must be pointed out that as the influencing mechanisms only target younger workers, the process of increasing future human capital through raising school enrollment rates will be slow. This means that even if the school enrollment rate increases significantly in the short term, the increase in a country’s average level of human capital will still be very limited. But because training covers all labor, if we see it as another way of increasing the number of years spent in education, then raising human capital by increasing training will have a significant impact on potential growth rates. According to the simulation results, the growth effect generated by training did not exhibit an obvious trend of gradual decline. For a training program commencing in 2011, the growth effect produced during the period 2045–2050 will still be 0.344 percentage points (Figure 4.4b). If governments and firms can provide more training opportunities in the future, training programs will have an even more obvious impact on potential growth rates. 3.5 The Growth Effects Generated by Combinations of Policies In the above simulations of the “reform dividend,” we looked at the impact of single reform measures on China’s potential growth rates, ceteris paribus. However, in practice, the government can simultaneously implement several reforms. A combination of policies may produce even more significant “growth effects.” Annex 2.1 and 2.2 show the effects of various policies combinations on China’s potential growth rates for the period 2011–2050. Figure 2.5 shows the growth effects generated by different policy combinations. The thick black line shows the baseline scenario and simulates the (%) 12 10

Scenario A

8

Scenario B

Scenario C

6 4 0 2005

Baseline scenario (tfr=1.6) 2010

2015

2020

2025

2030

2035

2040

2045

2050

2055 (Year)

Figure 2.5 The impact of a combination of policies on China’s long-term potential growth rate (baseline scenario TFR=1.6). Source: Lu and Cai (2014).16 16  Ibid.

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changes in China’s potential growth rate for the period 2011–2050 when the “demographic dividend” disappears, TFR remains constant at 1.6 and when the government does not implement any reform measures. Scenario A simulates the changes in China’s potential growth rate on the basis of the baseline scenario, with the added assumptions that China’s labor force participation rate for the period 2011–2050 is higher than that of the baseline scenario by one percentage point, that TFP increases by 0.5 percentage point, and that by 2050, junior and senior middle school graduation rates will increase by three and five percentage points respectively. We find that “Policy Combination A” produces a growth effect that causes China’s average potential growth rate to rise from 3.84% to 4.74% for the period 2045–2050, with the “growth effect” being close to one percentage point. Scenario B simulates the changes in China’s potential growth rate on the basis of the baseline scenario, with the added assumptions that China’s labor force participation rate for the period 2011–2050 increases by one percentage point, TFP increases by 0.5 percentage points, and that human capital would be enhanced by increasing the number of training programs (workers get one year of training for every 10 years of work). The only difference between this and Scenario A is the way in which human capital is accumulated. We find that Scenario B generates a greater growth effect than Scenario A. By the period 2045–2050, China’s average potential growth rate can increase from 3.84% to 5.07%, with the “growth effect” rising to 1.2 percentage points. Scenario C is a variation of Scenario B with a higher TFR of 1.94, with other assumptions remaining the same as that in Scenario B. We had earlier discussed the “short term” negative effects and “long-term” positive effects of relaxing population control policy on the potential growth rate and this is relevant here as well. We see that the economic growth effect generated by Scenario C will bring the potential growth rate up to 5.47% from 3.84% in the period 2045–2050, with the “growth effect” exceeding 1.5 percentage points. 4

Establishing the Priority Areas of Reform

China’s “demographic dividend” began diminishing from the year 2010 and this was a trend that even the policy of “two children for only-child parents” could not fundamentally reverse. This indicates that China’s experience with highspeed economic development sustained by the “demographic dividend” has come to an end and that its potential growth rate will henceforth gradually decline. However, this does not mean that the Chinese government is powerless in the face of declining potential growth. Rather, it has to shift from a reliance on the “demographic dividend” to focus on reaping the “institutional dividend” as soon as it can by implementing specific reform measures to remove

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institutional barriers that block the supply of production factors and productivity increases, in order to increase factor supply and productive efficiency. This is the only way to ensure sustainable economic development. We have simulated the various possible reform measures and found that raising TFP produces very significant “growth effects,” and there are no diminishing marginal returns of reform growth effects even in the long term. This is in sharp contrast to reform measures that try to raise the potential growth rate by unleashing the supply of production factors. For instance, raising the labor force participation rate can only produce significant growth effects in the short term, which gradually diminish in the long term. Hence, after comparing the growth effects produced by various reforms, we suggest the following reform priorities and methods: First, the government should urbanize migrant workers through household registration system reform. This can impact the potential growth rate in three ways. First, it raises the potential growth rate by stimulating urban labor supply; second, it enhances labor mobility by removing institutional barriers, thereby continuing to create resource reallocation efficiency, in turn raising TFP and the potential growth rate; third, it helps to accelerate the process of agricultural modernization, thereby increasing productive efficiency in agriculture and the potential growth rate. In addition, this reform can alleviate the pressure of rapid wage increases and buy more time for firms to undergo industrial upgrading. Thus, the government needs to do three things concurrently in this reform: absorb migrant workers into the cities and give them urban household registration, give those who still do not meet the criteria for urban residence the same level of basic public services enjoyed by urban residents, and give universal social security coverage for urban and rural residents. We can expect household registration system reform to be the classic area of reform that will reap reform dividends. For this reason, the top-down design of reform should address the issue of cost-sharing between the central and local governments, in order to achieve incentive compatibility. Second, we should optimize the system and mechanisms through which the market allocates resources and create a level playing field for competition to enter and leave the market. According to research conducted by Foster et al.,17 American firms within an industry contribute as much as 30–50% to the increase in TFP through a mechanism of creative destruction in which they 17  Lucia Foster, John Haltiwanger, and Chad Syverson, “Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?” American Economic Review, 98 (1) (2008): 394–425; Lucia Foster, John Haltiwanger and C.J. Krizan, “Aggregate Producivity Growth: Lessons from Microeconomic Evidence,” in Charles R. Hulten, Edwin R. Dean

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enter the market, exit, survive, and fold. Hsieh et al.18 found huge productivity gaps among firms within the Chinese sector, which if narrowed to the extent observed in the United States, could increase China’s TFP by 30%–50%. The coincidence in the figures cited by these two studies shows that China has yet to obtain such a source of TFP. Therefore, by allowing more efficient firms to survive, expand, and develop, and by eliminating firms that have made no efficiency improvements in the long term, we can raise productive efficiency in the various sectors as well as the overall productivity of the Chinese economy, with associated reforms being areas that generate obvious benefits. In addition, mixed ownership reform allows private firms to enter sectors formerly monopolized by state-owned enterprises, which promotes competition and breaks the latter’s monopoly, in turn promoting productive efficiency within the sector. It can similarly produce the abovementioned reform dividend by boosting TFP and ultimately increasing the potential growth rate by enhancing factor mobility. By following a similar logic, the Chinese government can enable the efficient allocation of capital by implementing financial system reform to liberalize interest rates. We know that under conditions of non-market interest rates, both the efficiency of production and allocation are below the optimal level if interest rates cannot move in tandem with the rate of return to capital, and this does not favor the raising of TFP. But interest rate liberalization is the best way to achieve efficiency in capital allocation. Third, governments and firms need to provide specific training for workers. As mentioned earlier, the government needs to provide specialized training as new technologies emerge to demand new skills, while enterprises need to provide employees with regular opportunities for training and advanced study in order to improve their productive efficiency and innovative capacity. However, from the perspective of enterprises, more training programs adds to their short-term costs, while the benefits take a longer time to manifest and are uncertain as employees are mobile. But employees will choose to leave when their employers do not give them opportunities to upgrade their skills, and this causes enterprise to lose their long-term competitiveness. In theory, different types of enterprises (big versus small, capital-intensive versus labor-intensive) will determine the eventual amount of training to be provided based on their own cost and revenue curves, with big and capital-intensive firms providing more training per capita relative to small and labor-intensive firms. However, and Michael J. Harper (ed.) New Developments in Productivity Analysis, Chicago: NBER/ University of Chicago Press, 2001. 18  Hsieh Chang-Tai and Peter J. Klenow, “Misallocation and Manufacturing TFP in China and India,” Quarterly Journal of Economics, 124(4) (2009): 1403–1448.

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the amount of training provided by firms based on their cost and revenue considerations at the micro level may not necessarily be the optimal level of training required by the country. Thus, the government has to step in as the other training provider and it can also provide specialized skills training for the unemployed as well as help those seeking employment to increase their human capital. Eventually, the training programs offered by the government and enterprises can significantly raise the potential growth rate. According to the simulation results, if each worker received one year of opportunities for training and advanced study for every 10 years of work, then China’s potential growth rate can increase by 0.3–0.4 percentage points. Finally, the government should continue to adjust and improve its current family-planning policy. China has moved from a “one child” policy to a policy of “two children for only-child parents” in its family-planning policy, even though a more relaxed family-planning policy does not generate an immediate growth effect. For instance, when compared with the “one child” policy, the “two children for only-child parents” policy produces a negative but weak impact on the potential growth rate in the first 15 years. In the long term, relaxing the family-planning policy helps to make the demographic structure more sound and increases the size and proportion of the working-age population, thereby having a positive impact on the potential growth rate. But we must recognize that although family-planning policies can affect the TFR, a declining birth rate is the outcome of socioeconomic development. As the economy develops, a decreased willingness to give birth is an inevitable trend for which no obvious reversal can be expected. Thus, the sooner we adjust our family-planning policy, the more obvious the effects produced. Hence, the Chinese government should make the transition from a policy of “two children for only-child parents” to “two children for all” as soon as possible, and further adjust the family-planning policy according to the reality of population development. To sum up, when facing a package of reforms, the government should pay more attention to the “order of priority in reform.” Presently, economics researchers feel that China should “start with the easier reforms before moving on to the more difficult ones,” and “start with reforms for which there is consensus,” and work on “a minimum package of reforms.” But the fact remains that China’s future potential growth rate will keep on declining as its “demographic dividend” gradually disappears. As such, when discussing the issue of the “order of priority in reform,” we can use the “growth effect” as the basic principle to select the specific measures of reform and decide the order of implementation. For instance, the gradual implementation of reforms to

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“urbanize migrant workers,” financial system reform and deeper reform of state-owned enterprises, achieving the efficient allocation of resources, increasing human capital through training, and the gradual transition from a policy of “two children for only-child parents” to “two children for all.” This is also consistent with the views of Premier Li Keqiang, who said that “reform should start with addressing the most obvious problems that restrict socioeconomic development.” Annex 2.1 Policy simulations of China’s potential growth rate (2011–2050) Unit: % Period

2011– 2015

2016– 2020

2021– 2025

2026– 2030

2031– 2035

2036– 2040

2041– 2045

2046– 2050

I. Effect of adjusting the family-planning policy on the potential growth rate (2011–2050) (%) TFR=1.6 7.73 6.64 5.87 5.40 5.05 4.60 4.17 3.84 TFR=1.77 7.72 6.58 5.78 5.34 5.16 4.80 4.39 4.04 TFR=1.94 7.71 6.50 5.66 5.23 5.29 5.08 4.65 4.25 II.1. Effect of increasing the labor force participation rate on the potential growth rate when TFR=1.6: (2011–2050) (%) Add 1 percentage point 7.92 6.68 5.90 5.43 5.07 4.61 4.19 3.85 Add 2 percentage points 8.11 6.71 5.93 5.45 5.09 4.63 4.20 3.86 Add 5 percentage points 8.68 6.82 6.01 5.52 5.15 4.68 4.24 3.90 II.2. Effect of increasing the labor force participation rate on the potential growth rate when TFR=1.77 (%) Add 1 percentage point 7.91 6.62 5.81 5.36 5.18 4.82 4.40 4.05 Add 2 percentage points 8.10 6.65 5.84 5.39 5.20 4.83 4.42 4.07 Add 5 percentage points 8.67 6.76 5.92 5.46 5.26 4.88 4.45 4.10 III.1. Effect of increasing TFP on the potential growth rate when TFR=1.6 (%) Add 0.5 percentage points 8.30 7.32 6.62 6.20 5.88 5.44 Add 1 percentage point 8.87 8.01 7.37 7.00 6.72 6.30

5.03 5.90

4.71 5.59

III.2. Effect of increasing TFP on the potential growth rate when TFR=1.77 (%) Add 0.5 percentage points 8.28 7.26 6.52 6.13 5.99 5.65 5.25 Add 1 percentage point 8.85 7.94 7.27 6.93 6.83 6.52 6.13

4.92 5.80

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Annex 2.1 Policy simulations of China’s potential growth rate (2011–2050) Unit: % (cont.) Period

2011– 2015

2016– 2020

2021– 2025

2026– 2030

2031– 2035

2036– 2040

2041– 2045

2046– 2050

IV. Effect of raising graduation rate on the potential growth rate (2011–2050) (%) TFR=1.6 7.84 6.73 5.94 5.47 5.11 4.64 4.20 TFR=1.77 7.83 6.66 5.85 5.40 5.22 4.85 4.42

3.86 4.06

V. Effect of increasing training on the potential growth rate (2011–2050) (%) TFR=1.6 8.14 7.02 6.28 5.80 5.45 4.98 TFR=1.77 8.12 6.96 6.18 5.73 5.54 5.17

4.18 4.37

4.49 4.70

VI. Simulation of a combination of polices: increasing the labor force participation rate and TFP by 1 percentage point, raising graduation rate TFR=1.6 9.18 8.13 7.48 7.10 6.80 6.36 5.95 5.62 TFR=1.77 9.16 8.06 7.38 7.03 6.91 6.58 6.18 5.83 TFR=1.94 9.15 7.98 7.26 6.92 7.05 6.88 6.46 6.05 VII. Simulation of a combination of polices: increasing the labor force participation rate by 1 percentage point, raising TFP by 0.5 percentage points, raising graduation rate TFR=1.6 8.60 7.45 6.72 6.29 5.96 5.51 5.08 4.74 TFR=1.77 8.59 7.38 6.63 6.23 6.07 5.72 5.30 4.95 TFR=1.94 8.58 7.30 6.51 6.12 6.21 6.01 5.57 5.16 VIII. Simulation of a combination of polices: increasing the labor force participation rate and TFP by 1 percentage point, increasing training TFR=1.6 9.48 8.44 7.82 7.45 7.16 6.72 6.25 5.96 TFR=1.77 9.46 8.37 7.73 7.37 7.25 6.92 6.47 6.17 TFR=1.94 9.45 8.29 7.60 7.25 7.37 7.20 6.74 6.38 IX. Simulation of a combination of polices: increasing the labor force participation rate by 1 percentage point, raising TFP by 0.5 percentage points, increasing training TFR=1.6 8.90 7.75 7.06 6.63 6.31 5.85 5.37 5.07 TFR=1.77 8.89 7.68 6.97 6.56 6.40 6.05 5.58 5.27 TFR=1.94 8.88 7.60 6.85 6.44 6.52 6.32 5.84 5.47 source: Lu and Cai (2014).19 19  Lu and Cai 陆旸、蔡昉, “Renkou jiegou bianhua dui qianzai zengzhang lü de yingxiang: Zhongguo he Riben de bijiao,” 2014.

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the impact of the “ reform dividend ” Annex 2.2 Net effects of various policy measures on China’s potential economic growth rate (2011–2050) Unit: % Period

2011– 2015

2016– 2020

2021– 2025

2026– 2030

2031– 2035

2036– 2040

2041– 2045

2046– 2050

I. Effect on China’s potential growth rate when TFR reaches 1.94 Baseline scenario (TFR=1.6) –0.024 –0.140 –0.204 –0.168 0.241 Baseline scenario (TFR=1.77) –0.009 –0.076 –0.114 –0.103 0.135

0.485 0.279

0.477 0.259

0.413 0.209

II.1. Effect on China’s potential growth rate of raising the labor force participation rate when TFR=1.6 Add 1 percentage point 0.190 0.036 0.029 0.025 0.021 0.017 0.015 0.014 Add 2 percentage points 0.381 0.072 0.058 0.050 0.042 0.033 0.029 0.027 Add 5 percentage points 0.952 0.177 0.142 0.123 0.101 0.080 0.071 0.064 II.2. Effect on China’s potential growth rate of raising the labor force participation rate when TFR=1.77 Add 1 percentage point 0.190 0.036 0.029 0.026 0.021 0.016 0.014 0.012 Add 2 percentage points 0.381 0.071 0.057 0.052 0.042 0.031 0.027 0.024 Add 5 percentage points 0.951 0.176 0.140 0.126 0.101 0.076 0.065 0.059 III.1. Effect on China’s potential growth rate of raising TFP when TFR=1.60 Add 0.5 percentage points 0.568 0.680 0.748 0.797 0.828 Add 1 percentage point 1.136 1.364 1.502 1.602 1.666

0.844 1.700

0.858 1.728

0.869 1.751

III.2. Effect on China’s potential growth rate of raising TFP when TFR=1.77 Add 0.5 percentage points 0.567 0.679 0.745 0.794 0.830 Add 1 percentage point 1.135 1.360 1.496 1.597 1.672

0.851 1.714

0.865 1.743

0.875 1.764

IV. Effect on China’s potential growth rate of raising the graduation rate TFR=1.6 0.111 0.084 0.077 0.069 0.059 TFR=1.77 0.111 0.084 0.077 0.067 0.060

0.047 0.047

0.032 0.031

0.019 0.017

V. Effect on China’s potential growth rate of increasing training opportunities TFR=1.6 0.404 0.381 0.408 0.402 0.400 TFR=1.77 0.404 0.380 0.406 0.393 0.385

0.383 0.370

0.319 0.309

0.344 0.333

VI. Simulation of a combination of polices: increasing the labor force participation rate and TFP by 1 percentage point, with TFR rising to 1.94 and raising the graduation rate Baseline scenario (TFR=1.6) 1.419 1.340 1.394 1.518 2.006 2.285 2.284 2.216 Baseline scenario (TFR=1.77) 1.433 1.403 1.483 1.582 1.899 2.079 2.066 2.012

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Annex 2.2 Net effects of various policy measures on China’s potential economic growth (cont.) Period

2011– 2015

2016– 2020

2021– 2025

2026– 2030

2031– 2035

2036– 2040

2041– 2045

2046– 2050

VII Simulation of a combination of polices: increasing the labor force participation rate by 1 percentage point and TFP by 0.5 percentage points, with TFR rising to 1.94 and raising the graduation rate Baseline scenario (TFR=1.6) 0.848 0.658 0.644 0.717 1.159 1.410 1.395 1.321 Baseline scenario (TFR=1.77) 0.863 0.721 0.734 0.781 1.052 1.205 1.178 1.117 VIII. Simulation of a combination of polices: increasing the labor force participation rate and TFP by 1 percentage point, with TFR rising to 1.94 and increasing training Baseline scenario (TFR=1.6) 1.72 1.64 1.73 1.85 2.33 2.61 2.57 2.54 Baseline scenario (TFR=1.77) 1.73 1.71 1.82 1.91 2.22 2.40 2.35 2.33 IX. Simulation of a combination of polices: increasing the labor force participation rate by 1 percentage point and TFP by 0.5 percentage points, with TFR rising to 1.94 and increasing training Baseline scenario (TFR=1.6) 1.15 0.96 0.98 1.04 1.47 1.72 1.67 1.64 Baseline scenario (TFR=1.77) 1.16 1.02 1.07 1.11 1.36 1.52 1.45 1.43 note: The baseline assumptions about human capital are the same as that in Lu Yang and Cai Fang (2014): here we assume that by 2050, China’s enrollment rate for children of schooling age as well as the primary school, junior middle school, and senior middle school graduation rates would have increased from 99.98%, 99.95%, 95%, and 90% to 99.999%, 99.999%, 98%, and 95% respectively, ceteris paribus. The data for other years are obtained by the averaging method. source: Lu and Cai (2014).20

References Cai, Fang and Yang Lu. “Population Change and Resulting Slowdown in Potential Growth in China.” China and World Economy, 21 (2) (2013): 1–14. Cai, Fang 蔡昉. Pojie Zhongguo jingji fazhan zhimi《破解中国经济发展之谜》[Solv­ ing China’s Economic Development Puzzle]. Beijing: Social Sciences Academic Press, 2014. Eichengreen, Barry, Donghyun Park, and Kwanho Shin. “When Fast Growing Economies Slow Down: International Evidence and Implications for China.” NBER Working Paper. No. 16919, 2011. 20  Ibid.

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Foster, Lucia, John Haltiwanger, and Chad Syverson. “Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?” American Economic Review, 98 (1) (2008): 394–425. Foster, Lucia, John Haltiwanger, and C.J. Krizan. “Aggregate Producivity Growth: Lessons from Microeconomic Evidence,” in Charles R. Hulten, Edwin R. Dean and Micheal J. Harper, eds., New Developments in Productivity Analysis. Chicago: NBER/ University of Chicago Press, 2001. Guo, Zhigang 郭志刚. “2011–2050 nian Zhongguo renkou yuce《2011–2050 年中国人 口预测》 [China’s Population Forecast 2011–2050],” Working paper, 2014. Hsieh, Chang-Tai and Peter J. Klenow. “Misallocation and Manufacturing TFP in China and India.” Quarterly Journal of Economics, 124(4) (2009): 1403–1448. Kuijs, Louis. “China through 2020—A Macroeconomic Scenario.” World Bank China Research Working Paper, No. 9, 2010. Lu, Yang and Fang Cai 陆旸、蔡昉. “Renkou jiegou bianhua dui qianzai zengzhang lü de yingxiang: Zhongguo he Riben debijiao《人口结构变化对潜在增长率 的影响：中国和日本的比较》 [The Impact of Changes in the Demographic Structure on Potential Growth Rates: Comparing China and Japan].” Shijie jingji 《世界经济》 Vol. 1 (2014): 3–29. Lu, Yang and Fang Cai. “China’s Shift from the Demographic Dividend to the Reform Dividend” in Liguang Song, Ross Garnaut and Fang Cai, eds., Deepening Reform for China’s Long Term Growth and Development. Canberra: ANUe Press, 2014. Williamson, Jeffrey. “Growth, Distribution and Demography: Some Lessons from History.” NBER Working Paper Series, No. 6244, 1997.

CHAPTER 3

The Benefits of Comprehensively Deepening Household Registration System Reform Du Yang, Cai Fang, Qu Xiaobo, and Cheng Jie 1

The Substance of Household Registration System Reform

The household registration system is rarely adopted in other economies, particularly developed ones, most of which have allowed people and labor to move freely domestically in the process of industrialization. But we can still observe the relationship between migration and productivity by looking at international population flows, e.g. immigrants to the United States and population flows among EU countries. Earlier studies have mainly focused on the impact of immigrant inflows on the labor market, particularly how they affect local residents, e.g. whether immigrants hurt the employment prospects of local residents and depressed wages in recipient countries, etc. Vast amounts of empirical research have shown that with open competition in the labor market, immigrant inflows have neither hurt the employment prospects of locals nor depressed market wages.1 This suggests that as the labor market expands, factors including labor can be more efficiently utilized. More recent studies are beginning to focus on the relationship between migration and aggregate economic performance, particularly its impact on the choice of technique2 and productivity.3 As an institutional legacy of the planned economy era, the household registration system has left a deep imprint on China’s socioeconomic structure. Hence, despite being very clear in the direction and objectives of reform, progress is incremental and made more difficult by the extent of the population that is affected making it one of the “deep water zones” of China’s reforms.

1  George Borjas, “The Economics of Immigration,” Journal of Economic Literature, 32 (4) (1994): 1667–1717. 2  Ethan Lewis, “Immigration, Skill Mix, and the Choice of Technique,” Federal Reserve Bank of Philadelphia Working Paper, No. 05–08, 2005. 3  Giovanni Peri, “The Effect of Immigration on Productivity: Evidence from U.S. States,” NBER Working Paper, No. 15507, 2009.

© koninklijke brill nv, leiden, ���7 | doi ��.��63/9789004342156_004

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Household registration is perhaps something that every Chinese national is familiar with, yet individual understanding of what it entails differ. This divergence in understanding is what causes the substance, process, difficulty, as well as the cost-and-benefit estimations of reform to vary widely. It is difficult to find a precise definition for the “household registration system,” even in official documents on the subject. It is not our intention to provide a normative definition of the household registration system but we hope to clarify its substance through our discussion, which then allows our analysis to better focus on those who are the targets of the reform. Population registration and management is the first essential function of household registration. In 1958, the National People’s Congress passed the “Regulations on Household Registration of the People’s Republic of China,” thus putting in place a nationwide system for residence registration. Therefore, it would seem that the household registration system was initially meant for registering and managing the population. In fact, many countries have a system to do so. If the household registration system were only a means of social governance, it would be much less difficult to reform it. This was precisely why most regions began reforming the household registration system in the 1990s by changing the registration method and adopting a common registration system for both urban and rural residents. Clearly, these moves sidestepped the core substance of household registration system, and even until now, the basic institutional framework that is impeding the flow of people and labor remains fundamentally unchanged. The greatest difference between China’s household registration system and the residence registration systems of other countries is that the former controls the distribution of the urban and rural populations and the allocation of labor through different resident “statuses” and link this to employment and a series of welfare benefits. Population registration and management may play the smallest role in the household registration system, but it still has an impact on the reform process. For example, the Ministry of Public Security, which is responsible for managing the household register, is generally given the leading role in reform, and it was this ministry that proposed the latest reform objective to establish a new household registration system by 2020. Aside from population registration and the management of the household register, there are other institutional functions of household registration with deeper implications for labor mobility and economic development. For a relatively longtime, household registration also served as an individual’s means of identification, and there was a time when it determined the kind of employment opportunities one could get. Thus when rural labor first began flocking to the cities in large numbers, their rural household registration prevented them

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from having equal employment opportunities. The local government in some of these places receiving rural labor even classified jobs under different categories to restrict those with non-local household registration from getting certain jobs. Hence, the policy problem associated with household registration system is first and foremost about giving the migrant population fair treatment and equal employment opportunities in the labor market. Even though the policy direction has shifted time and again throughout the process of reform, but as indicated by the document on “Several Opinions on Resolving the Problems of Migrant Workers” issued by the State Council in 2006, the problem of ensuring equal employment for workers with different household registrations has basically been resolved. However, it is far from enough to bridge the gaps between people with different household registrations only in labor market institutions, without fundamentally eradicating the differences in welfare benefits tied to household registration. Obvious gaps between urban and rural residents and across different regions remain in terms of social security, social assistance, and access to basic public services, etc. Because of this, rural-urban population flows largely consist of labor flows, while population mobility and urbanization are chiefly driven by employment demand. This makes the process of urbanization a far cry from what the new model of urbanization envisions, which centers on the transformation of the rural population into urban residents. This exerts a negative impact on the social structure in turn. On the one hand, without adequate social protection (comprising social security, social assistance, and basic public services), migrant workers find it difficult to access services normally available to those living in the cities and are thus unable to become urban residents in the real sense. This causes rural labor mobility to be very selective: once migrant workers are unable to succeed in the urban labor market, they have no choice but to return to the countryside. On the other hand, the net outflow of labor distorts the demographic structure in the rural areas. A very high migration rate among those under the age of 30 causes the age structure of the rural population to change after taking into account those who had left. This is the so-called phenomena of the “left-behind elderly” and “left-behind children.” Meanwhile, as men are more inclined to leave for the cities than women, the proportion of females in the rural resident population is also higher. As the problem of an aging population becomes increasingly serious, the fragile system of old-age support in the rural areas will have difficulties coping with the immense challenges. Therefore, if we take the household registration system to be a three-in-one system for population registration, employment management, and social protection, then reform must happen at the core, i.e. integrating the system of

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social protection, social assistance, and public services for the urban and rural populations and letting household registration regain its original function of managing the population. Given such circumstances, there is consensus that reform can unleash institutional dividends, increase TFP, and promote economic growth. The comprehensive deepening of household registration system reform is one important aspect. Most discussions on household registration system reform have invariably focused on its cost. Considerations have typically revolved around the content of reform, the ability to shoulder the financial burden, and the obligations of the central and local governments. But we should also see that if we take the household registration system to be a three-in-one system for population registration, employment management, and social protection, and if we ensure that reform is thorough and comprehensive, this would further improve the labor market environment and stimulate labor mobility and supply to generate new institutional dividends, which promotes the healthy and sustainable development of the economy in turn. The comprehensive deepening of household registration system reform discussed in this chapter means implementing reform measures that impact its core substance, i.e. a reform proposal that involves integrated planning for the urban and rural systems of social protection, social assistance, and public services, so as to eventually close the gaps between different groups of people and let household registration regain its original function of population management. The focus of our discussion in this chapter is on how much China’s economic growth can benefit if we reform the household registration system in an expeditious, comprehensive, and thorough manner and if labor mobility is further enhanced. We hope that the empirical research conducted on this issue can further strengthen our resolve to comprehensively reform the household registration system. 2

How Deepening Household Registration System Reform Can Bring Growth Dividends

Deepening household registration system reform, or to put it more simply, achieving the integration of the social protection system, implies greater openness and competition in the labor market. How would a more open labor market affect economic development? Research on other economies have answered this question. Peri’s study4 on how immigrants in various US states affected local productivity changes showed that increases in the number of 4  Ibid.

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immigrants significantly raised the degree of specialization and TFP, benefiting the economic growth of the state in question. Meanwhile, there is no evidence to suggest that they crowded out native workers in terms of employment or the hours of work. We should point out that China’s current rural population transfer is very similar to the immigration flow described in the aforementioned study, given that rural migrants in China too enjoy no social protection in the places they move to and are less educated and less skilled than the local resident population, etc. By using a similar method of analysis, we can assume that the growth dividends generated by deepening household registration system reform come from the following sources: 2.1 A Bigger Labor Market According to neoclassical theory, there are two sources of GDP growth: increased employment and higher output per capita. Obviously, deepening household registration system reform can further stimulate labor supply as the latter increasingly becomes the restraining factor in economic growth, and this will increase the overall size of the labor market and the economy in turn. We can see from the earlier analysis that although employment equality in the labor market has improved, there is still a high degree of selectiveness in employment as the household registration system has yet to be totally separated from social protection. Particularly for rural labor, the prerequisite for urban migration must be employment, therefore only the young and better educated are willing and able to do so. According to our analysis on the age structure of surplus rural labor under existing labor market conditions and the current household registration system, the surplus rural labor that can be transferred to the cities stands at 76.22 million, but this is mainly made up of middle-aged and older workers, of which 59% are above the age of 40. It will be very difficult to transfer this portion of rural labor to the cities without substantive institutional reform. So, how do we get them to move to the cities? On the one hand, rural urbanization can drive the transfer of this portion of labor; on the other hand, once the various institutions to do with social protection are integrated, this group will have no more reservations about leaving the countryside. This will help lower their reservation wage and increase the likelihood of their participation in labor. 2.2 Increasing the Level of Output Per Capita Apart from increasing output by raising the overall level of employment, deepening household registration system reform can boost the level of output per

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capita. There are several ways to do this: Raising the capital-output ratio, raising TFP, increasing working hours per capita, etc. Among these, raising TFP (i.e. economic efficiency) is the most crucial for increasing the level of output per capita. First, migrant workers work longer hours as they are at the lower end of the labor supply curve. Our study shows that workers with local urban household registration clocked an average of 45 hours per week, while migrant workers clocked up to 57 hours. Hence, enhancing labor mobility can help increase output per capita. More importantly, taking household registration system reform to a deeper level will raise TFP and boost economic growth. As mentioned earlier, when economic development crosses the Lewisian turning point, changes in the labor supply and demand relationship will cause economic growth to be increasingly dependent on higher economic efficiency. Why do we then say that deepening household registration system reform can help increase productivity? This is inspired by the actual experiences of other economies. Empirical analysis on various US states have illustrated that more immigrants (even though they were mostly a lowly-skilled group) helped drive local workers in the labor market toward greater specialization and enabled TFP to grow by more than half. Other studies have also shown that as immigrants were mostly concentrated in labor-intensive sectors, this enabled the skills of other workers to be more efficiently allocated. Therefore, the inflow of immigrants drives more local workers toward skills-intensive and knowledge-intensive sectors. Thus, higher levels of specialization and competition makes the inflow of immigrants the source of improved economic efficiency. Unfortunately, we have neglected the facts presented by the experiences of other countries to some extent. In the process of household registration system reform, many cities still erect higher barriers as a means of restricting numbers and the types of migrants who can settle down. A common reason given is that “low-quality” labor has no place in local economic development. Clearly, it will be very difficult for us to reap the dividends of improved efficiency with a segmented labor market. 2.3 Optimizing the Economic Structure Facilitating the rational flow and distribution of the population through deepening household registration system reform also helps to optimize the economic structure. A people-centric process of urbanization will enable cities to better perform their service functions and help the economic structure achieve better balance between the secondary and tertiary sectors. Meanwhile, given the huge gaps in rural and urban public service standards at present, allowing

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public services to be concentrated in the cities via population migration can help raise economic efficiency and boost the development of the tertiary sector. 3

Empirical Analysis of the Benefits of Household Registration System Reform

Before the household registration system undergoes radical reform, China’s internal migration will be greatly similar to the aforementioned international population flows: Although they have a positive effect on the labor market, rural migrants do not enjoy the social protection and public services available to local residents. Thus, we will use Peri’s theoretical framework5 and his analysis of the contributions of immigrants to the productivity of various US states to discuss the impact that migrant workers have on the productivity of recipient cities in China. The main aim of this chapter is to observe the effects of labor transfer on economic development in the cities, particularly its effect on productivity. Hence, our main method of analysis is to observe how changes in labor migration affect the size of the labor market and the various components that make up the output per worker. 3.1 Data Cities are our basic units of analysis. As China has a special administrative structure that categorizes cities into different “levels,” we need to carefully define what constitutes a “city.” For instance, in terms of administrative divisions, county-level cities often come under the administration of prefecturallevel or higher-level cities. In this chapter, we will only look at the city districts of the prefectural-level or higher-level cities (市辖区, shixiaqu) and ignore the counties and county-level cities under their administration. As data for some indicators are difficult to obtain for county-level cities, we will only analyze cities at the prefectural-level and above. 3.1.1 Output and Capital Stock Data on output and capital stock were collated from the China City Statistical Yearbook published in various years. “Output” is the “regional GDP” of the city districts and is derived by using the provincial “regional GDP deflator” to 5  Ibid.

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remove the effects of price changes in order to calculate the regional GDP of various cities in year-1990 constant prices. “Capital stock” is calculated based on the “fixed asset investments” of the various cities over the years by using the perpetual inventory method. The following steps were taken to calculate the capital stock at the city level. First, we determined the capital stock of the base year Kio. According to the perpetual inventory method, the earlier the choice of the base year, the lesser the effect of the estimation error in the base year capital stock on subsequent years. This study is concerned with the city districts of prefectural-level or higher level cities for which the earliest data can be traced to 1990. Hence we chose this as our base year. Also, we had to determine the capital-output ratio (K/Y) in the base year. The capital stock in the base year is generally derived by backward induction using an assumed capital-output ratio (K/Y). Early studies (e.g. Chow, 19936) have taken the capital-output ratio to be 2.5–3.0 circa 1952and a number of researchers have used this figure. According to estimates by Wang Xiaolu and Fan Gang,7 K/Y has basically maintained at 2.0, while Zhang Jun and Zhang Yuan8 found it to be above 3.0. But it has been declining since around the 1990s. Taking into account the relevant studies by various researchers and considering that the base year for this study is relatively close to the present, we set the capital-output ratio in the base year at 2.0, and used this to work out the capital stock in the base year. Next, we determined the depreciation rate δt. Researchers have generally put the depreciation rate of China’s fixed assets at 5%–10%, with Perkins9 and Wang Xiaolu and Fan Gang10 assuming it to be 5%, Young11 assuming it to be

6   Gregory Chow. “Capital Formation and Economic Growth in China,” Quarterly Journal of Economics, 108 (3) (1993): 809–842. 7   Wang Xiaolu and Fan Gang 王小鲁、樊纲, Zhongguo jingji zengzhang de kechi xuxing— kuashiji de huigu yu zhanwang 《中国经济增长的可持续性—跨世纪的回顾与展 望》 [Sustainability in China’s Economic Growth: A Cross-Century Review and Outlook], Beijing: Economic Science Press, 2000. 8   Zhang Jun and Yuan Zhang 张军、章元, “Dui Zhongguo ziben cunliang K de zai guji 《对中国资本存量Ｋ的再估计》   [Recalculation of China’s Capital Stock K],” Jingji yanjiu 《经济研究》Vol. 7 (2003). 9   Dwight Perkins, “Reforming China’s Economic System,” Journal of Economic Literature, 26(2) (1988): 601–645. 10  Wang and Fan, “Zhongguo jingji zengzhang de kechi xuxing,” 2003. 11  Alwyn Young, “Gold into Base Metals: Productivity Growth in the People’s. Republic of China during the Reform Period,” Journal of Political Economy, 111(6) (2003): 1220–1260.

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6%, Liu Mingxing,12 Gong Liutang and Xie Danyang13 assuming it to be 10%, and Shan Haojie14 assuming it to be 10.96%. Zhang Jun et al.15 explained the theoretical significance of the depreciation rate δt in the perpetual inventory method and used the official rate of the residual value in place of the relative efficiency of capital goods. They divided fixed asset investment of the whole society into three parts (construction and installation works, purchase of equipment and instruments, and others) and took into account the significant differences in lifespan of these three types of assets by calculating the depreciation rate based on the lifespan of each before arriving at a weighted average depreciation rate of 9.6% for the various provinces. This chapter has used the results obtained by Zhang Jun et al.16 and set the depreciation rate at 9.6%. Finally, we determined the level of investment. Most studies use the gross capital formation or gross fixed capital formation but the bureau of statistics had only accounted for and published figures at the national and provincial levels for these, with no statistics available at the prefectural level. Thus, this study has used the total investment in fixed assets for the whole society as an indicator to measure investment Iit in a given year. After establishing the main parameters and variables mentioned above, we used Kit = Iit + Kit–1 (1-δt) to calculate the capital stock of various cities in the corresponding years. 3.1.2 Migration and Employment The impact of migrant labor on the various components of output is the focus of this study. Hence, we had to accurately define and measure migrant labor 12  Liu Mingxing 刘明兴, “1952–1999 nian Zhongguo jingji zengzhang shuju《1952–1999 年中国经济增长数据》Statistics on China’s Economic Growth 1952–1999,” Research report for forum on economic development organized by the China Center for Economic Research, Peking University, 2002. 13  Gong Liutang and XieDanyang 龚六堂、谢丹, “Woguo shengfen zhi jian de yao su liudong he bianji shengcanlü de chayi fenxi《我国省份之间的要素流动和边际生 产率的差异分析》 [Variance Analysis of Factor Mobility and Marginal Productivity Among China’s Provinces],” Jingji yanjiu 《经济研究》Vol. 1 (2004). 14  Shan Haojie 单豪杰, “Zhongguo ziben cunliang K de zai gusuan 1952–2006 nian《中国资 本存量Ｋ的再估算： 1952–2006 年》 [Recalculation of China’s Capital Stock K: 1952– 2006],” Shuliang jingji jishu jingji yanjiu《数量经济技术经济研究》Vol. 10 (2008). 15  Zhang Jun, Wu Guiying, and Zhang Jipeng 张军、吴桂英、张吉鹏, “Zhongguo sheng ji wuzhi ziben cunliang gusuan: 1952–2000《中国省际物质资本存量估算: 1952– 2000》 [China’s Inter-Provincial Physical Capital Stock: 1952–2000],” Jingji yanjiu 《经济 研究》Vol. 10 (2004). 16  Ibid.

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in the various cities. We defined migrant labor as “labor with household registration outside the local city and working in the said city for more than half a year.” Our data was derived from the long-form microdata in the one percent population survey conducted in 2005 and the sixth national population census conducted in 2010. The abovementioned microdata also includes information that reflects individual characteristics such as employment and others. We could therefore calculate the city’s overall employment level and the ratio of migrant labor to total employment, etc. The two surveys also provided information on weekly working hours, which enabled us to calculate Xit and xit. Given the information on educational attainment, we could also calculate the working hours of workers who received education above senior middle school and those with at most senior middle school education, as well as their respective ratios to the total number of hours worked, i.e. Sit and 1- sit. 3.1.3 Wage and Skill Intensity Index The skill intensity index φit reflects the extent of bias toward skilled-labor and is derived from calculations based on the data we collected. As we needed to know the weight of wage levels relative to productivity for workers with varying educational attainment, and the sixth national population census of 2010 did not provide any information on wages in its long-form data, we used the survey data on urban resident households published by the National Bureau of Statistics to calculate W sit and wlit, which are the average wage levels of labor educated beyond the senior middle school level and those who had received at most a senior middle school education in various cities in 2005 and 2010, from which we then calculate the skill intensity index φit. 3.1.4 Parameters σ and α When calculating the skill intensity index φit and TFP Ait, we had to determine σ, the elasticity of substitution of high-skilled workers and low-skilled workers. Ciccone and Peri17 put the elasticity of substitution at between 1.5 and 2.0 in the long term, thus Peri18 uses the mean value of 1.75 for σ. It must be pointed out that China’s labor market is undergoing a transformation and one striking characteristic is its transition from a Lewisian dualistic economy to a neoclassical economy. Before competition can unleash its full potential in the labor market, the abovementioned elasticity of substitution may be below that of 17  Antonio Ciccone and Giovanni Peri, “Identifying Human-Capital Externalities: Theory with Applications,” Review of Economic Studies, 73(2) (2006): 381–412. 18  Peri, “The Effect of Immigration on Productivity,” 2009.

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estimates in developed countries. Du Yang’s study19 which made use of survey data on China’s manufacturing firms, found the elasticity of substitution to be smaller than that in studies done on mature economies, at least in the short term. In this study, we used 1.75 as the base parameter for our calculations while observing how TFP changes when the values 1.5 and 1.25 are used. In fact, the parameter α reflects the relative importance of capital and labor in the production function. With reference to numerous empirical studies on China’s economic development, we set the value of α at 0.68. Table 3.1 lists the descriptive statistical values of the main variables used in this study as well as their changes over two points in time. Table 3.1 Descriptive statistics of the main variables 2005 (a)

GDP (billion yuan, at 1990 prices) 22 (44) Employment (1,000 people) 713.4 (952.4) Output per worker (1,000 yuan, at 1990 prices) 33.5 (17.5) Share of migrant employment (%) 27.2 (23.4) Average weekly working hours (hours) 47.8 (3.64) Migrant labor (hours) 52.3 (4.63) Local labor (hours) 46.1 (3.07) Capital-Output ratio 1.65 (0.46) Output per worker (yuan/hour) 17.33 (8.75) TFP (yuan/hour) 5.94 (9.39) φ 1.143 (0.05) β 0.277 (0.177) S (%) 16.3 (8.4)

2010 (b)

Change (b-a)

40.8 (79.4) 18.8 945.3 (1469.1) 231.9 43.2 (19.3) 9.7 35.5 (24.3) 8.3 46.4 (2.62) –1.4 49.7 (3.05) –2.6 44.7 (2.38) –1.4 2.12 (0.62) 0.47 23.20 (10.24) 5.87 3.82 (6.60) –2.12 1.153 (0.05) 0.01 0.325 (0.175) 0.048 19.2 (8.3) 2.9

note: The figures in brackets are the standard deviations. source: The authors’ own calculations based on data collected for this study.

19  Du Yang 都阳, “Zhizao ye qiye dui laodongli shichang bianhua de fanying: jiyu weiguan shuju de guancha 《制造业企业对劳动力市场变化的反应：基于微观数据的观察》 [The Response of Manufacturing Firms to Changes in the Labor Market: Observations Based on Micro Data],” Jingji yanjiu 《经济研究》 Vol. 1 (2013).

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3.2 The Estimation Model As mentioned earlier, the main purpose of this study is to observe the impact of and means by which labor migration to the cities affect output levels and economic efficiency. Thus, the main explanatory variable is ΔLmi /Li, which is the change in employment due to the inflow of migrant labor as a proportion of total employment. Similar to the empirical regression model used by Peri,20 this study’s main aim is to use the following series of equations to observe the corresponding elasticity values ηb. m

bˆi = γ + ηb ΔLi + εi Li

(Equation 3.1)

where the variables bi on the left of the equation are total level of employment L, capital-output ratio K/Y, TFP A, average working hours x, and the skill intensity index φ. Due to the casual relationship between the explanatory variable and the explained variable, using OLS regression will cause our calculation of elasticity to be biased. Thus, we chose to use instrumental variables and 2SLS estimation for the above equation. Instrumental variables include the following two types: migrants who had already settled down at an earlier stage as a proportion of total employment, and the distance by rail from the city to the nearest transportation hub. Cities that are transportation hubs include Beijing, Shanghai, Guangzhou, Xi’an and Chengdu. 3.3 Estimation Results Table 3.2 lists the main regression results. As mentioned earlier, we need to observe how the main explanatory variable ΔLmi /Li, which is the “change in employment due to the inflow of migrant labor as a proportion of total employment,” affects the size of the labor market (employment) and output per worker. According to equation 3.1, the impact on output per worker can be further divided into the impact on capital-output ratio, TFP, working hours, and the skill intensity index, with the latter further involving two other parameters β and S. Every row in Table 3.2 lists the regression results of one of the abovementioned variables on the explanatory variable ΔLmi /Li that we are interested in and every column reflects the changes in the specification. Every cell in Table 3.2 reports the estimated elasticity value ηb. We will explain the meaning of these elasticity values in detail in the next section. 20  Peri, “The Effect of Immigration on Productivity,” 2009.

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Table 3.2 Main regression results OLS Basic specification

Employment Output per worker

Composition of output per worker Capital-Output ratio TFP Working hours Skill intensity index

Composition of skill intensity index β S Number of observations

Lagged explanatory variable

2SLS Basic specification

Lagged explanatory variable

1.08 (0.033)*** –0.525 (0.054)***

1.10 (0.034)*** –0.34 (0.05)***

0.837 (0.098)*** –1.00 (0.167)***

0.994 (0.077)*** –0.493 (0.306)**

–0.153 (0.038)*** –0.138 (0.099)*** –0.027 (0.066) 0.0003 (0.005)

–0.201 (0.037)*** –0.077 (1.06) 0.026 (0.057) –0.036 (0.047)

–0.731 (0.141)*** 0.598 (0.291)*** –0.061 (0.018)*** –0.0088 (0.014)

–0.759 (0.136)*** 0.906 (0.39)*** –0.043 (0.018)*** –0.0026 (0.012)

–0.383 (0.158) –0.011 (0.064) 251

–0.355 (0.370) –0.033 (0.055) 251

–0.1225 (0.443)*** –0.412 (0.183)*** 251

0.139 (0.352) 0.207 (0.581) 251

note: The first column in the table lists the explained variables, and the reported results are the regression results of ΔLmi /Li. All regression equations were weighted according to the size of urban employment in 2010. *** denotes statistical significance at the 1% level, ** denotes statistical significance at the 5% level and * denote statistical significance at the 10% level.

4

How Much Dividend Can Household Registration System Reform Bring?

As the urban and rural labor markets become increasingly integrated, rural migrant labor has emerged as the main source of labor supply in the urban labor market. According to the nationwide migrant worker monitoring survey

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conducted by the National Bureau of Statistics, the number of outgoing migrant workers had reached 166 million in 2013, accounting for 43% of urban employment. However, the relaxing of labor market restrictions without comprehensive household registration system reform has resulted in population flows that are mainly labor flows. With household registration system reform lagging behind, an urbanization process that is dominated by labor migration will inevitably distort the demographic and economic structure, and restrict economic development. With population flow and urbanization being dominated by labor migration, China is beginning to experience a labor crunch just as its urbanization reaches the halfway mark. Due to the selectiveness of the labor market, those who get to utilize the opportunities in the labor market first are always the ones with better human capital. Thus, the net migration of labor is dependent on family and individual endowments, thus causing the flow of labor to present a non-linear characteristic: i.e. only labor with human capital and household endowments reaching the critical level can make use of the labor market (Du et al., 2005).21 When there can be no further transfer of this sort of labor, we will approach the Lewisian turning point even if there is still plenty of surplus agricultural labor.22 This sort of urbanization distorts the urban-rural demographic structure. With a very high migration rate among those below the age of 30, there will be new changes in the age structure of the rural resident population, with the so-called phenomena of the “left-behind elderly” and “left-behind children” becoming increasingly obvious. This leads to problems in education and oldage support as well as other social problems. Similarly, there is a widening gap between urbanization that is defined in terms of the resident population and urbanization that is defined in terms of the registered population, with this gap reaching 17.3 percentage points in 2012 (“National New Urbanization Plan 2014–2020”). 4.1 Increasing the Size of the Labor Market Given the current distribution of rural labor resources, due to the aforementioned selectivity of labor migration, the amount of surplus labor resources will increase with age. As shown in Figure 3.1, due to higher reservation wage, it 21  Du Yang, Albert Park, and Wang Sangui, “Migration and Rural Poverty in China,” Journal of Comparative Economics, 33 (4) (2005): 688–709. 22  Cai Fang 蔡昉, “Jingji fazhan yu liuyisi zhuanzhedian 《经济发展与刘易斯转折点》 [Economic Development and the Lewisian Turning Point].” Jingji yanjiu 《经济研究》 Vol. 1 (2010).

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moved to the cities

remaining in the countryside

(10,000 people)

10000

5275

3280

8000 5150

6000

4071

4000 2000 0

6317 874 616 16~19

2650

2998

20~29

30~19

40~49

8553

50~64

(age)

Figure 3.1 Distribution of rural labor resources in 2009. Source: Calculated according to microdata obtained from the “National Bureau of Statistics Household Survey in 2009.”

becomes more difficult for workers above the age of 40 to migrate via the labor market. In 2009, there were 178 million rural workers aged between 30 and 64 remaining in the countryside, comprising 84.5% of the total number of rural workers in the countryside. If that is the case, can such labor be better used in the urban labor market? The answer is yes. First, the current labor shortage is mainly caused by the lack of low-skilled workers. Thus, increasing the supply of low-skilled labor will no doubt enable them to secure better employment opportunities and sustain China’s economic competitiveness at the same time, thus buying time for structural adjustment. Second, the relationship between ordinary labor and existing high-skilled urban labor is a complementary one. The inflow of low-skilled workers encourages further specialization and professionalization among high-skilled workers, thereby improving economic efficiency. Finally, the experiences of other countries23 have shown that changes in employment structure generally exhibit a trend of polarization, with low-end jobs also experiencing continuous growth during the restructuring process. As such, there will be sustained demand for rural workers above the age of 40 in the urban labor market. Returning to the issue of our discussion, we can easily tell from the regression results that the size of urban employment is already mainly determined by the magnitude of labor inflows, with the elasticity value as high as 0.99. According to neoclassical growth theory, as capital-output ratio cannot increase indefi23  Oldenski, Lindsey, “Offshoring and the Polarization of the US Labor Market,” in the Handbook of Labor Economics, Volume 4. Amsterdam: North Holland Press, 2012.

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nitely, long-term economic growth will almost exclusively depend on increasing the scale of employment and raising TFP. 4.2 Raising TFP Peri’s empirical analysis24 of various US states illustrated that more immigrants (even though they were mostly a lowly-skilled group) helped drive local workers in the labor market toward greater specialization and enabled TFP to grow by more than half. Other studies have also shown that as immigrants were mostly concentrated in labor-intensive work, this enabled the skills of other workers to be more efficiently allocated. Therefore, the inflow of immigrants drives more local workers toward skills-intensive and knowledge-intensive sectors. Thus, higher levels of specialization and competition makes the inflow of immigrants the source of improved economic efficiency. Table 3.1 shows the changes in TFP between the year 2005 and 2010. From 2005 to 2010, the average TFP in the cities fell by 36%. However, the main reason for this fall was because there was no change in, but instead further entrenchment of the economic growth model that is based on factor accumulation. As Table 3.1 shows, the average urban capital-output ratio rose from 1.65 in 2005 to 2.12 in 2010, an increase of 28%, while two figures at the top of Figure 3.2 show an obvious inverse relationship between the capital-output ratio and TFP, i.e. the more reliant a city is on investment to stimulate economic growth, the lower its economic efficiency. The two figures at the bottom of Figure 3.2 show the relationship between labor migration and TFP, which indicates that even without controlling for other factors, we can observe that the more open the labor market is in a given city, the higher its economic efficiency. The regression results of using instrumental variables in Table 7.2 indicate that changes in migrant labor numbers in urban employment do have a positive effect on raising economic efficiency. By controlling the initial level of TFP, the elasticity value was 0.91 and of a statistically significant level. To observe the effect of the value σ (elasticity of substitution) on TFP, we gave σ the values of 1.5, 1.25, and 0.5 so as to observe the changes in the elasticity value η. Using the same instrumental variables, regression method and specification, the respective values of η were 0.99, 0.75, and 0.18, which were all statistically significant at the 1% level. 4.3 Capital-Output Ratio, Working Hours, and the Skill Intensity Index According to neoclassical theory, in the long term, when economic growth reaches a stable state, growth in output per worker will be solely determined 24  Peri, “The Effect of Immigration on Productivity,” 2009.

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2 0

-2

-4

-0.5

0

-4

0 0.5 1.0 1.5 Capital-output ratio ( logarithm ) 2005

4 tfp (logarithm)

tfp (logarithm)

2

-2

4 2 0

-2

-4

2010

4 tfp (logarithm)

tfp (logarithm)

4

-0.5

0 0.5 1.0 1.5 Capital-output ratio ( logarithm ) 2010

2 0

-2

-4 0.4 0.6 0.2 0.8 1.0 0 0.2 0.4 0.6 0.8 1.0 Percentage of rural workers Percentage of rural workers Figure 3.2 TFP and capital-output ratio and the migrant worker ratio. Source: Calculated from relevant data. 0

by increases in TFP, while capital-output ratio, working hours, and the skill intensity index will all remain constant and will not contribute to growth in output per worker. However, for the Chinese economy which is on the cusp of structural adjustment, we can still observe the effects of these factors on output per worker, especially since our data focuses on observing the changes in the growth performances of various cities between 2005 and 2010, during which a large-scale stimulus program was implemented after the financial crisis, with the capital-output ratio increasing significantly during this time. 4.3.1 Capital-Output Ratio As Table 3.1 shows, the capital-output ratio rose significantly during the period of our observation, but our regression analysis showed that the inflow of migrant labor had lowered the capital-output ratio considerably, with the elasticity value at –0.76. Such a finding is consistent with Peri’s (2009) analysis on immigrants in US states. The capital-output ratio is already fairly high due to China’s excessive dependence on investment for economic development. To a certain extent, a lowered capital-output ratio is consistent with the overall aim of changing the economic growth model and beneficial to the sustainable and healthy development of the Chinese economy.

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4.3.2 Working Hours Given the difference in working hours for the two types of workers in the urban labor market, in general, the change in average working hours ΔT is dependent on the following factors: the change in the working hours of local workers (ΔTL), the difference in the working hours of migrant labor and local labor (TML2005) and its change (ΔTML) and the ratio of migrant labor to total employment (s M2005) and its change (Δs M), which is: ΔT = ΔTL + Δs M TML2005 + s M2005 Δ TML+ Δs M Δ TML  (Equation 7.2) When compared with the year 2005, average weekly working hours in the urban labor market had dropped by 1.37 hours. The census data showed that both local labor and migrant labor had shorter working hours. According to equation 3.2, we can further break down the source of this change. The results show that working hours decreased mainly due to decreases in the working hours of local urban workers, which accounted for 102%; while the narrowing gap between the working hours of migrant workers and local workers accounted for 28%; and the increased ratio of migrant workers to total employment caused average weekly working hours to increase by 0.41 hour, accounting for 30%. This means that ceteris paribus, if we only observe the impact of labor flows on average working hours, we will see that it helps to increase average working hours (Table 3.3) On the whole, our data shows that working hours are on the decline. The regression results show that increased migration had also caused the average weekly working hours to decrease slightly, with an elasticity value of –0.043. Table 3.3 Sources of the change in average weekly urban working hours 2005–2010 Weekly working hours (hours)

Proportion (%)

ΔT ΔTL Δs M TML2005

–1.37 –1.40 0.50

100.0 102.1 –36.8

s M2005 Δ TML Δs M Δ TML

–0.39 –0.09

28.0 6.6

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4.3.3 Skill Intensity Index The skill intensity index saw negligible change from 2005 to 2010. Also, the impact of the flow of labor on the skill intensity index was not statistically significant. This could be due to the fact that our period of observation was fairly short. Thus in the following analysis, we will ignore the effects of changes in the skill intensity index on the benefit of reform. 4.4 Net Benefit of Reform The “National New Urbanization Plan 2014–2020” clearly states the following development objectives, which are to “achieve urbanization rates of around 60% for the resident population and around 45% for the registered population, narrow the urbanization gap between the registered population and resident population by about a 2 percentage points, and strive to have around 100 million rural migrants and other resident population to settle down in the cities” by 2020. 7.4% of the population (around 100 million people) will have to move from the countryside to the cities for the urbanization rate of the resident population to reach 60%. With a situation in which young and able workers are already fully participating in this transfer, this objective can only be realized through the comprehensive reform of the household registration system. To bring another 100 million rural workers to the cities by 2020 would mean an additional inflow of 16.67 million people on average yearly. Considering that these new rural migrants will not mainly consist of young and able workers, we assume their labor force participation rate to be the average non-agricultural labor force participation rate of 65% in 2010.25 Using the elasticity values calculated in this study, we can gauge the economic benefit of realizing the above objectives by deepening household registration system reform. As Table 3.4 shows, over the next six years, the economic benefits of expanding the labor market and raising TFP would be in the region of four to five percentage points each year. But the capital-output ratio would drop as a result of population movement and the working hours per worker would also decrease, causing the benefit to be in the negative. Due to the statistical insignificance of the skill intensity index in regression, we will not take its impact into consideration. Overall, population movement has a positive net benefit and can initially

25  Du Yang and Lu Yang 都阳、陆旸, “Jingji fazhan xin jieduan de laodong gongji xingshi yu zhengce《经济发展新阶段的劳动供给形势与政策》 [The Labor Supply Situation and Policies in the New Stage of Economic Development],” in Cai Fang (ed.) 2013 nian Zhongguo renkou yu laodong wenti baogao《2013中国人口与劳动问题报告》2013 Report on China’s Population and Labor Issues. Beijing: Social Sciences Academic Press, 2013.

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generate a net benefit of about 2 percentage points for the GDP per year. But this will drop thereafter and will still be about 1.6 percentage points in 2020. Even if we assume that the GDP growth rate falls to 5.5% in the next few years, the annual net benefit (in 2013 prices) will still be in excess of 1 trillion yuan as shown in the last column of Table 3.4. We should point out that a new model of urbanization driven by the comprehensive deepening of household registration system reform can make China’s economic development more sound. The negative effects of a decreased capital-output ratio and decreased working hours are offset by the more comprehensive utilization of labor and increases in productive efficiency. If these objectives are met, China can avoid falling into the middle-income trap and it can also raise the quality of its economic growth by abandoning the old growth model of factor accumulation. 5 Conclusion China’s reform is now entering the “deep-water zone” and the comprehensive reform of the household registration system should be one of its most important tasks. As the traditional model of economic growth based on factor accumulation outlives its usefulness and is unable to do more, deepened reforms becomes compatible with sustained growth. Indeed, only reform can provide new impetus for China’s economic development, enable it to avoid Table 3.4 Net benefit of comprehensive household registration system reform Year

Size of the labor TFP (%) market (%)

K/Y (%) Working hours (%)

Net benefit Net benefit (%) (billion yuan)

2014 2015 2016 2017 2018 2019 2020

5.56 5.26 5.00 4.76 4.54 4.34 4.16

–8.24 –7.80 –7.41 –7.05 –6.73 –6.44 –6.17

2.14 2.03 1.93 1.84 1.75 1.68 1.61

5.06 4.80 4.56 4.34 4.14 3.96 3.79

–0.24 –0.23 –0.22 –0.21 –0.20 –0.19 –0.18

1220 1213.2 1209.8 1209.5 1211.9 1216.9 1224.3

note: In accordance with the population transfer objectives set by the “National New Urbanization Plan 2014–2020” and assuming an economic growth rate of 5.5%. source: Authors’ calculations according to estimation results.

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the problems in development associated with the middle-income stage to join the ranks of high-income economies, as well as lay a sound material basis for China’s national rejuvenation. Comprehensive reform of the household registration system will not just facilitate integrated rural and urban development and allow more people to enjoy the opportunities provided by reform and opening up, the growth potential that it brings will also be an important driver of China’s continued economic development. In the past, we have neglected the dividends that household registration system reform can bring. This study has made use of data from many nationally-representative databases to observe the impact of migrant inflows on urban economic development. The results show that migrant inflows are the main source of labor market expansion and make an important contribution to economic growth. More importantly, the free flow of labor improves economic efficiency, and the latter will become the main source of China’s future long-term economic growth. Although an increase in migrant numbers can have a negative effect on capital-output ratio, but as the need to transform the economic growth model becomes greater, this change will also be compatible with our reform objectives. The “Decision of the CCCPC on Some Major Issues Concerning Comprehensively Deepening Reform” and the “National New Urbanization Plan 2014–2020” have clarified the reform objectives concerning the household registration system for the next few years. On June 30, 2014, the Politburo of the CCCPC held a meeting and passed the “Opinions on Further Promoting the Reform of the Household Registration System” which proposed “actively pushing for the provision of basic urban public services to shift from targeting the local registered population to the resident population.” The thrust of comprehensive household registration system reform should be to thoroughly reform the welfare system and public services that are linked to household registration and create conditions for further and full labor mobility. The method of reform should also go beyond past methods that focus on regional experimentation and categorical reforms. Instead, there should be more systematic design at the top level to push for more comprehensive reform of the household registration system in different types of cities and regions. However, the process of reform will face unprecedented challenges. Hopefully, the empirical results of this study will enable more people to recognize that the so-called “costs” of household registration system reform will in fact enable a wider population to benefit from the fruits of development. The focus on the “costs” incurred in reform is a narrow one, as its benefits are the source of China’s continued economic development.

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References Borjas, George. “The Economics of Immigration.” Journal of Economic Literature, 32 (4) (1994): 1667–1717. Cai, Fang 蔡昉. “Jingji fazhan yu liuyisi zhuanzhedian《经济发展与刘易斯转 折点》 [Economic Development and the Lewisian Turning Point].” Jingji yanjiu 《经济研究》Vol. 1 (2010). Chow, Gregory. “Capital Formation and Economic Growth in China.” Quarterly Journal of Economics, 108 (3) (1993): 809–842. Ciccone, Antonio and Giovanni Peri. “Identifying Human-Capital Externalities: Theory with Applications.” Review of Economic Studies, 73 (2) (2006): 381–412. Du, Yang 都阳. “Zhizao ye dui laodongli shichang bianhua de fanying: jiyu weiguan shuju de guancha 《制造业企业对劳动力市场变化的反应：基于微观数据 的观察》 [The Response of Manufacturing Firms to Changes in the Labor Market: Observations Based on Micro Data].” Jingji yanjiu 《经济研究》 Vol. 1 (2013). Du, Yang, Albert Park, and Sangui Wang. “Migration and Rural Poverty in China.” Journal of Comparative Economics, 33 (4) (2005): 688–709. Du, Yang and Yang Lu 都阳、陆旸. “Jingji fazhan xin jieduan de laodong gongji xingshi yu zhengce《经济发展新阶段的劳动供给形势与政策》 [The Labor Supply Situation and Policies in the New Stage of Economic Development],” in Fang, Cai (ed.) 2013 nian Zhongguo renkou yu laodong wenti baogao《2013中国人口 与劳动问题报告》 [2013 Report on China’s Population and Labor Issues]. Beijing: Social Sciences Academic Press, 2013. Gong, Liutang and Danyang Xie 龚六堂、谢丹阳. “Woguo shengfen zhijian de yaosu liudong he bianji shengcanlü de chayi fenxi《我国省份之间的要素流动和边 际生产率的差异分析》 [Variance Analysis of Factor Mobility and Marginal Productivity Among China’s Provinces].” Jingji yanjiu 《经济研究》 Vol. 1 (2004). Lewis, Ethan. Immigration, “Skill Mix, and the Choice of Technique.” Federal Reserve Bank of Philadelphia Working Paper, No. 05–08, 2005. Liu, Mingxing 刘明兴. “1952–1999 nian Zhongguo jingji zengzhang shuju《1952–1999 年中国经济增长数据》 [Statistics on China’s Economic Growth 1952–1999].” Research report for forum on economic development organized by the China Center for Economic Research, Peking University, 2002. Oldenski, Lindsey. “Offshoring and the Polarization of the U.S. Labor Market,” in the Handbook of Labor Economics, Volume 4. Amsterdam: North Holland Press, 2012. Peri, Giovanni. “The Effect of Immigration on Productivity: Evidence from U.S. States.” NBER Working Paper, No. 15507, 2009. Perkins, Dwight. “Reforming China’s Economic System.” Journal of Economic Literature, 26 (2) (1988): 601–645.

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Shan, Haojie 单豪杰. “Zhongguo ziben cunliang K de zai gusuan 1952–2006 nian 《中国资本存量Ｋ的再估算: 1952–2006 年》 [Recalculation of China’s Capital Stock K: 1952–2006].” Shuliang jingji jishu jingji yanjiu 《数量经济技术经济研 究》 Vol. 10 (2008). Wang, Xiaolu and Gang Fan 王小鲁、樊纲. Zhongguo jingji zengzhang de kechi xuxing—kua shiji de huigu yu zhanwang《中国经济增长的可持续性—跨世纪的 回顾与展望》[Sustainability in China’s Economic Growth: A Cross-Century Review and Outlook.] Beijing: Economic Science Press, 2000. Young, Alwyn. “Gold into Base Metals: Productivity Growth in the People’s. Republic of China during the Reform Period.” Journal of Political Economy, 111 (6) (2003): 1220–1260. Zhang, Jun and Yuan Zhang 张军、章元. “Dui Zhongguo ziben cunliang K de zai guji《对中国资本存量Ｋ的再估计》 [Recalculation of China’s Capital Stock K].” Jingjiyanjiu 《经济研究》Vol. 7 (2003). Zhang, Jun, Guiying Wu, and Jipeng Zhang 张军、吴桂英、张吉鹏. “Zhongguo sheng ji wuzhi ziben cunliang gusuan: 1952–2000《中国省际物质资本存量 估算: 1952–2000》 [China’s Inter-Provincial Physical Capital Stock: 1952–2000].” Jingji yanjiu 《经济研究》 Vol. 10 (2004).

CHAPTER 4

Extending Compulsory Education: Accumulating Human Capital for China’s Transition to the High-Income Stage Du Yang China’s economic development in the period of the “13th Five-Year Plan” will be of milestone significance in its journey toward national revival. The rapid growth of the Chinese economy over the last three decades or so has been a miracle in the history of economic development. Not only did China cut poverty at an unprecedented scale in the history of mankind within a very short period of time, it has also become an upper-middle income country by the World Bank’s standards and is not far from the minimum level that will make it a high-income economy. By the World Bank’s calculation, when measured by purchasing power parity, China’s GDP per capita (in constant 2005 dollars) hit US$6,804 in 2010. According to calculations based on economic growth rates from 2010 to 2013, China’s GDP per capita had reached US$8,626 (purchasing power parity, 2005 constant dollars) in 2013. If China can maintain an annual average economic growth rate of 6% during the period of the “13th Five-Year Plan,” its GDP per capita measured by purchasing power parity would reach around US$13,000 in 2020, which generally makes it a high-income country. Even though this seems an easy task, we cannot expect instant results. Looking at the history of economic development, there are few successful examples of countries becoming high-income economies, while it is common to see the growth of countries stagnate during the middle-income phase. Some scholars even predicted that regression to the mean would be a very likely phenomenon for economies that had experienced a relatively long period of rapid growth1 and they made some grim predictions about the growth prospects of some rapidly-growing economies in Asia. A multinational survey covering more than 100 countries showed that countries in the middle-income stage were much more likely to experience long periods of “stagnated growth” than

1 Lant Pritchett and Lawrence H. Summers, “Asiaphoria Meets Regression to the Mean,” NBER Working Paper, No. 20573, 2014.

© koninklijke brill nv, leiden, ���7 | doi ��.��63/9789004342156_005

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those in the low-income and high-income stages.2 Although the factors determining economic performance are very complex, a comparison of countries that have succeeded and those that remain stuck in the middle-income trap reveals that the effective accumulation of human capital during the middleincome phase and using the increased human capital to boost the growth of TFP, which will in turn drive economic growth, is a very important link. China has achieved marked progress in accumulating human capital over the last three decades. It is an indisputable fact that the rapid and comprehensive universalization of nine years of compulsory education produced large pools of qualified industrial workers for China’s industrialization process. The accumulation of human capital during this time enabled China’s manufacturing industry to grow by leaps and bounds and increased the international competitiveness of its labor-intensive economy. The unusually rapid expansion of higher education in the recent decade also had a positive impact on raising the overall quality of China’s workforce. Even though some university graduates experienced employment difficulties in the short term, improvements in the quality of labor will lay the human capital foundation for the future comprehensive transformation and upgrading of its economic structure. As China’s economic development faces challenging times during the period of the “13th Five-Year Plan,” sustaining the trend of human capital accumulation, while having important implications for continued economic development, will also face severe challenges. In this regard, extending compulsory education should be emphasized in the new round of work planning. Incorporating senior middle school education into the compulsory education framework can further boost the accumulation of human capital and lay a strong human capital foundation for China to become a high-income economy. 1

Greater Human Capital Accumulation Needed to Escape the Middle-Income Trap

With nine years of universal compulsory education, China has accumulated an effective pool of human capital within a relatively short time, and this has enabled its economy to grow rapidly for a fairly long period of time and allowed it to accrue ample human resources for the initial stage of industrialization. As an economy transits from the middle-income to the high-income phase, the constraints on economic development will also become increasingly obvious, particularly since economic growth will progressively depend on 2 Shekhar Aiyar, Romain Duval, Damien Puy, Yiqun Wu, and Longmei Zhang, “Growth Slowdown and the Middle-Income Trap,” The IMF Working Paper, No. 13/71, 2013.

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improvements in economic efficiency (productivity), thus placing a greater demand on human capital. This on the one hand requires the further deepening of reforms to the economic system so as to create a market environment that is more favorable to efficient resource allocation; on the other hand, the government must continue to play an active role in accumulating human capital and perform the functions that cannot be replaced by the market. Looking at the internal demands of China’s economic development during the period of the “13th Five-Year Plan,” there is still a pressing need to extend compulsory education and strengthen the accumulation of human capital and this is mainly reflected in the following ways: Economic Growth Driven by TFP is Crucial for Escaping the MiddleIncome Trap International experience has shown that the essential difference between economies that have successfully made the leap from the middle-income to high-income phase (such as Japan, South Korea, Singapore, and Taiwan) and those that remain stuck in the “middle-income trap” (such as some Latin American and South Asian countries) is that the East Asian economies had depended more on TFP-driven economic growth in the later stages of the middle-income phase, which accounted for their smooth transition into the highincome stage, while countries stuck in the middle-income trap continued to rely on the simple accumulation of production factors. As for the sources of TFP, this can be achieved by the more efficient allocation of various production factors including labor, or by improving the productive efficiency of workers in their current positions, and these two sources play different roles at different stages of economic development. Meanwhile, the corresponding policy measures used to achieve these two forms of TFP also differ greatly. The miraculous economic growth that China has experienced since its reform and opening up is both due to the rapid accumulation of production factors and more productive efficiency enabled by the reallocation effects of labor flows. In the period of the dual economy, given the very low marginal productivity of agricultural labor, labor shifts from the agricultural to the nonagricultural sector can raise the marginal productivity of labor and improve the efficiency of allocation, thereby raising TFP. In the first two decades of reform, the reallocation of labor contributed 20%–25% to annual economic growth.3 1.1

3 World Bank 世界银行, 2020 nian de Zhongguo: Xinshiji de fazhan tiaozhan 《2020 年的 中国：新世纪的发展挑战》 [China in 2020: Challenges in Development in the New Century], Beijing: Finance and Economic Publishing House, 1998;

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But in recent years, due to significant changes in labor market conditions, the wages of workers in different regions and in the urban and rural areas have increasingly converged. Agricultural labor input is becoming increasingly expensive due to rising opportunity cost and the substitution of labor with mechanization in agriculture is becoming more and more evident. The marginal productivity of agricultural labor is also gradually increasing due to the transfer of surplus agricultural labor. This means that any further transfer of agricultural labor will not just result in losses to total agricultural output, but will also generate far lesser benefits in efficiency when compared to the period of a classic dual economy. In other words, the possibility of achieving TFP through labor shifts and reallocation becomes progressively low. We used the wage of hired agricultural labor in place of agricultural wage to reflect the marginal productivity of agricultural labor input, and the average wage of outgoing migrant workers in place of their marginal productivity of labor in the non-agricultural sector. This way, we can calculate the average productivity contributed by each transferred worker. Multiply that with the total number of outgoing migrant workers and we can know the contribution of agricultural labor transfer to economic growth. The results are shown in Table 4.1. We can see that as wages in the agricultural and non-agricultural sectors converge, the reallocation effects of labor flow makes a gradually diminishing contribution to economic growth, and this is particularly obvious during the period of the “12th Five-Year Plan.” With the labor market experiencing pivotal changes during the periods of the “11th Five-Year Plan” and the “12th Five-Year Plan” and as the supply of agricultural surplus labor dries up, converging wages (marginal productivity of labor) in the agricultural and non-agricultural sectors make it progressively difficult for TFP and economic growth to be driven through the reallocation of labor. During the period of the “10th Five Year Plan,” the average contribution of the reallocation of labor to economic growth was 23.1%, but this fell to 12.4% during the period of the “11th Five Year Plan” and 8.6% during the earlier period of the “12th Five Year Plan.” As changes to the labor market intensify during the period of the “13th Five Year Plan,” it will become even more difficult to achieve TFP through the reallocation of labor and economic growth will become ever more dependent on the increased productivity of transferred labor in their new jobs. This means we cannot simply rely on industrial workers with mainly junior middle Cai, Fang and Dewen Wang 蔡昉、王德文, “Zhongguo jingji zengzhang kechi xuxing yu laodong gongxian 《中国经济增长可持续性与劳动贡献》 [The Sustainability of China’s Economic Growth and the Contribution of Labor],” Jingji yanjiu《经济研究》 Vol. 10 (1999): 62–68.

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Extending Compulsory Education Table 4.1

The contribution of the reallocation of labor to economic growth

Unit: %

Year

Economic growth rate

Contribution of reallocation

Contribution of reallocation to growth

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

 8.3  9.1 10.0 10.1 11.3 12.7 14.2  9.6  9.2 10.4  9.3  7.7

2.02 2.86 2.59 1.71 1.94 1.74 1.20 1.04 1.30 1.06 0.72 0.73

24.3 31.4 25.9 16.9 17.2 13.7  8.5 10.9 14.2 10.1  7.7  9.5

school education to sustain the increase in TFP during the period of the “13th Five Year Plan” and beyond, and that the need to increase the overall quality of industrial workers is becoming more urgent. Also, during a period when TFP mainly depends on the reallocation effects of labor flows, the main policy measures will be to encourage labor-intensive sectors to develop and to strengthen the mobility, competitiveness, and flexibility of the labor market. But when TFP mainly depends on increased productivity of workers in their current positions, then the further accumulation of human capital becomes more important, and the latter is the main challenge that we are going to encounter during the period of the “13th Five Year Plan.” Economic Restructuring Requires Greater Accumulation of Human Capital China has entered the middle-to-late phase of its industrialization. A striking characteristic of economic growth in the later period of the middle-income phase is that the economic structure tends to gradually shift from specialization to diversification. Imbs and Wacziarg4 observed that in the initial stages 1.2

4 Imbs, J. and R. Wacziarg, “Stages of Diversification,” American Economic Review, 93(1) (2003): 63–86.

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80

Employment distribution of all jobs

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70 66.7

60

60

50

50

40

40

30 20 10

7.1 7.6

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3

15.4

4

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20.4

18.8

5

6

7

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2.2 3.8 1

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7.9

4.6 2.0 3.3 5.5 2.1 1.8

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8

9

10

Figure 4.1 Employment distribution of non-agricultural jobs by job-quality decile. Source: Calculations based on data from the one percent population survey in 2005.

of economic development, with employment concentrating in the industrial sector, the economic structure gradually becomes more specialized. But it becomes more diversified once again during the later stages of the middleincome phase, and places greater demands on the mode of economic growth and the level of human capital. The transformation of China’s economic and employment structures show similar characteristics. China’s rapid economic growth since its reform and opening up was mainly driven by massive transfers of agricultural labor to nonagricultural sectors. The development of labor-intensive sectors not only created plenty of employment opportunities but also increased the specialization of labor-intensive sectors such as in manufacturing and expanded the market, making China the world’s factory within the short span of a few decades. Meanwhile, its economic structure gradually became more specialized. But in recent years, China’s employment structure is becoming more diversified. Based on nationally-representative microdata, we grouped the industries and occupations according to their 2-digit classification codes in order to observe the job situation concerning 5,034 jobs, including their industrial and occupational characteristics. After ranking all the jobs by wage level, we divided them into deciles. Figure 4.1 shows the distribution of employment by job-quality decile. The bar chart on the right shows that, the lowest-end jobs accounted for two-thirds of all non-agricultural employment in 2005. The bar chart on the left in Figure 4.2 shows the average number of years spent in education by workers in each job-quality decile. The jobs in the lowest 30% require approximately 9–9.4 years of human capital, which coincides with the

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Number of years spent in school (educational attainment)

6 3 0

1

2

3

4

5

6

7

8

9 10

Educational attainment distribution of all jobs 13.3 12.6 12 11.1 11.6 10.3 10.6 10.0 9.4 9.4 9 9.0 15

Number of years spent in school (educational attainment)

Educational attainment distribution of wage jobs 13.5 12.7 11.9 12 10.8 11.3 10.2 10.4 9.5 9.5 9.2 9 15

6 3 0

1

2

3

4

5

6

7

8

9 10

Figure 4.2 Demands on human capital by job-quality decile. Source: Calculations based on data from the one percent population survey in 2005.

average number of years spent in education by workers during this period. In a way, employment structure is not only linked to economic structure but also determined by the supply structure of human capital. Given the limited information, we were unable to observe more recent changes in the employment situation according to job quality, i.e. during the period of the “11th Five-Year Plan” and the “12th Five-Year Plan.” But we can say based on the observation of other microdata that the employment structure had indeed been changing since 2005, with constant growth in the number of wage jobs and increasing regularity in employment. Even if we do not take the structural upgrading of employment into account and only observe the distribution of wage jobs in the same period, we can see the demands placed by changes in the industrial structure and employment structure on human capital. The bar chart on the left in Figure 4.2 shows that waged employment is mainly concentrated in jobs of medium quality demanding 10–12 years of human capital. In other words, if the employment structure continues to evolve during the period of the “13th Five-Year Plan,” then the corresponding human capital required for the jobs will be senior middle school education. Rising Labor Costs Demand Human Capital Investments to Raise Productivity Changes in the labor market were the most obvious during the periods of the “11th Five-Year Plan” and the “12th Five-Year Plan,” i.e. frequent labor shortages and accelerated increases in the wages of ordinary workers. Between 2001 and 2006, the compound annual growth rate of the real average wage of migrant 1.3

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workers was 6.7%, and this grew to 12.7% from 2007 to 2013. The rise in the wages of ordinary workers has a significant impact on an economy that is mainly supported by labor-intensive sectors. Once the growth in labor costs outpace that of productivity, the comparative advantage of such labor-intensive sectors will be eroded. Under such circumstances, the pressure for the economic structure to transform and upgrade becomes much greater and there is an urgent need to change the economic growth model and raise labor productivity. As increases in labor costs are to a large extent driven by supply-side factors (especially medium-to-long term stable factors such as the demographic structure), it is probable that wages will still increase steadily for sometime into the future. The only way to sustain China’s economic growth potential and international competitiveness is to increase labor productivity and the most basic means of doing so is to enhance the human capital of labor. The Labor Market Returns to Senior Middle School Education are Still Significant Even if we discount the new demands on skills that may arise as a result of changes in the economic structure during the period of the “13th Five-Year Plan” and beyond, the labor market returns to senior middle school and college education are significant at present (Figure 4.3). Our calculations of wage equations in different periods using microdata reveals that after controlling for other individual characteristics and labor market factors, workers with senior middle school education enjoyed approximately 17% higher returns over 1.4

0.9 0.8

Senior high school 0.804

College education and beyond 0.753

0.7

0.571

0.6 0.5 0.4 0.3 0.2

0.259

0.173

0.169

0.1 0

2005 2010 (Year) 2001 Figure 4.3 Returns to senior middle school education and college education and beyond relative to nine years of compulsory education. Source: Calculated based on data from the “Chinese Urban Labor Market Survey.”

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workers with junior middle school education. The relative returns to college education and beyond diminished as the supply of graduates increased, but in 2010, it was still higher than that of workers with junior middle school education by around 57%. From this, we can see that on the whole, extending compulsory education up to the senior middle school level can still improve economic efficiency and bring better labor market returns even under the existing supply and demand structure of the labor market. Considering that investments in human capital should be made ahead of changes to economic structure, it would be timely to extend compulsory education to the senior middle school level during the period of the “13th Five-Year Plan.” A Nine-Year Compulsory Education System is Already Lagging behind China’s Stage of Development Economies that have successfully made the transition from the middle-income phase have all adopted development strategies that prioritize education. In China’s experience with development, the universalization of nine years of compulsory education was also an important strategic measure that enabled it to enter the middle-income stage. But the earlier experiences of developed countries show that a nine-year compulsory education system is already lagging behind China’s stage of development. A basic direction of modern economic growth and transformation is that when development reaches a particular stage, the economic system must shift from a model of growth that mainly relies on traditional factor inputs to one that allows human capital to play a role and is dependent on innovation and technological improvements enabled by the accumulation of human capital. The Chinese economy, which has entered the middle-income phase, can no longer just rely on the input of factors such as labor and capital to sustain economic growth. Future economic development must depend on human capital and the technological improvements and productivity increases that it brings. The accumulation of human capital is a key engine of economic growth, particularly for less-developed countries that are trying to catch up with and surpass developed countries. This is also the broad consensus reached by development economics and economic growth theories. Economies that have successful emerged from the middle-income phase such as South Korea and Japan had senior middle school enrollment rates of close to 100% before their economies took off. Thereafter, they maintained their investments in the various stages of education. Developed countries generally have higher levels of human capital. To cite the number of years spent in education (median) by those aged between 25 and 64 as an example, this is 1.5

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approximately 13.3 years in the United States and Canada, 11.9 years in Australia and New Zealand, and around 11.8 years in Europe. Currently, China’s senior middle school enrollment rate still falls behind that of OECD countries three decades ago. Due to imbalances in urban and rural educational development, senior middle school education is less developed in the countryside. This situation of imbalances in educational development and China’s compulsory education structure is very similar to that of some countries which are still hovering in the upper-middle-income stage, e.g. Mexico. Considering that rural labor will form the main source of China’s future labor supply, if we do not make senior middle school education compulsory for all, its decline in the rural areas will cause severe challenges for future human capital accumulation. 2

Extending Compulsory Education is a Natural Continuation of the Educational Development Strategy

China has made tremendous progress in education since its reform and opening up. Effective human capital accumulation is one of the critical factors that has sustained China’s rapid economic growth for the past three decades. Major developments in education included having free and compulsory education for both urban and rural populations and achieving mass higher education in the 21st century. According to calculations based on data from two population censuses, the average number of years spent in education by the population aged between 15 and 64 rose from 8.29 years in 2000 to 9.44 years in 2010, which is to say that after years of effort, the average educational attainment of the working-age population had exceeded junior middle school level on the whole. According to calculations based on data from the sixth national population census, the labor force participation rate followed an inverted U curve as age changed. To be specific, labor force participation rose rapidly from the age of 22 and dropped sharply after the age of 49. For the 22–49 age band that had the highest labor force participation rates, the average number of years spent in education rose from 8.56 years in 2000 to 9.74 in 2010. The “Outline of China’s National Plan for Medium and Long-Term Education Reform and Development (2010–2020)” (henceforth referred to as the “Plan”) called for “basically achieving the modernization of education, developing a learning society, and turning China into a country with rich human resources by 2020.” To achieve this goal, China needs to address the relative gaps and deficiencies in senior middle school education as soon as possible on the basis of universalizing nine years of compulsory education and rapid expansion of

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the higher education sector. The “Plan” also explicitly stated that China should “universalize senior middle school education and achieve a gross enrollment rate of 90%; raising the average number of years spent in education by newlyadded members to the workforce from 12.4 to 13.5 years; and increasing the average number of years spent in education by the main working-age population from 9.5 to 11.2 years.” As mentioned earlier, even after universalizing nine years of compulsory education and making huge strides in higher education, the average number of years spent in education by the population aged between 15 and 64 only increased by 1.15 years. Therefore, it remains a colossal task to raise the average number of years spent in education by the main working-age population by a further 1.7 years within a decade, even after universalizing nine years of compulsory education and achieving a relatively high college gross enrollment rate. Whether the strategic objectives outlined by the “Plan” can be realized will be decided by whether we can develop senior middle school education in a big way. Figure 4.4 shows the changes in the average number of years spent in education by the population between the ages of 15 and 64 between 2000 and 2010. We rank the population in age groups beyond the senior middle school level in 2010 and shift them backward by 10 years to derive the average number of years spent in education by age group in 2020. The figure clearly shows that in 2020, the working-age population aged 28 and older will all receive less than 11.2 years of education on average. To achieve the strategic objectives outlined by the “Plan”, we can only ensure that those of schooling age before 2020 receive sufficient education. A very crucial target group in this endeavor comprises those who are of senior middle school-going age. Thus, we must ensure that 12

2000

2010

2020

9 6 3 0

15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63

Figure 4.4 Average number of years spent in education by the population aged between 15 and 64. Source: Calculated based on data from the population census.

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this group receives more than 11.2 years of education during the period of the “13th Five-Year Plan.” In terms of actual implementation, although the “Plan” proposed the strategic objective of universalizing senior middle school education, but because it is not part of the compulsory education system, there is a lack of binding force over the government, schools, families, and individuals to achieve this. Moreover, with wages rising in the labor market, the opportunity cost of receiving senior middle school education becomes much higher and this has caused it to be on a shrinking trend instead. In 2013, the total number of senior middle schools nationwide fell by 643 and admission numbers dropped by more than 1.01 million, while the number of existing students fell by more than 2.25 million over the previous year. The gross enrollment rate for senior middle schools was 86.0%, and with the population of potential senior middle school students falling by 1.62 percentage points, the gross enrollment rate only increasing by 1.0 percentage point over the previous year. China achieved significant results from the universalization of nine years of compulsory education and satisfied the demand for manpower resources in the early stages of industrialization. Currently, a good foundation exists for the universalization of senior middle school education. Making it part of the compulsory education system is both necessary for achieving the strategic objectives of education development and also a continuation of education development and planning that stays ahead of the times. This is a key area of planning that the “13th Five-Year Plan” should focus on. .

3

It is Feasible to Make Senior Middle School Education Compulsory during the Period of the “13th Five Year Plan”

As China’s comprehensive national power continues to grow and as public spending on education greatly increases, there is sound material basis for the continuing development of education. With the successful universalization of nine years of compulsory education and the expansion of higher education, it is feasible to further extend the length of compulsory education during the period of the “13th Five-Year Plan.” Changes in the demographic structure in particular will cause the total population of potential senior middle school students to keep declining in the future. Therefore, we can expect that a longer period of compulsory education will not put much additional pressure on public spending.

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5.73

5.5 5.0 4.5 4.0 3.5

5.44 5.01

5.84

5.79 5.42 4.92 4.32

4.17 4.09

4.04 3.98

3.90 3.76

3.59

3.55 3.57 3.47 3.55 3.50

20 0 20 1 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20

3.0

(Year)

Figure 4.5 Population of potential senior middle school students (15–17 years old) as a proportion of total population. Source: Calculated based on data from the population census.

Figure 4.5 shows the changes in the population of potential senior middle school students (15–17 years old) as a proportion of total population. This proportion peaked at 5.84% in 2004 and has been falling yearly since, reaching 4.04% during the early period of the “12th Five-Year Plan.” It is predicted to drop further to around 3.59% toward the end of this period. Although it will be relatively stable during the period of the “13th Five-Year Plan,” it will continue to decline slightly every year and is expected to be less than 3.5% at the end of the period of the “13th Five-Year Plan.” According to population projections, the total population of potential senior middle school students is expected to reach around 48.12 million toward the end of the period of the “13th Five-Year Plan.” Assuming that the senior middle school student population remains at the 2013 level during the period of the “12th Five-Year Plan,” which is 43.7 million, and that senior middle school education is gradually made compulsory during the period of the “13th Five-Year Plan,” with a 100% gross enrollment rate achieved for the population of potential senior middle school students at the end of this period, then there would be around 4.42 million additional senior middle school students for the entire period. If we maintain the public investment in education for these additional senior middle school students at 2012 levels, i.e. public spending of 7,776 yuan per student on education, then we will need to spend an accumulated 34.4 billion yuan (in 2002 prices) to achieve a gross enrollment rate of 100% during the period of the “13th Five-Year Plan.” This means that the level of public spending

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for the entire duration of the “13th Five-Year Plan” will be roughly equal to 1.5% of the state funding for education in 2012. Clearly, the additional investment of resources needed even after taking in account the implementation of compulsory education is fairly insignificant. 4

The Timeline and Roadmap for Extending Compulsory Education

Compulsory education is uniformly implemented by the state according to law, in which everyone of schooling age must receive education. It is mandatory, free, and universal, as well as the most crucial of educational endeavors. Although education at the senior middle school level has achieved much progress in the past decade, but because it is not part of the compulsory education system, it is therefore not compulsory for all. With the wages of ordinary workers rising rapidly and the growing opportunity cost of education, there is a lack of clear institutional intervention even when financial resources for public spending on education are relatively abundant. This leads to the inevitable shrinking of the senior middle school education sector. In this sense, making senior middle school education compulsory both deepens and extends the strategic objective of “universalizing senior middle school education” and offers an effective means of strengthening investments in human capital to address market failures through institution-building. To uphold the spirit of progressive reform and ensure that some breakthrough is achieved in reforming and refining the compulsory education system during the period of the “13th Five-Year Plan,” we can follow the general thinking outlined below when extending compulsory education to the senior middle school level. 4.1 Achieving Compulsory Senior Middle School Education The primary characteristic of compulsory education is its mandatory nature. In this sense, institution-building should be the priority. By making senior middle school education part of the compulsory education framework, we can further strengthen the roles that the state, schools, families, and individuals play in senior middle school education, encourage society to pay greater attention, and buck the trend of its yearly decline. Making senior middle school education part of the compulsory education framework also helps to further clarify the roles that various levels of government and public finance play in this sort of education, and spurs the former to do a good job in implementing senior middle school education.

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Striving for a 100% Gross Enrollment Rate for Senior Middle School Education at the End of the Period of the “13th Five-Year Plan” In 2013, the gross enrollment rate for senior middle school education was 86%, of which general senior middle school education accounted for 48% while adult senior middle school and middle vocational education accounted for 38%. With the population of potential senior middle school students decreasing each year, there is hope that the strategic objective of attaining a 90% gross enrollment rate for senior middle school education by 2020 as stated in the “Outline of China’s National Plan for Medium and Long-term Education Reform and Development (2010–2020)” can be achieved by the end of the period of the “12th Five-Year Plan.” With this as the basis and given that the population of potential senior middle school students will continue to decline during the period of the “13th Five-Year Plan” (Figure 4.5), it is perfectly feasible to raise the standards and objectives to be achieved for the next five years to achieve the universalization of senior middle school education. Even if we assumed that the number of existing senior middle school students were to remain at current levels in the initial period of the “13th Five-Year Plan,” we can achieve the universalization of senior middle school education just by having around 880,000 more students every year (less than 2% of the existing senior middle school student population). 4.2

Increasing Investment in Public Resources for Senior Middle School Education It is absolutely necessary to have appropriate increases in public financial investment in senior middle school education during the period of the “13th Five-Year Plan.” This can be done in a step-by-step manner. First, ensure that resources are invested to universalize senior middle school education, i.e. injecting the additional public financial resources needed to achieve a 100% gross enrollment rate for senior middle school education at the end of the period of the “13th Five-Year Plan.” According to the static estimations made earlier, this can be achieved by spending an accumulated 34.4 billion yuan during the period of the “13th Five-Year Plan.” Second, increase the funding per student on senior middle school education. Currently, as it is not part of the compulsory education system, the level of public resources investment per student on senior middle school education is even lower than that of junior middle school education. According to static calculations, to match the spending level for junior middle school education in the initial stages of the “13th Five-Year Plan,” an accumulated increase in public spending of about 15.8 billion yuan is needed. Finally, gradually increase the level of public resources 4.3

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investment in senior middle school education and make sure that the magnitude of the increase is the same as that for other stages of compulsory education. We can learn from the successful experience of implementing nine years of freeand compulsory education by gradually promoting free and compulsory education at the senior middle school level, starting from the central, western, as well as the rural regions. 4.4 Integrating the Resources for Vocational and General Education The distinctiveness of senior middle school education lies in its mix of general and vocational education. During the period of the “12th Five-Year Plan,” China increased its public resources investment in vocational education, but resources were clearly divided among different regions, departments, and types of school. The integration of state investments of educational resources in general and vocational education by making senior middle school education compulsory will ensure that resources are more efficiently used and help drive the implementation of compulsory education. Raising the Gross Enrollment Rate of General Senior Middle School Education Compared with the major developments in other stages of education and middle vocational education, the development of general senior middle school education has largely stagnated during the late stages of the “11th Five-Year Plan” and the period of the “12th Five-Year Plan.” As shown in Figure 4.6, the gross enrollment rate for general senior middle school education had hardly increased since 2008 and has even shown signs of shrinking in recent years. The increase in gross enrollment rate for senior middle school education is 4.5

(%) 90

senior high school stage

general senior high school

80 70 60 50 40 20 10 0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (Year) Figure 4.6 Changes in the senior middle school gross enrollment rate. Source: China Statistical Yearbook, China Statistics Press, 2013.

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generally attributable to the expansion of middle vocational education. The fact is that relative to the general education offered by general senior middle schools, the investment of public resources in vocational education will face more risks and uncertainties, and it is easy for such investments to achieve little effect or even fail. First, human capital produced by vocational education has more specific uses relative to that produced by general senior middle schools. From the perspective of labor market compatibility, the more specific the use of the human capital, the more difficult it is to match workers with jobs, leading to a higher risk of structural unemployment. Second, as mentioned earlier, China’s transition from the middle-income to high-income stage will inevitably be accompanied by upheavals in the economic structure, which will cause job, occupational, and sectoral characteristics to change significantly. Given that the direction of change in the economic structure is uncertain, the robust development of vocational education poses a greater risk in terms of setting the direction for education, the curriculum, as well as admission size and structure. Finally, with industrial upgrading, the general knowledge acquired by those receiving a general senior middle school education will be more helpful in encouraging innovation and will have effects on human capital accumulation in the longer term. With this in mind, we urge that the increase in resources for senior middle school education during the period of the “13th Five-Year Plan” should mainly be allocated to general senior middle schools. On the current basis of a 48% gross enrollment rate in general senior middle schools, we should strive for a 60% gross enrollment rate by the end of the period of the “13th Five-Year Plan.” Thereafter, we should adjust the respective proportions of middle vocational and general senior middle school in takes in accordance with the actual needs of economic development and changes in the labor market situation, while gradually increasing the weightage of general senior middle school education. Providing More General Education Courses through Vocational Education Reform Although investments in vocational education have increased significantly, the results of vocational education, particularly whether there is effective linkage between vocational education and the labor market, requires further careful analysis. What we can expect is that the Chinese economy will undergo a more obvious structural transformation in the period of the “13th Five-Year Plan” and beyond. In order to lower the potential risks to existing investments in vocational education, we propose strengthening the reform of vocational education during the period of the “13th Five-Year Plan,” particularly by increasing the 4.6

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proportion of general education courses in vocational education so as to increase the ability of students in vocational schools to acquire general knowledge. At the same time, we should learn from successful experiences overseas and gradually adjust and standardize the curriculum for senior middle school education during the period of the “13th Five-Year Plan.” Strengthening Integrated Rural-Urban Planning to Promote Senior Middle School Education in the Rural Areas With increasing urbanization, more and more of the rural population will congregate in the cities. Given the differences in the processes of urban and rural population transformation, the urban registered population is seeing a more rapid decline in the population of potential senior middle school students. Deepening household registration system reform and integrating urban and rural educational resources will help drive the process of implementing compulsory senior middle school education. Meanwhile, making senior middle school education part of the compulsory education framework also helps to clarify the responsibilities of different regions in implementing senior middle school education, which will drive deeper reform of the household registration system in turn. 4.7

References Aiyar, Shekhar, Romain Duval, Damien Puy, Yiqun Wu, and Longmei Zhang. “Growth Slowdown and the Middle Income Trap.” The IMF Working Paper, No. 13/71, 2013. Cai, Fang and Dewen Wang 蔡昉、王德文. “Zhongguo jingji zengzhang ke chixuxing yu laodong gongxian《中国经济增长可持续性与劳动贡献》[The Sustain­ ability of China’s Economic Growth and the Contribution of Labor].” Jingji yanjiu 《经济研究》 Vol. 10 (1999): 62–68. Imbs, J. and R. Wacziarg. “Stages of Diversification.” American Economic Review, 93(1) (2003): 63–86. Pritchett, Lant and Lawrence H. Summers. “Asiaphoria Meets Regression to the Mean.” NBER Working Paper, No. 20573, 2014. World Bank 世界银行. 2020 nian de Zhongguo: Xinshiji de fazhan tiaozhan《2020 年的 中国：新世纪的发展挑战》 [China in 2020: Challenges in Development in the New Century], Beijing: Finance and Economic Publishing House, 1998.

Part 3 Building a Better Social Security Network

∵

CHAPTER 5

The Urban and Rural Old-Age and Medical Insurance Systems: Current State, Challenges, and Countermeasures Cai Fang and Wang Meiyan 1 Introduction China’s population has rapidly transformed under the driving forces of economic development and population policy, with decreased fertility rates that have remained very low (1.4) in the long term. The result is a huge change in the demographic structure, with the population between the ages of 15 and 59 peaking in 2010 and declining annually thereafter. Meanwhile, China’s population is also aging more rapidly. Although the Chinese government is beginning to make moderate adjustments to its population policy, this will not have a huge impact on the demographic trend. According to policy simulations, if China’s population policy remains unchanged, then the aged population (those aged 60 and above) will comprise 25.4% of the total population by 2030; under the policy of “two children for only-child parents” (a slight policy adjustment made in 2014), the aged is expected to comprise 24.2% of the population; with a policy of “two children for all” (which is expected to be implemented in a few years’ time), the aged is expected to comprise 22.8% of the population (China Development Research Foundation, 2012). The rapid aging of China’s population is clearly an inevitable and irreversible trend. Apart from that, China’s population transformation has its particular characteristics. International comparisons show that China’s population was aging faster than that of other developing countries after 1970, and had reached a speed close to that of developed countries in 2010. There is no doubt that the proportion of China’s aged population will soon match or exceed that of developed countries. China remains a developing country by any measure. For instance, the World Bank has classified all countries into low-income, lower-middleincome, upper-middle income, and high income countries by GDP per capita. According to this standard, China belongs to the upper-middle income category, which makes it a developing country. In 2010, the proportion of the population aged 65 and above was 7.7% for upper-middle income countries, © koninklijke brill nv, leiden, ���7 | doi ��.��63/9789004342156_006

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and 9.4% for China. A higher proportion of the aged population shows the uniqueness of its population transformation. We describe this as “growing old before growing rich.” An aging population presents a huge challenge for the old-age insurance system. Overcoming this challenge is an important goal of institutional reform. Since the 1990s, institutions related to China’s old-age insurance system have developed swiftly and achieved significant results. There are now six different old-age insurance schemes based on region, target group, and type of coverage and they are: 1) the old-age insurance scheme for urban employees; 2) the medical insurance scheme for urban employees; 3) the old-age insurance scheme for urban residents; 4) the medical insurance scheme for urban residents; 5) the new old-age insurance scheme for rural residents; and 6) the new rural cooperative medical scheme. With these six schemes in place, China has basically transformed its old-age insurance system from one that relies on workplace insurance (for the urban population) and family support (for the rural population) to a social insurance system that institutionalizes coverage for the whole population. However, due to institutional and historical legacies, the characteristic of “growing old before growing rich,” and weaknesses in institutional design, China’s old-age insurance system still faces various problems and challenges. This chapter will briefly introduce how the six schemes were formed and talk about their basic design and current state of implementation, so as to reveal the sustainability challenges they face in terms of financing and institutional design. Thereafter, we will introduce the various policy discussions and policy trends, as well as offer some policy suggestions. 2

The Current State of China’s Urban Old-Age and Medical Insurance Systems

China’s social insurance system in its present form had its beginnings in the late 1990s, and generally approached a turning point in 1997. Prior to that, employers were the main providers of old-age and medical insurance for urban employees, and unemployed urban residents were not covered by any form of insurance. Elderly rural residents were mainly supported by family members and basically had no medical insurance coverage. When state-owned enterprises faced severe operational challenges during the macroeconomic slump and the Asian financial crisis, large numbers of workers lost their jobs and this was the time when employee old-age and medical insurance systems were set up as a component of an active employment policy.

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In 1997, the State Council officially proposed the establishment of a uniform old-age insurance system for urban employees that integrated social pooling with individual accounts. A nationwide system of individual accounts was set up at 11% of an employee’s wage, in which individual contributions were gradually increased from 4% to 8% with the remainder to be contributed by employers. Between 1990 and 2012, the number of people participating in the basic old-age insurance scheme for urban employees grew from 61.66 million to 304 million, of which the number of existing employees increased by 3.4 times from 52.01 million to 230 million, while the number of retirees increased by 6.7 times from 9.65 million to 74.46 million. In 2013, the total number of participants in the basic old-age insurance scheme for urban employee stood at 322 million. However, the mixed management and usage of social pooling accounts and individual accounts have caused the latter to remain notional. In 2001, the emphasis was on managing the transition costs of reforming the old-age insurance system, i.e. to simultaneously address the issues of “new participants,” “middle participants” and “old participants” (participants who joined the labor force after 1997, participants who were already working in 1997, and participants who had retired before 1997 respectively) in the system and establish a multi-pillar system, with a focus on reducing the size of individual accounts and turning notional accounts into real accounts. The pilot proposal made adjustments to the size of the individual account and reduced it from 11% to 8% of an employee’s wage and raised the individual contribution rate from an average of 5% to 8%, thus making it entirely funded by the individual. The 20% contribution rate for employers remained unchanged but this no longer went into individual accounts and only went into the social pool. The pilot program was first implemented in Liaoning Province and later expanded to cover the three northeastern provinces and some other provinces. At around the same period, the State Council stipulated that all urban work units including enterprises (state-owned, collective, foreign-invested and private), state organs, public institutions, social organizations, and private nonenterprise units and their employees had to participate in the basic medical insurance scheme. The premiums for basic medical insurance had to be copaid by employers and employees, with the employer’s contribution to be maintained at around 6% of the employee’s wage while employees had to contribute 2% of their own wages to form the social pool and individual accounts for basic medical insurance. The employees’ contributions to the basic medical insurance premium were all credited into their individual accounts while the employers’ contributions were divided into two components, with one going into the social pool and the other going into individual accounts. The

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component credited into the individual accounts was usually around 30% of the employer’s contribution. Increasing numbers of people have participated in the basic medical insurance scheme for urban employees since its total implementation in 1999. Between 1999 and 2012, the number of urban employees with basic medical insurance coverage rose from 20.65 million people to 265 million people, of which the number of existing employees increased by 12 times from 15.09 million to 199 million, while the number of retirees increased by 11 times from 5.56 million to 66.24 million. The total number of participants in the basic medical insurance scheme for urban employees reached 299 million in 2013. While gradual improvements were made to the workplace social insurance system, the total level of coverage was affected by the presence of large numbers of unemployed or informally-employed people in the cities. This group mainly consisted of the following types of people: 1) the urban youth population who had yet to enter the labor market and the elderly population who were not covered by social insurance when they retired. According to Hu Ying’s calculations, those aged 14 and below accounted for 16.9% of the urban population in 2013, while those aged 65 and above accounted for 10.4%. 2) Urban residents who were informally employed. They numbered close to 100 million in 2012 and accounted for more than a quarter of all urban employment. 3) The large population of migrant workers who were mainly engaged in informal employment, with numbers reaching 166 million in 2013 and accounting for 35% of all urban employment in 2013. Thus, the focus of developing the urban social security system shifted to programs that targeted residents. The old-age insurance scheme for urban residents is a system that covers non-employees with urban household registration. The process of exploring this scheme was relatively brief and it took off fairly quickly. In 2007, the various regions began piloting their own schemes for urban residents according to local conditions. An integrated system of social pooling and individual accounts was established in 2011 on the basis of these pilot programs and the old-age insurance system for urban residents was piloted at the national level, with universal coverage basically achieved in 2012. Urban residents participating in the scheme must pay the stipulated premiums which were divided into 10 tiers at 100, 200, 300, 400, 500, 600, 700, 800, 900, or 1,000 yuan every year. Local governments can add more premium tiers at their own discretion, and participants are free to decide which tier they wish to subscribe to, with higher premiums offering higher payouts. The state will adjust premium levels from time to time to keep pace with changing conditions,

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such as economic development and the growth in disposable income per capita of urban residents, etc. This system is basically adapted from the new oldage insurance scheme for rural residents. The basic medical insurance scheme for urban residents is a medical insurance system designed with the young and unemployed residents in mind. Pilot programs were conducted in 2007 and expanded in 2008, and the system was eventually implemented nationwide in 2010 to gradually cover all urban residents who were non-employees. All those who are not covered by the basic medical insurance system for urban employees, such as primary and middle school students (including vocational middle schools, polytechnics, and technical schools), young children, and other unemployed urban residents, can all voluntarily participate in the basic medical insurance scheme for urban residents. The urban resident basic medical insurance premiums are mainly paid by families, with moderate subsidies from the government. The government also provides additional help for some disadvantaged families to pay their premiums. The level of government subsidies has been increasing yearly from 40 yuan in 2007 to 280 yuan in 2013. The basic medical insurance system for urban residents mainly covers hospitalization fees and outpatient fees for major illnesses, while some regions with the means to do so can also gradually explore the possibility of covering all outpatient medical expenses. Government subsidy levels and individual contribution rates will be further raised in 2014. The number of participants exceeded 221 million in 2011 and further increased to more than 271 million in 2012. 3

The Current State of China’s Rural Old-Age and Medical Insurance Systems

Along with employment reform in the enterprises that ended the practice of “eating from the same big pot” and the growth of the labor market, an urban social insurance system has gradually taken shape and offered wide coverage to urban residents and even a portion of migrant workers. However, given the long-term existence of a dual economy and with family support being the basic model of rural old-age support at one point, the rural old-age insurance and medical insurance systems were non-existent for a long period of time. Meanwhile, due to the massive outflows of labor, the rural population was aging much more rapidly than the urban population. For instance, according to Hu Ying’s calculations, the proportion of the rural population aged 65

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and above was 14.7% in 2013, 4.4 percentage points higher than in the cities. In response to this situation, the government moved to establish medical and old-age insurance systems according to the characteristics of Chinese villages. The first scheme to be launched was the new rural cooperative medical scheme (henceforth referred to as the “new rural cooperative scheme”). It is a system of mutual medical help and assistance for the rural population offering coverage for major illnesses and is organized, led, and supported by the government, based on voluntary participation, and co-financed by individuals, collectives, and the government. The “new rural cooperative scheme” seeks funding through collecting individual premiums as well as collective and government subsidies. The main sources of funding come from government inputs and are supported by multiple sources of financing, with both the central and local governments setting aside special funds each year to support the scheme, which is administered and managed at the county level. Its emphasis is to prevent rural residents from being reduced or returned to poverty because of major illness. The scheme was first implemented in 2003 and premiums have increased with simultaneous higher increases in subsidy levels. In 2014, the subsidy per capita provided by the various levels of government for the “new rural cooperative scheme” was raised to 320 yuan, of which the central government maintained its contribution of 120 yuan, while subsidies were given to cover 80% of the remaining 200 yuan for the western region and 60% for the central region. Provinces in the eastern region would also be given a fixed ratio of subsidy. The nationwide average premium that an individual had to pay was around 90 yuan per annum. The funding level per capita for the “new rural cooperative scheme” grew consistently from 50 yuan in 2004 to 371 yuan in 2013. The number of reimbursements too showed a trend of growth, from 76 million reimbursements in 2004 to 1.9 billion in 2013. The usage rate for the “new rural cooperative scheme” funds rose steadily from 65.4% in 2004 to 84.4% in 2008 before jumping to 97.7% in 2009. It then fluctuated in 2010 and 2011 before returning to a relatively high level in 2013 (97.9%) (Table 5.1). Reimbursement claims for the “new rural cooperative scheme” covered the three components of outpatient treatment, hospitalization, and treatment of major illnesses, with deductibles and caps on reimbursements. Hospitalization fees below the annual deductible for reimbursement is borne by the individual, while hospitalization fees incurred over two or more hospital stays within the same contribution period can be reimbursed cumulatively if they exceed the deductible. Hospitalization fees that exceed the deductible are calculated in segments and reimbursed cumulatively, with a cap on the accumulated claims that an individual can make in a year.

The Urban And Rural Old-age And Medical Insurance Systems Table 5.1

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Usage rates of “new rural cooperative scheme” funds

Year

2004

2005

2006

2007

2008

Level of funding per capita (yuan) Reimbursements (million times) Total level of funding (billion yuan) Expenditure of funds (billion yuan) Usage rate of funds (%)

50.4 76 4.03 2.64 65.4

42.1 122 7.54 6.18 81.9

52.1 272 21.36 15.58 72.9

58.9 453 42.8 34.66 81

96.3 585 78.46 66.23 84.4

Year

2009

2010

2011

2012

2013

Level of funding per capita (yuan) Reimbursements (million times) Total level of funding (billion yuan) Expenditure of funds (billion yuan) Usage rate of funds (%)

113.4 156.6 246.2 308.5 370.6 759 1087 1315 1745 1942 94.43 130.89 204.76 248.47 297.22 92.29 118.78 171.02 240.8 290.92 97.7 90.8 83.5 96.9 97.9

note: Usage rate of funds = Expenditure of funds/ Total level of funding X 100%, all in current year figures. source: China Statistical Yearbook (Various Years), China Statistics Press.

The coverage of the “new rural cooperative scheme” has expanded rapidly since the scheme was first piloted in 2013. In 2004, there were only 333 counties (districts and cities) nationwide that launched the “new rural cooperative scheme,” with a total of 80 million participants and a 75.2% participation rate. In 2007, the total number of participants was 730 million with the partici­pation rate reaching 85.7%. By the end of 2012, there were 2,566 counties (districts and cities) that had joined the “new rural cooperative scheme” with 805 million participants and a participation rate of 98%. In 2013, there were 802 million participants with a participation rate of 99%. The new old-age insurance scheme for rural residents (henceforth referred to as “new rural old-age insurance scheme”) is one social security program that has taken the shortest time to emerge and develop. With the aim of meeting the basic living requirements of elderly rural residents, this scheme is an oldage insurance system that is organized and implemented by the government and combines individual contributions, collective subsidies, and government subsidies to fund old-age benefits through social pooling and individual accounts, and it is complemented by other social protection policy measures such as family support, land security, and social assistance.

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Rural residents who are at least 16 years old (excluding students) and not covered by the basic old-age insurance scheme for urban employees can voluntarily subscribe to “new rural old-age insurance scheme” in the place of their household registration. Funds for the scheme come from individual contributions, collective subsidies, and government subsidies. Rural residents who participate in this scheme have to pay the stipulated premiums which are set at five tiers of 100, 200, 300, 400, or 500 yuan per year. Local governments can add more premium tiers at their own discretion, and participants are free to decide which tier they wish to subscribe to, with higher premiums offering higher payouts. The state will adjust premium levels from time to time to keep pace with changing conditions, such as the growth in net income per capita of rural residents. Locals governments should offer subsidies to individuals to pay their premiums and the subsidy amount should not be less than 30 yuan per capita per annum. They can also offer some incentives to encourage participants to opt for the higher premiums and subsidize part of the premiums for severely disabled participants or pay the lowest premium on their behalf. The country should set up individual accounts with lifetime records for every participant. Individual contributions, collective subsidies, as well as other forms of premium subsidies coming from economic organizations, social welfare organizations, personal sponsorship, and local governments are all directed into the individual account. The old-age benefit consists of a basic payout and payouts from individual accounts which are disbursed over an individual’s lifetime. The central government has set the basic payout at 55 yuan per capita per month and participants who fulfill the criteria will get the full amount. The central government subsidizes the basic payout in full for the central and western regions and half the amount for the eastern region. Local governments can raise the basic payout rates at their own discretion, and can increase payouts to rural residents who have been consistently paying their premiums in the long term. These additional payouts are to be borne by the local governments. The monthly payout from individual accounts is derived by dividing the total funds in the account by 139. Those who were at least 60 years old and not beneficiaries of the basic oldage insurance scheme for urban employees at the time of the scheme’s implementation were exempted from paying the premiums and could collect the basic monthly payouts so long as their children who were eligible for participation did so and paid their premiums. Those with less than 15 years to go before withdrawing their insurance funds have to pay annual premiums and are also allowed to make supplementary payments, with accumulated premiums not exceeding 15 years. Those with more than 15 years to go also have to pay annual

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premiums and the accumulated premiums should not be less than the sum to be paid for 15 years. Since its inception, progress in implementing the “new rural old-age insurance scheme” has been smooth. It was first piloted in 2009 and later expanded in 2010, with universal coverage basically achieved in 2012. The Social Insurance Law which came into effect in 2011 clearly states that “governments in the provinces, autonomous regions, and municipalities can, in light of actual conditions, integrate the implementation of the old-age insurance scheme for urban residents and the new old-age insurance scheme for rural residents.” The State Council issued a document stating the decision to integrate the implementation of the “new rural old-age insurance scheme” and the old-age insurance scheme for urban residents by establishing one nationwide basic old-age insurance system for urban and rural residents. By the end of 2013, the number of participants for both schemes had reached 498 million, with 138 million people collecting benefits. Together with those covered by the old-age insurance scheme for urban employees, the total population receiving coverage reached 820 million.1 4

Sustainability Challenges Faced by the Urban and Rural Old-Age and Medical Insurance Systems

The whole world is currently facing the problem of population aging. Various countries encounter challenges in establishing their old-age insurance systems. But due to several unique factors, this is a rather more serious problem in China. First, it has a population that is aging faster than almost any other country in the world, while its old-age insurance system is relatively backward, with many problems in financing and operation that will persist for a long time. Second, China is undergoing economic transformation as its population ages, thus developing an old-age insurance system becomes part of the transition from a planned economy to a market economy. The difficulty of reform is hence fully manifested in its implementation, particularly in the form of institutional legacies and the massive hidden liabilities that they bring. Finally, the system of rural-urban segregation that has been implemented in the long term

1 Ministry of Human Resources and Social Security 人力资源和社会保障部. 2013 nian duo renli ziyuan he shehui bao zhang shiye fazhan tongji gongbao《2013 年度人力资源和社会 保障事业发展统计公报》 [China’s 2013 Statistics for Human Resource and Social Security Development], 2014, http://www.mohrss.gov.cn/SYrlzyhshbzb/dongtaixinwen/buneiyaowen/ 201405/t20140528_131110.htm.

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and the resultant rural-urban income gap, as well as the instability of population flows have all hindered the rural-urban integration of the old-age insurance system. 4.1 Low Coverage of Urban Employees in Social Insurance Schemes Although social security programs to do with elderly support have formed a relatively robust safety net, their coverage remains very low at present. There are large groups of people who are still not covered by social insurance, both among the elderly population who have exited the labor market and existing employees. Even the old-age insurance scheme for urban employees, which has been around for the longest time and is the most established, only covered 62% of local urban employees in 2012, while the coverage for migrant workers without urban household registration was only 13%. 54% of urban employees and 16% of migrant workers participated in the medical insurance scheme offered to urban employees. This means that there were respectively 144 million and 139 million migrant workers who were working in the cities but were neither covered by the social old-age insurance system nor the social medical insurance system. There are two reasons for the low coverage. The first is the existence of a large informal economy. For instance, for migrant workers without urban household registration, although the Labor Contract Law stipulates that enterprises must provide them with old-age and medical insurance, but due to their high mobility and instability in employment, employers and employees are both not actively participating in the relevant social insurance schemes. The second reason is the lack of convergence among the different social insurance programs as well as programs implemented in different regions, and thus they cannot be transferred. As a result, migrant workers tend to surrender their insurance policies each time they leave a city. In doing so, they can only retrieve their own contributions and not their employers’ contributions in the social pool. Currently, major destinations for migrant labor such as the Guangdong province collect a huge amount of social insurance contributions while making very little actual payout, thereby accumulating vast surpluses in social insurance funds. But there are many other regions that are barely able to make ends meet and face an increasing risk of being unable to support their old-age populations. Institutional Design and Implementation Issues of the “New Rural Old-Age Insurance Scheme” First, there is the issue of coverage. When the program was first piloted in 2009, the government declared that it would conclude the institution-building work for the new old-age insurance scheme for rural residents by 2020. But as 4.2

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circumstances changed and at the urging of different segments of society as well as researchers and decision-makers who presented their arguments, the State Council decided to bring the timeline forward to the period of the “12th Five-Year Plan” and this process was further accelerated soon after. At the end of its term in 2013, the previous government declared that China had basically “institutionalized universal basic old-age insurance coverage for urban and rural residents.” However, this “institutional coverage” only meant that a system of basic old-age insurance coverage for residents was in place in all rural and urban areas, and did not equate to the 100% coverage of the population. As the “new rural old-age insurance scheme” and the basic old-age insurance scheme for urban residents shared the same institutional design, and the central government had already proposed an institutional framework of ruralurban planning in which the main feature was the convergence of the two, the official figures released in 2013 only gave the combined total of participants in the basic old-age insurance scheme for both urban and rural residents (498 million) and did not give separate figures for the two. To this figure, we added the total number of participants in the basic old-age insurance scheme for urban employees to derive a total coverage of 820 million for the three types of basic old-age insurance schemes, which only accounted for 61% of the total rural and urban populations. Second, there is the issue of premium affordability, the lack of incentives for participation, and the level of benefits. The lack of affordability refers to the fact that there are some among the rural population who wish to participate in the scheme but cannot afford the premiums. Thus, they are not covered by the scheme. The lack of incentives pertains to those among the rural population who can afford the premiums but are not incentivized to join the scheme. There are five premium tiers set at 100, 200, 300, 400, and 500 yuan per annum respectively, but the overwhelming majority opt for the lowest. A survey of the pilot program implemented in Anhui province revealed that more than twothirds of rural participants chose to pay the lowest premium of 100 yuan, with almost all participants choosing to pay the lowest premium in some regions.2 This preference for lower premiums have caused the benefits disbursed to be relatively low. The minimum basic payout for the new old-age insurance scheme for rural residents is 55 yuan per month (i.e. 660 yuan per annum).

2  Luo, Xia 罗遐, “Xinxing nongcun yanglao baoxian shidian wenti de shizheng yanjiu—jiyu Anhui sixian shi de diaocha 《新型农村养老保险试点问题的实证研究—基于安徽四 县市的调查》 [Empirical Research on the Issues Faced by the Pilot Program for the New Old-Age Insurance Scheme for Rural Residents: A Survey of Four Counties and Cities in Anhui Province],” Shehui baozhang yanjiu 《社会保障研究》, Vol. 1 (2011).

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Given that the net rural income per capita was 8,896 yuan in 2013, the substitution rate of the basic payout was only 7.4%. Finally, there is the issue of financial sustainability. According to the financing arrangements for this scheme, government subsidies are an important source of funding. As the population ages further and as premiums and benefits keep increasing in the future, financial sustainability will become a critical issue. Also, pooling for most of the scheme’s funds still takes place at the county-level, which increases the costs and risks of managing these funds and creates greater challenges in preserving and increasing their value. Main Issues Concerning the Development of the “New Rural Cooperative Scheme” First, there is the issue of funding. The funding level for the “new rural cooperative scheme” is relatively low, and this inevitably leads to lower benefits and protection. This limits what the scheme can do in terms of risk pooling for illnesses or alleviating the financial burdens of those plagued by illness. There are regional differences in the funding level, with the eastern region having a higher actual funding level per capita than the central and western regions. There is a lack of scientific basis in calculating the amount of funding, with funding level basically determined through experience. Then there is the issue of reimbursement. The method of reimbursement lacks scientific basis, and reimbursement rates are low and vary significantly by region. Even though rural participants get a certain ratio of reimbursement when they seek treatment for their illnesses, they still need to pay a significant sum on their own. When presenting these out-of-pocket expenses as a ratio of net rural income per capita to measure the reimbursement rate, we found that there were obvious gaps in the level of reimbursement among different provinces, with some being higher than 40%, such as Shanxi and Shaanxi, and others being less than 20%, such as Hunan.3 There is also the issue of monopoly privilege and moral hazard. The “new rural cooperative scheme” stipulates that participants can only seek reimbursements for treatments at designated medical institutions. The fact that designated medical institutions enjoy monopoly privilege generally causes the fees to rise, which offsets the reimbursement benefits enjoyed by the rural participants to a certain extent. At the same time, there is the danger that 4.3

3  Ren Gang and Wang Zaoli 任钢、汪早立, “Xinxing nongcun hezuo yiliao zhidu diqu chayi de shizheng yanjiu《新型农村合作医疗制度地区差异的实证研究》[Empirical Research on the Regional Differences of the New Rural Cooperative Medical Scheme],” Zhongguo nongcun weisheng shiye guanli《中国农村卫生事业管理》, Vol. 2 (2013).

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medical institutions may try to stimulate demand for their services, leading to situations such as the provision of unnecessary treatments. Also, with an institutional design that focuses on voluntary participation, the scheme is more attractive to higher-risk groups while those who are young and able are less eager to join it. Furthermore, the institutional design emphasizes risk pooling for major illnesses, which may induce some rural participants to “seek extensive treatment for minor ailments.” Finally, there is the issue of system convergence. The process of claiming reimbursement is a complicated one for rural participants and this becomes even more tedious when they are seeking treatment away from home. Particularly for outgoing migrant workers, the paperwork for claiming reimbursements is exceptionally cumbersome and this reduces their enthusiasm to participate in the scheme. The “new rural cooperative scheme” needs to align itself with many other complementary social protection schemes or policies, such as the medical insurance scheme for urban employees, the medical insurance scheme for migrant workers, and the rural minimum living standard scheme. Currently, the urban and rural medical insurance schemes have yet to achieve seamless convergence. 5

Policies to Optimize the Old-Age and Medical Insurance Systems: Debates, Suggestions, and Trends

Given the existing problems and challenges in implementing the urban and rural social insurance programs that are related to social security, there has been continuing policy discussion on how these programs can be optimized, and there are many different views. Domestic and foreign researchers or research organizations have offered their respective policy suggestions based on research focusing on institutional design and optimization to address issues concerning financial sustainability, the level of coverage, and the degree of protection. Meanwhile, the Chinese government has incorporated the optimization of the social protection system into its overall masterplan of reform. For instance, the Third Plenary Session of the 18th CPC Central Committee outlined the principles and direction of reform and clarified the set objectives of the basic old-age insurance system: to establish a fairer and more sustainable system of social protection, continue to have a basic old-age insurance system that integrates social pooling with individual accounts, refine the system of individual accounts, enhance the incentive mechanisms to encourage “more contributions for more payouts,” protect participants’ rights, have a national risk pool for the basic payout, and to maintain actuarial balance.

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The World Bank and the Development Research Center of the State Council are both opposed to having a fully-funded old-age insurance system. Instead, they propose having a system of nominal accounts which consists of: 1) a basic protection component, which is a non-contributory social pension that provides the elderly with the minimum means of subsistence and prevents them from descending into poverty (this will be based on the practices of the current “new rural old-age insurance scheme” and the old-age insurance scheme for urban residents); 2) an individual contribution component in the form of a mandatory “nominal account” for wage workers or an old-age savings scheme for those among the urban and rural populations with no wage income; 3) the supplementary savings component, which is when urban and rural residents voluntarily participate in employee annuity schemes to supplement their oldage insurance plans.4 Optimizing the “New Rural Old-Age Insurance Scheme” Based on the Principle of Rural-Urban Pooling Domestic researchers have proposed several policy suggestions on how to optimize the “new rural old-age insurance scheme” based its current state and existing problems. The first is to increase the level of basic payouts and to establish a long-term mechanism for adjusting the level of old-age security. The government should make moderate increments to the subsidy level. Aside from government subsidies, it should also explore bringing the subsidy incentive mechanisms of the collective economy into play. Financial subsidies for basic payouts should have a particular emphasis and more help should be given to special disadvantaged groups. As we achieve the objective of universal institutional coverage, risk pooling should also shift from the counties to the cities and provinces. The level of old-age security benefits should also be commensurate with the level of socioeconomic development. Another suggestion is to gradually optimize the way contributions are made to individual accounts. For instance, we can consider using the net rural income per capita as a base figure to work out a system of proportionate contribution rates, and the setting of the different contributions tiers should be more flexible; we can consider having differentiated contributions rates and corresponding subsidy levels. Given that the existing social protection system tends toward fragmentation, the “new rural old-age insurance scheme” has to align itself with various 5.1

4  World Bank and Development Research Center of the State Council, China 2030: Building a Modern, Harmonious, and Creative Society. Beijing: China Financial and Economic Publishing House, 2013.

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complementary social security systems and policies, including the old-age insurance schemes for urban employees and residents, the old-age insurance scheme for migrant workers, the old-age insurance scheme for farmers whose land had been appropriated, and the previous system of rural old-age insurance. Currently, some guiding principles on enhancing the convergence of the various schemes have already been established, and detailed rules that are operational and standardized nationwide should be formulated as soon as possible. As urbanization progresses, vast sections of the rural population will move to the cities and the issue of convergence between the rural and urban old-age insurance schemes will become more acute. Hence, clear policies are needed to resolve them. Raising the Actual Level of Protection for the “New Rural Old-Age Insurance Scheme” First, we need to establish a sustainable and effective long-term system of increasing the level of funding. We should actively explore the responsibilities of the government and individuals in funding the scheme, and design a scientific method to calculate the funding level. At present, individual contribution rates are limited and we need to further explore if these should be raised or what they should be based on. To tackle the issue of adverse selection due to the principle of voluntary participation, we can test-run a semi-compulsory system in some regions, which is to make it compulsory to join the scheme while giving participants the autonomy to select which plan to join. Based on their respective levels and characteristics of development, the pilot regions can design plans of different tiers and levels for rural participants to choose from. The funding level for the “new rural old-age insurance scheme” should be further increased and there should be a system for doing so that makes it commensurate with socioeconomic development, income per capita, and the development of the local healthcare sector. We should also elevate the risk pool of the scheme to a higher level for better risk sharing. Second, we need to design a rational and scientific means of determining reimbursement rates and increase the level of reimbursements. With participation rates and funding levels growing yearly, we should keep increasing reimbursement levels, actively explore effective ways and means to offer reimbursements, and establish specific and scientific standards for doing so. We should gradually expand the coverage of the scheme to cover the treatment of many chronic illnesses or minor ailments, in addition to the main focus on major illnesses. This would allow the scheme to gradually transform from a riskier model that mainly covers major illness to a more stable model that covers both major and minor illnesses. 5.2

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Establishing an Integrated System of Basic Protection for Urban and Rural Populations Both the “new rural old-age insurance scheme” and the “new rural cooperative scheme” exist within a fragmented system and there is the problem of poor convergence. Most discussions have focused on increasing the degree of convergence and establishing a more integrated system. For instance, researchers who have offered suggestions for the “12th Five-Year Plan”5 and a report published by the World Bank and the Development Research Center of the State Council6 have all proposed adapting the “new rural old-age insurance scheme” for the urban areas. They also propose separating the non-contributory (government subsidies) and contributory components, so as to have a universal basic payout not tied to the contribution rate, thus enabling all rural and urban elderly to collect a basic pension fund. This citizen’s pension scheme is also the first step toward a more integrated and seamless basic old-age insurance system. Work has presently begun on the establishment of an integrated basic oldage insurance system for urban and rural residents. The document “Several Opinions on Establishing a Single Basic Old-Age Insurance System for Urban and Rural Residents” issued by the State Council in 2014 proposed the following: the comprehensive implementation and continuous optimization of a basic old-age insurance system that covers all rural and urban residents by following the guidelines of universal coverage, basic protection, flexibility, and sustainability, with a focus on strengthening equality, adapting to population mobility, and ensuring sustainability. Rural and urban residents aged 16 and above (excluding students) who are not employees of state organs or public institutions and who are not covered by the basic old-age insurance scheme for urban employees can join the old-age insurance scheme for rural and urban residents in their place of household registration. This scheme is financed by individual contributions, collective subsidies, and government subsidies. Participants need to pay the stipulated annual premiums which are set at 12 tiers of 100, 200, 300, 400, 500, 600, 700, 800, 900, 100, 1,500, or 2,000 yuan. Even though this is not yet a non-contributory pension scheme, it is the first integrated system for rural and urban residents that is transferable across regions and allows those aged 60 and above at the time of implementation to collect a basic payout regardless of their contributions. We can say that this is a 5.3

5  Lim, Edwin and Michael Spence, Thoughts and Suggestions for China’s 12th Five-Year-Plan from an International Perspective. Beijing: China CITIC Press, 2011. 6  World Bank and Development Research Center of the State Council, China 2030: Building a Modern, Harmonious, and Creative Society, 2013.

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move that is in line with the new philosophy and it can also become the logical starting point for reforms henceforth. 6 Conclusion As a response to a rapidly-aging population and an important move in economic reform, China has instituted an old-age and medical insurance system that covers all urban and rural residents through the establishment of six basic social insurance schemes since the later part of the 1990s. Currently, the total number of urban and rural participants in the basic old-age insurance schemes has reached 820 million, while the number of participants in the basic medical insurance scheme for urban employees and medical insurance scheme for urban residents has reached 570 million, and the number participating in the “new rural cooperative scheme” has exceeded 800 million. Along with other social assistance programs that include the minimum living standard scheme, China has laid the necessary and preliminary foundations for old-age support in the present and future. However, this system is still facing problems in terms of institutional design and financial security, and this poses a threat to its long-term sustainability. This includes both challenges that other countries also face and difficulties caused by the phenomenon of “growing old before growing rich” that is particular to China. For instance, 1) the low coverage rate that is difficult to raise; 2) the lack of financial security in the long term and too little payout or reimbursement; 3) institutional segmentation and fragmentation and the lack of convergence and connectivity; 4) the trend of population aging has caused the current “pay as you go” system to be unsustainable. The Chinese government is already paying attention to these challenges and is trying to fine-tune its policies in response. However, two factors have obscured the basic direction for the establishment of a social security system for old-age support. First, China’s decisionmakers have yet to come up with a clear overall design for the social security system. This is closely related to the second factor, which is that China’s reforms follow the principle of step-by-step implementation. With many proposals still open to debate, it seems more prudent to continue observing the situation and take incremental steps in development, while the existing institutional framework can only be revamped when the right opportunity presents itself. Thus, current reforms still fall within the original institutional framework, with no significant breakthrough. However, the government’s current overall direction of refining the institutions does not run counter to future reforms.

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In light of this situation, our suggestion is to respect the advantages that have emerged from China’s successful experience with reform, and continue to make incremental adjustments within the existing framework. We can establish the following order of priority and roadmap for reform. First, make use of an integrated basic old-age insurance scheme for rural and urban residents to establish a universal citizen’s pension that is not dependent on contributions but on financial spending. Second, widen the reach of pilot programs to reform the old-age insurance scheme for urban employees, and continue to boost real individual accounts as well as fine-tune other related social insurance programs based on the same principles. Third, gradually implement a two-pillar system (universal benefits and individual accounts) for old-age and medical insurance systems on the basis of a tax-financed basic pension, with annuity schemes and other programs supplementing and no longer forming the main pillars of the social insurance system. References Lim, Edwin and Michael Spence. Thoughts and Suggestions for China’s 12th Five-YearPlan from an International Perspective. Beijing: China CITIC Press, 2011. Luo, Xia 罗遐. “Xin xingnongcun yang laobaoxian shidian wenti de shizheng yanjiu— jiyu Anhui sixianshi de diaocha 《新型农村养老保险试点问题的实证研究— 基于安徽四县市的调查》 [Empirical Research on the Issues Faced by the Pilot Program for the New Old-Age Insurance Scheme for Rural Residents: A Survey of Four Counties and Cities in Anhui Province],” Shehui baozhang yanjiu 《社会保障 研究》, Vol. 1 (2011). Ministry of Human Resources and Social Security 人力资源和社会保障部. 2013 nian duo renli ziyuan he shehui baozhang shiye fazhan tongji gongbao 《2013 年度人力资 源和社会保障事业发展统计公报》 [China’s 2013 Statistics for Human Resource and Social Security Development], 2014, http://www.mohrss.gov.cn/SYrlzyhshbzb/ dongtaixinwen/buneiyaowen/201405/t20140528_131110.htm. Ren, Gang and Zaoli Wang 任钢、汪早立. “Xin xingnongcun hezuo yiliao zhidu diqu chayi de shizheng yanjiu《新型农村合作医疗制度地区差异的实证 研究》[Empirical Research on the Regional Differences of the New Rural Cooperative Medical Scheme].” Zhongguo nongcun weisheng shiye guanli《中国农 村卫生事业管理》, Vol. 2 (2013). World Bank and Development Research Center of the State Council. China 2030: Building a Modern, Harmonious, and Creative Society. Beijing: China Financial and Economic Publishing House, 2013.

CHAPTER 6

An Investigation on Equal Access to Basic Public Services for Rural Migrants Gao Wenshu and Cheng Jie The push for equal access to basic public services such as basic education, public healthcare and social security, so that rural migrants have the same access to basic public services as local urban residents, are important means and guarantees for orderly rural-urban labor transfer, greater and better urbanization, and the execution of a new urbanization strategy. They are also the necessary requirements for China to achieve the goal of building a moderately prosperous society (小康社会, xiaokang shehui). In recent years, China has accelerated its comprehensive deepening of reforms, worked on its top-down design and strategy, and revolutionized management service models and measures, all of which have clearly enhanced the quality of public services available to the rural migrant population. However, the development of new urbanization is facing a multitude of challenges, such as the economic slowdown, structural transformation, and regional imbalances. The process of reform is affected by the complex relationship between the household registration, land, and financial systems, etc. Providing equal access to basic public services for all will inevitably be a long-term endeavor, in which one must be bold enough to innovate, be open-minded, respect and learn from actual experiences on the ground, and strive to overcome the obstacles. The authors of this chapter conducted a study in April and June 2014 in cities such as Shenzhen and Shanghai, which are typical destinations for rural migrants, to determine their progress in giving the rural migrant population equal access to basic public service. The study was conducted through discussions with the relevant government departments and in-depth exchanges with rural migrants and employers on the ground, from which we summed up the methods and successful experiences as well as discovered the main issues and obstacles, in order to give our suggestions on how to accelerate the provision of equal access to basic public services.

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New Developments in Providing Equal Access to Basic Public Services

Since the 21st century, China has made a strong push for integrated rural-urban development, taken practical steps to safeguard the employment rights of rural migrants, and implemented significant reforms in social security for these migrants and education for their children, so as to drive the process of rural urbanization. On the whole, China has been lifting arbitrary restrictions on rural migrants seeking urban employment since 2000 and is gradually integrating the urban and rural labor markets. Meanwhile, it has actively implemented complementary reforms in areas such as employment, social security, household registration, education, housing, and the development of small towns and cities. The urbanization the rural migrant population continues to gather pace and achieve significant progress.1 Since the 18th National Congress of the CPC, various government departments at all levels, in conforming with the spirit of the Congress and the Third Plenary Session of the 18th Central Committee, have accelerated the comprehensive deepening of reform, worked on the top-down design and strategy for reform, and revolutionized management service models and measures. There was thus significant improvement in ensuring that the rural migrant worker population had equal access to basic public services. We summarize these below through a combination of policy research and field surveys: The Comprehensive Deepening of Reform and Gradual Optimization of Institutional Policies Providing equal access to basic public services depends on two major endeavors at the systemic level, that is, the new urbanization strategy and household registration system reform. In 2013, the Third Plenary Session of the 18th CPC Central Committee issued the “Decision of the CPC Central Committee on Some Major Issues Concerning the Comprehensive Deepening of Reform” in which it clearly stated the objectives of urbanizing the rural migrant population, progressively converting those who meet the criteria into urban residents, and steadily making basic public services available to all permanent urban residents. In March 2014, the CPC Central Committee and the State Council jointly issued the “National New Urbanization Plan 2014–2020” to set out the strategic thinking behind and key tasks of new urbanization. Giving 1.1

1  Gao, Wenshu 高文书. “Jincheng nongmingong shiminhua: xianzhuang, jinzhan yu gaige jianyi 《进城农民工市民化：现状、进展与改革建议》 [The Urbanization of Migrant Workers in the Cities: The Current Situation, Progress and Suggestions for Reform].” Chengshi guancha 《城市观察》 Vol. 2 (2014).

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rural migrants equal access to basic public services was also emphasized as an important component, and the plan further clarified the direction of reform. In July 2014, the State Council issued the “Opinions on Further Promoting Household Registration System Reform,” in which it established the top-down design of reform and further clarified the thinking behind it. It required administrative townships and small cities to completely lift restrictions on new residence registration, medium-sized cities to relax restrictions on new residence registration in an orderly fashion, big cities to set out appropriate conditions for new residence registration, and megacities to exercise strict controls on the population size. The document also stated that China should establish an integrated household registration system for the rural and urban populations as soon as possible, cease differentiating between rural and urban residence, enable rural migrants who meet the criteria to settle down in the cities, and aim to transfer around 100 million of the rural population and other resident population into towns and cities by 2020. Those residing in the towns and cities but are unable or unwilling to settle down should also be provided with basic urban public services such as compulsory education, employment services, basic old-age support, basic healthcare, and housing security. A new urbanization strategy mainly depends on the coordinated implementation of the two pillars of household registration system reform and providing equal access to basic public services. This means getting regions in which conditions are mature to absorb more rural migrants as quickly as possible, and accelerating the provision of equal access to basic public services to secure the basic rights and welfare of the rural migrant population. Relevant policy measures should be optimized as soon as possible to incorporate rural migrants who have settled down in the cities into the urban housing and social security systems, ensure that their rural old-age and medical insurance plans can be properly transferred into the urban social insurance system, and give their children equal rights to compulsory education in their new place of residence. There should also be one uniform nationwide system to manage the information of primary and middle school students, a comprehensive plan to upgrade the vocational skills of migrant workers, and a system of fiscal transfer payments that is linked to the urbanization of the migrant population. Accelerating the Process of Separating Household Registration from Basic Rights and Giving More Permanent Residents Access to Basic Public Services The various regions are actively exploring ways to provide equal access to basic public services that suit their particular conditions, reducing the scope of basic welfare and rights that are directly tied to household registration, and trying 1.2

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their best to provide more public services to the permanent resident population that includes rural migrants. The results of our research and investigation show that in Shenzhen, where rural migrants have already outnumbered the locals, the provision of basic social insurance for urban employees has basically achieved uniformity in four aspects with regard to local and migrant labor: uniform policy, uniform management, uniform contributions, and uniform benefits. Household registration is no longer a restricting condition for insurance participation and entitlement to benefits. The number of people participating in social insurance schemes rose rapidly, and it became easier to transfer and continue the same insurance policies when moving from one place to another. In particular, its unemployment insurance scheme was the first in the country to offer equal benefits to local and migrant workers. As of January 2014, some 4,700 people without household registrations in Shenzhen had collected their unemployment insurance benefits.2 Shenzhen has also adopted a system of “four equals” which disregards household registration status for its public healthcare and basic medical services. The first is the equal access to services, in which its community health centers have to provide services to all including rural migrants. The second is having equal standards, in which its “Community Public Health Service Package” does not discriminate between rural migrant and registered populations. The third is providing equal security for all, in which it raised the funding level for basic public health services to 40 yuan for every permanent resident (including rural migrants). The fourth is ensuring equality in assessment, in which the assessment criteria and funding incentives of community health centers are consistent for both registered and rural migrant populations. Changing the Service Philosophy and Incorporating the Rural Migrant Population into a Uniform Talent Policy System First, we must be able to identify with the idea that rural migrants are also an indispensable part of urban socioeconomic development, see them as an important component of cultivating and developing a talent pool, and recognize that they are no different from college graduates or even overseas returnees at the systemic level. For instance, Shenzhen has incorporated the settling of migrant workers into the city’s policy framework for attracting talent and it 1.3

2  The figures cited in this chapter are all derived and compiled from the authors’ own field investigation and research unless otherwise stated.

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no longer implement a separate points system for migrant workers to obtain local household registration. This is both an improvement in terms of thinking and an innovation in the management model. Shenzhen’s points system for household registration has its roots in migrant worker household registration system reform. In 2010, the province of Guangdong issued the “Guiding Opinions on Establishing a Points System for the Residence Registration and Employment of Migrant Workers (Trial)” and Shenzhen became an important city for the trial. In order to fine-tune the migrant workers points system, Shenzhen issued the “Provisional Regulations on the Points System for Residence Registration of Migrant Workers” in 2012 to further clarify the detailed rules and regulations. In May 2013, Shenzhen issued the document “Measures to Attract Talent to Shenzhen” and under the new policy, such talent included transferred cadres and workers recruited from beyond the city, as well as those who had returned from overseas study. Migrant workers were also included but they were no longer referred to as nongmingong (literally “farmer workers”). The points system for obtaining residence registration applied to all those stated above and the earlier provisional regulations concerning migrant workers were abolished soon after. It is both an improvement in terms of thinking and an innovation in the management model to treat migrant workers as an important part of talent recruitment. Second, we should replace the quota system with a points system for approval. Some cities have learned from experience and optimized and improved their points system to establish a uniform and diversified quantitative scoring system for the assessment and recruitment of talent. As long as the points obtained meet a certain threshold requirement, an individual can apply for residence registration in accordance with the regulations and is not directly affected by annual quotas. But in reality, many places set quotas for the points system while exercising relatively strict controls in its operation. As a result, there are large numbers of people who wish to obtain residence registration but are unable to do so while the quotas are unfilled. Finally, we need to break down geographical or regional barriers. Urbanization in many places is still skewed toward local urbanization to a large extent and excludes migrant workers from other regions. Some places have proactively abolished the practice of having separate rural and urban household registrations, with no differences in residence policy for migrant workers from within and outside the province, in which those from outside the city receive equal treatment, with no regional differences or special protection.

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Autonomously Widening the Range of Basic Public Services and Enhancing the Quality of Equal Access to Public Services Some cities have taken the initiative to offer a wider range of basic public services according to own financial abilities on top of those mandated by the country. A wider range of basic public services means that the quality of equal access to public services will be brought to higher levels. For instance, on top of the 11 public healthcare services mandated by the government, Shenzhen has taken the initiative to provide basic public healthcare services with local characteristics to the rural migrant population. It was also the first city nationwide to have a program for managing tuberculosis patients among the rural migrant population and the first to initiate a program for the prevention and control of mother-to-child transmission of syphilis. Other autonomous initiatives included programs on leprosy and AIDS prevention and treatment, reducing the mortality rate during pregnancy and childbirth, and eradicating tetanus among newborns. It also offered free pre-marital and pre-pregnancy health checks for rural migrants. Basic public healthcare services mandated at the national level were provided free of charge to permanent residents at community health centers, while Shenzhen’s own public healthcare programs were provided free of charge at specialized public healthcare organizations, medical institutions, and community health centers. Also, service quality was effectively improved with coordination between the public healthcare service organizations and medical institutions, and with various specialized public healthcare organizations taking charge of supervising and training the medical institutions and community health centers in their own districts. In many cities, organizations and facilities offering old-age support services were also open to seniors without household registration in Shenzhen, with the “Star Home for the Elderly” and daycare centers for the elderly providing the same services to local and migrant populations. 1.4

Strengthening the Development of a Modern Services Network and Increasing the Capacity and Efficiency of Providing Public Service Resources Given the relatively limited public service resources at present, some regions are actively looking at the integration of resources and increasing the efficiency of usage so as to uncover the potential of providing more public services for the rural migrant population. The Shenzhen government has adopted the following measures: Developing a public healthcare service system. It established a public healthcare service system based on “governance at two levels (city and district) and 1.5

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management at three levels” and instituted a “horizontally- and vertically-integrated” public healthcare service network managed at three levels by specialized public healthcare organizations at the city and district levels, preventive care departments of hospitals at various levels and community health centers. Optimizing the community healthcare services network. Shenzhen planned for a ratio of one community health center for every 10,000–20,000 residents and it currently has 609 such centers that cover all sub-districts and communities, able to service all residents within the radius of a 15-min walk and perform a wider range of service functions, which includes serving as community rehabilitation and primary healthcare centers tied to the medical insurance system for migrant workers. Fees are collected on a lump-sum basis per head with outpatient treatment fees capped at 800 yuan per annum and a maximum reimbursement limit of 350,000 yuan for hospitalization, with a reimbursement rate of 76%. The community health centers are all equipped with basic medication available at the national and provincial levels but their costs are on average 29.1% lower. Developing a standardized family planning service network. The Shenzhen Family Planning Service Center network has a total of 49 family planning service centers with one at the city level, six at the district level and 42 at the sub-district level, as well as 625 community parenting centers, with the family planning service centers all having a standardized set-up. Increasing the ability to manage information in an open and transparent manner. The entire process and various components of the points system for residence registration in some cities, including the standards, assessment criteria, and assessment results, can all be made public online in order to make its operation more transparent to all. This ensures that the system is fair and just and improves the efficiency of management services. 2

Problems and Challenges in Providing Equal Access to Public Services

Some major Chinese cities such as Shenzhen and Shanghai have taken a step forward in their thinking and actions in terms of providing equal access to public services for the rural migrant population, but some problems and challenges will inevitably remain. There is still no synchronized implementation of policies to provide equal access to basic public services and progress differs for different policy items, regions, cities, and groups. Employment policies that benefit local economic development are more quickly implemented, while healthcare and education reform policies, which require more financial investments

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or increase competition for locals are slower to take off. Some of these have to do with the internal issues that recipient cities of migrant labor face while others are due to the overall situation and environment in the country. Unsustainability of the Local Government-Led Model, with More Input Needed from the Central Government The security of financial input is necessary to provide equal access to public services for the rural migrant population. Given the existing division of financial power, the duties and responsibilities of local governments are not commensurate with the financial power that they have. Even cities in the economically-developed regions are unable to sustain the huge levels of public spending needed to provide the added public services in the long term. It is unfeasible to rely completely on local governments to lead the push for equal access to public services, given the regional inequalities in economic development and the high concentration of rural migrant population in some regions. According to our research and calculations, there are huge regional differences in economic development and public service standards. The accumulated costs of the ten cities that incur the highest costs in providing equal access to basic public services account for three-quarters of total costs for the whole country. Major cities with higher public service standards and higher concentrations of rural migrants will inevitably bear heavier costs and burdens in reform, while for some medium-sized and small cities with lower public service standards and fewer rural migrants, there is the issue of limited economic and financial resources, which also makes it difficult for them to shoulder the rigid costs of providing equal access to public services in the long term. Thus, without the central government taking a greater responsibility in education, healthcare, and social security, there will be great difficulties and resistance when local governments are left to their own devices to promote equal access to public services for all. 2.1

Stark Regional Imbalances and the Pressing Need for Coordinated Implementation There are relatively huge gaps in basic public service standards across different regions and cities, with different processes of providing rural migrants with equal access to basic public services and differing progress in implementation for different policies. Relatively speaking, employment policies that benefit local economic development are implemented more swiftly while public service policies that involve more financial input and may bring competition for locals are slower to take off. It is relatively common for children of migrants workers to face problems such as tedious application processes and arbitrary 2.2

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fees in school enrollment, as well as issues to do with compensatory education and integration. Migrant workers and their dependents are gradually being incorporated into the local medical assistance system, with central and western provinces such as Jiangxi and Guangxi putting more effort in its execution, while the more developed eastern provinces are not doing enough. First-tier and second-tier cities have come up with means for migrant workers to apply for low-cost rental housing, but third-tier and fourth-tier cities are progressing relatively slowly in this aspect. While some cities have tried to be more proactive in accelerating the provision of equal access to public services, but given the lack of coordinated action at the national level, their enthusiasm is dampened by worries about the “depressive effect” of welfare. For instance, while Shenzhen is financially capable of further expanding the range of public services targeted at the rural migrant population, it is concerned about the accelerated influx of rural migrants from other parts of the country who may be attracted to the higher levels of welfare, which may then result in a financial burden that is too heavy to bear and put pressure on population management in the city. Local government officials are of the view that: “As developed and well-endowed as Shenzhen is, it cannot foot the bill for the country’s entire population.” Therefore, without coordinated execution at the national level, giving the rural migrant population equal access to public services will inevitably cause greater regional imbalances and impede the progress of reform. Access to Public Services Still Demands Matching Contributions, with Non Employment-Related Welfare Basically Excluded Even as some regions have made good progress in expanding the range of public services and welfare available to the rural migrant population, many of these are still tied to employment. This implies that access to public services still depends on the value of an individual’s contribution, such as generating GDP or tax revenue through employment or subscribing to social insurance schemes for a certain number of years. Local governments have the narrow understanding that only these types of rural migrants contribute to local development and deserve to enjoy some of the public services and welfare that are offered. Thus, rural migrants are still being excluded from enjoying basic public services that are not tied to employment or fee contributions. Currently, only residents with local household registrations can benefit from welfare schemes that do not require fee contributions or are mainly financed by public spending, such as the old-age and medical insurance schemes for residents and the minimum living standard scheme. Local governments are mainly worried 2.3

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about greater financial pressure by opening up these schemes to more people. Furthermore, without coordinated implementation at the national level, these social insurance schemes will also face transferability and continuity as well as regional convergence issues. If restrictions are relaxed at the local level first, this may lead to the problem of overlapping benefit entitlements, which is also somewhat unfair. Based on the range of public services and welfare that rural migrants enjoy, there is still a relatively long way to go in providing equal access to public services. More Implicit Exclusion of the Rural Migrant Population, from Exclusion at the Institutional Level to Imposing Stringent Conditions Although some regions have made relevant institutional improvements to abolish discriminatory polices that directly exclude the rural migrant population, but as the newly-established uniform policy framework is one that is oriented toward high-end human capital, the general rural migrant population, and migrant workers in particular, are in fact still being excluded from the system. For instance, Shenzhen has taken a huge step forward in viewing migrant workers as a human resource and incorporating them into the overall talent pool, but when it comes to formulating actual policies, it still tends to use criteria such as human capital attributes, economic capabilities, and the regularity of employment. These will necessarily prove too stringent and harsh for migrant workers, even for those who have been working in the city for a long time. Statistics show that among those who had taken residence in 2013, there were 122,684 or 81.3% with urban household registration and 28,205 or 18.7% with rural household registration. Very few were migrant workers in the real sense of the term. In this sense, there is a shift in the methods of excluding migrant workers, from mainly direct institutional exclusion to indirect restriction by imposing stringent conditions. The actual prospects of settling down in the cities have not improved for most migrant workers. 2.4

No Moves Yet to Improve Core Rights, with Strict Population Controls Taking Precedence over Fair Access to Education Access to education is a core right that the rural migrant population is most concerned about. Although the policy of “two priorities” (which is to give priority to local governments receiving rural migrants and to public schools) has long been enunciated, actual implementation has been less than ideal. The issue of educating the rural migrant population has yet to be fundamentally resolved, with migrant children and youths forced to drop out of school and enter the labor market prematurely, thereby becoming a vulnerable group in society. The fact that the household registration system has become an important means of population control in major cities such as Beijing and Shanghai 2.5

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aggravates the situation. To a certain extent, the need to control the population has taken precedence over ensuring fairness in education. Given that the current thinking on household registration system reform calls for small and medium-sized cities to gradually relax controls and big cities, particularly megacities, to impose stricter controls, local governments have used education, the very issue that rural migrants are most concerned about, as a tool to deal with the difficult issue of regulating the rural migrant population, that is to squeeze them out by reducing their educational opportunities. Some years ago, children of rural migrants still had the opportunity to receive vocational education in cities such as Beijing and Shanghai, but this policy has also been tightened by now. The rights of migrant offspring to education are thus being further eroded and this leads to the wastage of quality educational resources in the cities at the same time. Lack of Convergence in the Urban and Rural Systems, which Impedes the Effective Push for Equal Access to Public Services China’s social insurance, healthcare, and household registration systems have yet to be integrated at the national level, and there is less than effective convergence between systems in the urban and rural areas, as well as between regions with inflows and outflows of rural migrants. Relevant policies cannot be implemented smoothly with only recipient cities of rural migrants pushing for reforms. For instance, Shenzhen has kept premium rates for its old-age insurance scheme fairly low in the long term, which was 8% for individuals and 10% for enterprises at one point when the national rate for the latter was 20%. But the policy for transferring and continuing the old-age insurance scheme stipulated that only 12% of the enterprises’ contribution could be transferred, with 8% to remain locally. As a result, Shenzhen was forced to raise the contribution rate for enterprises (currently at 13%) as it was not only unable to retain any funds but had to fork out additional funds. In terms of residence policies, there are similar convergence issues with other places of migrant outflow in areas such as contracted land, homestead land, and household registration management. Currently, many places can only set their own standards and are unable to take the policy needs of the places of migrant outflow into account, and this can easily create confusion in the management of household registration. 2.6

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Suggestions to Accelerate the Provision of Equal Access to Basic Public Services

By considering the latest developments and existing problems concerning the provision of equal access to basic public services for rural migrants,

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summing up the experiences and lessons of various regions, and targeting the most acute problems in the reform process, we propose focusing on the following areas to accelerate the provision of equal access to basic public services for rural migrants. First, the central government needs to be the overall coordinator and play the leading role. With the rural migrant population highly concentrated in certain cities and huge gaps in public service standards across different regions, there will inevitably be huge resistance if reform is to be mainly led by local governments. The financial burden of providing equal access to public services is not unbearable from the national perspective, and it demands coordinated implementation at the national level, with the central government taking the lead in order to prevent local governments from becoming trapped in a “Prisoners’ Dilemma,” in which megacities such as Beijing, Shanghai, and Shenzhen are not limited by financial ability on their own terms but by the dilemma of “not wanting to foot the bill for the entire population.” With the central government undertaking its rightful financial responsibility, local governments should have the motivation and ability to accelerate the process of providing equal access to public services. Therefore, the central government should strive for “simultaneous implementation at the national level while accounting for regional differences” when pushing for the provision of equal access to public services. Policy measures must be effectively implemented in all cities while simultaneous implementation ensures that the costs of reform are evenly distributed among regions and cities to avoid a “depressive effect.” Regional policy differentiation must go beyond the confines of existing administrative divisions and be based on the actual capacity of a city to shoulder the burden of reform, and not just in terms of the simple divisions of big, medium-sized, and small cities or eastern, central, or western regions. Second, a rational cost-sharing system needs to be set up. The financial burden of providing equal access to basic public services that a higher quality of urbanization in the next few decades will demand is not unbearable. What is crucial is a scientific and rational means of sharing the costs, i.e. who pays and how much. Given a situation where there are no major adjustments to the existing financial system, the central government needs to shoulder a greater proportion of the costs. The central government can consider bearing all the costs for the most basic public services and should be wholly responsible for education, particularly for compulsory education and secondary education. As for employment, healthcare, and old-age security, the higher the level of planning, the greater the proportion of the costs the central government should bear. The provision of some quasi-public services and welfare investments such as housing security

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and community services can be undertaken by local governments according to their own local conditions. Meanwhile, China should step up on reforms and improvements to the system of finance to establish a system of public transfers targeted at permanent residents, clarify the respective responsibilities of the central government, as well as the governments of regions with inflows and outflows of rural migrants, and encourage recipient cities of rural migrants to be more proactive in accepting such rural migrant inflows. Third, there needs to be a system of public service and welfare based on citizens’ rights. The narrow mindset that rural migrants should contribute before they can enjoy public services should be changed, with a gradual transition from a public service system that is based on employment rights to one based on citizens’ rights. Current efforts to provide equal access to public services are mainly targeted at rural migrants who have stable employment in a work unit and who are participants of social insurance schemes, while those who are self-employed, have flexible working arrangements, or are still unemployed do not have the same rights to social insurance participation as local residents. We should establish a system of universal benefits and transferable welfare as soon as possible, in which citizens can enjoy the rights and welfare that they are entitled to as citizens, no matter where they live, and not only when they are employed. Fourth, we must fully respect and take into account the characteristics of the migrant worker community. To change perceptions about the rural migrant population, we should abolish indirect forms of technical discrimination in institutional design and policy rules. One way is to put more weight on the group characteristics of migrant workers. Currently, the policy and criteria for granting residence still tends to favor the highly-educated, highly-skilled, and young talent, and priority is given to formally-employed individuals who have housing and social insurance. Migrant workers who have been living and working in the cities for a long time but are less educated are in a disadvantaged position, particularly for many who are working in sole proprietorships or engaged in informal work. The relevant policies and regulations need to respect the group characteristics of migrant workers. Another way is to consider having an integrated assessment system at the family level. The form of population flow is shifting from that of mainly labor migration to family migration. Meanwhile, it is also logical to consider the demographic characteristics of a family unit. Current residence policies are focused on evaluating the individual, but we can gradually explore the possibility of allowing entire families to apply for residence and adjust the relevant assessment criteria. Fifth, the rights of children of rural migrants to education should take priority and we should strictly prohibit the use of education as a means to control population size in the major cities. There should be basic guarantees for

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the right to education and cities absorbing rural migrants should ensure their children’s equal rights to compulsory education by taking this into account in educational planning and budgeting. Public schools should become the main providers of education for such children and the government should disburse standardized levels of funding per student to the schools. We should support non-governmental actors to establish schools for children of migrant workers and help private schools that are willing to and have suitable teacher resources as well as a safe teaching environment to play a role in providing compulsory education. This can be done through training for teachers and by providing teaching equipment and facilities, etc. The government can also provide financial subsidies based on student numbers to ensure that the children of migrant workers receive basic education of an acceptable quality. Private schools for children of migrant workers should be accorded the requisite legal status and properly incorporated into the national education system so that these schools can make additional investments for long-term development, thereby filling the gaps in the supply of formal education. Sixth, we need to comprehensively implement and accelerate improvements to the residence permit system. This system should be more servicecentric and less management-centric and it should perform the basic function of providing information about population flows, so as to become the basis for providing accurate coverage of public services and welfare to rural migrants. The core difference between the residence permit and temporary residence permit lies in their basic functional attributes. The former puts a stronger emphasis on public services and the latter, on population management. If we regard it as just another tool or means to manage the rural migrant population, then the significance of the residence permit is much reduced, and it may become no different from the temporary residence permit. We should gradually tie more public services and welfare to the residence permit so as to give the bearer the right to enjoy public services such as employment, education and training, social security, healthcare, and housing security, with the aim of gradually reducing and eliminating the differences in rights enjoyed by the locally registered and migrant populations. Seventh, we should protect the property rights of rural migrants in the place of their origin. The rights of rural migrants to contracted land, homestead land, and their collective economic rights in the rural areas of their origin are not accorded sufficient protection and this has become a major obstacle in the urbanization process. We should explore having a system of property rights that takes into account the realities of development in different regions. In economically-developed or highly-urbanized regions where there are diverse

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uses for land and the determination of ownership rights is complex and costly, we can allocate part of the property rights to the public domain. For less economically-developed or remote regions, where land is used for more singular purposes and it is easier to determine ownership rights, we can determine the rights to collective property by converting them into shares. We can explore the option of allowing direct market transactions in rural construction land, establish a price discovery mechanism driven by the market, allow land use rights for rural homestead land, rights to the contractual management of land, and the rights to forest land to be collateralized and mortgaged, establish a market for the transfer and transaction market of rural property rights, so as to achieve the principle of “same land, same rights and same price.” On the basis of safeguarding the rural property rights of rural migrants, we can then better provide equal access to public services for them and achieve better urbanization. Eighth, enhancing rural-urban and regional convergence in terms of policies. The central and local governments should coordinate their policies and try their best to reduce the benefit losses of rural migrants in the process of migration and to properly manage the interests of local governments. The household registration and land system reforms need to be implemented in coordination, and the former can be seen as a “pull” factor and the latter, a “push” factor. Together, they can promote the provision of equal access to public services and a higher quality of urbanization. There needs to be more effective convergence in the relevant policies of regions with an inflow of rural migrants and those with an outflow of rural migrants to properly manage the relinquishing of contracted land and homestead land rights in the latter. This prevents a new problem from arising, in which rural migrants simultaneously enjoy the benefits of being urban residents while retaining ownership of farming land and homestead land, while also claiming rural social benefits. Reference Gao, Wenshu 高文书. “Jincheng nongmingong shiminhua: xianzhuang, jinzhan yu gaige jianyi《进城农民工市民化：现状、进展与改革建议》[The Urbaniza­ tion of Migrant Workers in the Cities: The Current Situation, Progress and Suggestions for Reform].” Chengshi guancha《城市观察》Vol. 2 (2014).

Part 4 Promoting the Development of Labor Market Institutions

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CHAPTER 7

Ushering in the Long-Awaited: Starting with the Disclosure of the Surveyed Unemployment Rate Cai Fang This chapter begins by discussing China’s unemployment rate in order to look at the “new norm” in its labor market, and then observe the “new norm” in the Chinese economy. Everyone is concerned about the macro-economy but there is one essential difference when discussing this in the context of China and when talking about the macro-economy in the Western sense, which is that prior to taking any policy action, a central bank chief in the West needs to convince the congress or parliament of its merits and they mainly cite the unemployment rate for support. However, the Chinese central bank or finance ministry generally does not cite statistics on the unemployment rate when introducing the relevant macroeconomic polices. In fact, there has never been any systematic publication of important statistics to do with the unemployment rate. Lately, some bits and pieces of information have become available and this chapter will use them to start examining the labor market situation. 1

Facts Concerning the Unemployment Rate and Clarifying Some Misperceptions

Let us look at some facts on China’s unemployment rate, and we can touch on the different indicators and clarify some misperceptions at the same time. China’s economic growth has to this point been on a declining trend for 18 quarters, and also persistently below the average growth rate for the past 35 years for around 14 to 15 quarters, haven fallen from a double-digit figure to 7%–8%. When the Southeast Asian financial crisis hit in the late 1990s, former premier Zhu Rongji sought to keep the economic growth rate at 8%. During the global financial crisis in 2008 and 2009, then premier Wen Jiabao did the same. But this time round, even with our economy on such a prolonged decline, we had only implemented some so-called micro-level stimulus measures and generally did not seek to keep the growth rate at 8%. The government had also abandoned its earlier mindset and deemed a growth rate of 7.5% was acceptable. This was because it now felt reassured, and this perhaps stemmed from the observation © koninklijke brill nv, leiden, ���7 | doi ��.��63/9789004342156_008

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that economic decline had not put pressure on employment and cause unemployment to rise. This was what gave it assurance. Is there no pressure on the labor market when economic growth declines? There are many who think that employment will certainly come under pressure. We need to study some indicators in a more systematic way. It is insufficient to simply look at individual indicators. Instead, we have to look at the labor market as a whole, and also the unemployment rate and the labor force participation rate, etc. Meanwhile, we must compare the labor market situation and other relevant indicators such as macroeconomic indicators in order to form an accurate picture. To date, systematic data on the unemployment rate from official sources are given in the form of the “urban registered unemployment rate.” Many have criticized it for being unreliable and there are generally a few reasons given. First, it only takes into account urban residents with household registration when the bulk of the migrant worker population, who form 35% of the urban workforce, are not captured by this indicator. Second, those with local household registration may not necessarily want to register themselves as unemployed, as some may feel that it is pointless to do so even if they fulfill the criteria for registration. Thus, they are also not reflected in the unemployment register. This therefore does not make it an objective statistic on unemployment, as it depends on people to voluntarily declare their unemployed status. The urban registered unemployment rate has essentially been the same since 2002 (Figure 7.1). Over this period, we experienced some macroeconomic

Urban unemployment rate (%)

8 7

Registered unemployment rate Surveyed unemployment rate Natural unemployment rate

6 5 4 3 2 1

19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10 20 12

0 Figure 7.1 Changing trends in some urban unemployment rate indicators. Source: China Statistical Yearbook (Various Years), National Bureau of Statistics, Du Yang and Lu Yang (2011).

(Year)

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fluctuations, in particular the widespread financial crisis in 2008 and 2009. But even during then, the normal unemployment rate still hovered around 4.1%, and it only rose to 4.3% at one point when the economic situation was at its worst in 2009 and dropped again thereafter. The general sentiment was that this seemed very different from what people were actually experiencing with regard to China’s unemployment situation, thus the persistent doubts and numerous criticisms. Many scholars have also tried to come up with more systematic arguments about this inaccuracy. But this writer thinks that the indicator is not inaccurate but simply has its limitations. There have been persistent calls for the publication of an indicator that reflects the actual labor market situation, i.e. the surveyed unemployment rate. This is an indicator that is recommended by the International Labor Organization which many countries use. By using this indicator, we will not just cover urban residents with household registrations but include everyone who participates in the urban labor market. It is also useful for making international comparisons as it accepts the International Labor Organization’s recommendations. For instance, if China’s surveyed unemployment rate is 5% and the United States’ surveyed unemployment rate is 8%, then we can at least effectively compare the two on the whole. Some years ago, then Premier Wen Jiabao asked that (and we had also mentioned this in our documents numerous times) the surveyed unemployment rate be used and published, but this has yet to be done. Lately, we found that there were bits and pieces of data that were being released by government departments, albeit not in a regular and systematic way. Rather, Premier Li Keqiang disclosed some of the data on the surveyed unemployment rate in his speeches on various occasions. In 2013, he wrote an article for the Financial Times in which he disclosed that unemployment had stood at around 5% for the first seven months of that year. This figure was probably revealed because it did not look too bad next to the unemployment rates in Europe and the United States. When briefing an assembly of academics from the Chinese Academy of Sciences and the Chinese Academy of Engineering on the economic situation in 2014, Premier Li revealed that the surveyed unemployment rates for March, April, and May of that year were 5.17%, 5.15%, and 5.07% respectively. The Ministry of Human Resources and Social Security later added that by the end of June, the surveyed unemployment rate for 31 cities was 5.05% (the surveyed unemployment rate for each month was based on the consolidated data of 31 cities). During the 2014 Summer Davos forum, Premier Li Keqiang said that between January and August of that year, the surveyed unemployment rate in China’s 31 big and medium-sized cities was around 5%. In recent years, the surveyed unemployment rate has been around 5%.

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China’s urban registered unemployment rate has always been around 4.1%, which many people find doubtful. Given that the surveyed unemployment rate is 5%, it causes many to question the real rate of unemployment. Let us first look at how the surveyed unemployment rate is derived so that we may be able to understand it better after knowing its characteristics. The surveyed unemployment rate is an internationally-recognized indicator. Various countries had all previously used different indicators to describe their labor market situations but after exhaustive research, the International Labor Organization found the surveyed unemployment rate to be a relatively better indicator in describing the labor market situation and thus recommended its use. Presently, most countries use this indicator. Its one advantage is that it eliminates two scenarios. The first scenario is that people who are unemployed may not register themselves as such, either because they find that it serves no purpose or that it does not give them good employment, and they may not even want to receive unemployment training. As there is a deadline for claiming unemployment assistance, the unemployed may register themselves while these are still available, but not if the deadline has passed. Thus, there are people who are truly unemployed but do not register themselves as such, and they are not reflected in the registered unemployment rate. The second scenario is that there are people who have lost their jobs and registered themselves as unemployed, and they may even be collecting unemployment assistance and included in the 4.1% registered unemployment rate. But these people may also have found temporary work, which is not reflected in the registered unemployment rate. The advantage of the surveyed unemployment rate is that it can take the two abovementioned scenarios into account. According to its definition, the surveyed unemployment rate needs to look at one’s household circumstances and it can determine one’s labor market situation by asking three questions through various survey questionnaires. The first question is whether the respondent had engaged in at least an hour of paid work in the past week. If the answer is “yes,” then one is deemed to be employed. If the answer is “no,” then the respondent is one step closer to the status of unemployment by satisfying one-third of the definition. The second question is whether the respondent had been actively seeking employment in the past month. For instance, did the respondent register himself or herself with the employment services department, actively seek help from friends and relatives, or engage in other similar actions? The purpose of this question is to gauge whether the respondent intends to seek employment, as there are people who may not wish to work after losing or quitting their jobs. This is not unemployment but exiting the labor market altogether.

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Recently, unemployment in the United States had reportedly dropped to close to 6% from more than 10% after the financial crisis. There are people who say that 6% is not a real reflection of the employment situation in the United States, because there are many workers who are in fact not working and not actively looking for work. Such people are deemed to have left the labor market altogether and this suggests that the labor force participation rate among Americans has dropped. There are of course various reasons for this, such as the case of mothers who need to take care of their children or others who are not interested in working or have no need to do so because they are sufficiently well-off. However, if there are people who need a job but are unsure about the labor market or pessimistic about finding work, then these people may have apparently exited the labor market but are in fact unemployed. If the labor force participation rate drops by three percentage points and we take two percentage points out of that and add them to the unemployment rate, this effectively brings the unemployment rate in the United States back to 8%. Therefore, if a respondent states that he or she is on a active jobsearch but without success, then this brings him or her one more step closer to unemployment. We now come to the third question, which concerns whether a respondent is able to take up a job within a specific period of time if an employment opportunity arises, e.g. within a month. If the response is “no” because the children are still too young, it means that one has in fact voluntarily exited the labor market. If the respondent indicates that he or she can start work the following day, then this confirms his or her willingness and ability to work. If a respondent fulfills the criteria for the three questions stated above, this makes him or her unemployed and he or she will be included in the surveyed unemployment rate. There are of course also some problems with this. For instance, even if the respondent had engaged in at least an hour of paid labor in the past week, this is not a very ideal employment situation as the work would have been too limited to change his or her living conditions by much. But this is the definition that has been set, so even though some problems remain, it is still an unemployment indicator that everyone finds acceptable on the whole. In fact, the National Bureau of Statistics had already established a system for surveying the labor market since 1996 and it is possible to calculate the surveyed unemployment rate based on the data obtained since. But for a long time, the bureau did not publish these data, perhaps because decision-makers and government officials were reluctant to see them made public. There were generally a few reasons for this outlined below.

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One reason was that the unemployment rate had once been very high. Soon after the National Bureau of Statistics established its survey framework in 1996, the macro-economy took a turn for the worse in 1997. This, on top of the impact of the Southeast Asian financial crisis and a series of reforms including the shattering of the “iron rice bowl” (lifelong job security) in state-owned enterprises and manpower cuts for improved efficiency, all caused the unemployment rate to rise substantially. This was no longer simply unemployment but massive layoffs. The surveyed unemployment rate even reached 7.6% at some point in 2000. The government was worried that a sudden jump in the unemployment rate to 7.6% would cause panic, for people had become used to the idea of having an “iron rice bowl.” Thus it was reluctant to disclose the figures. But it had no concerns about disclosing the registered unemployment rate, which was only 3.1% in 2000. This figure was not inaccurate or wrong, because some people had indeed openly registered themselves as unemployed, and they accounted for 3.1% of the population. Social insurance for the unemployed did not exist at the time and there were no unemployment benefits for those who registered themselves. An idea emerged at the time that central and local governments as well as enterprises could all contribute some money on top of some unemployment insurance funds to set up reemployment service centers in enterprises for laid-off workers. This was not called unemployment but retrenchment. As they enjoyed some benefits after being laid off, these people were not reflected in the registered unemployment rate. Had there been any attempt to obtain the surveyed unemployment rate at the time, these people would have been included in the statistics. A problem that emerged later was that people discovered that the surveyed unemployment rate had suddenly dropped to very low levels and naturally they could not understand why this was so. It was unlike what we and the average person imagined, and even we began to doubt its credibility. The National Bureau of Statistics also tried to solve the puzzle but its understanding is probably still incomplete after so many years. At that time, some government departments such as the Ministry of Labor felt that the figures should not be published, otherwise neither the central nor the local governments would think it was important to protect jobs if a surveyed unemployment rate of 3% to 4% had been reported. In addition, we discovered that there were exceptionally huge fluctuations in the surveyed unemployment rate across different cities, different months, and among people of different statuses. Thus, the general opinion was that the instability of the figure probably accounted for why it was not disclosed for a very long time and explains why it is still not systematically released by any statistical department, even in the present day.

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In the past, I too had bemoaned the statistics bureau’s reluctance to disclose the surveyed unemployment rate, for it would at least give researchers like myself more information to work on. In response, the researchers at the bureau kindly explained how the surveyed unemployment rate could be derived from a series of related data, and while they did not do so, researchers could obtain a more or less accurate figure by paying close attention to the various types of data that the bureau released. Based on what was said, I decided to figure it out on my own and obtained a figure for the surveyed unemployment rate after working on it for close to a year. This was not calculated using my own microdata but by using official surveys, in which time-series data could be obtained by consolidating the various types of data under the same survey system. In fact, this figure has been available all these years, and it is considerably higher than the registered unemployment rate even though the gap between the two has narrowed in recent times. I had published this time-series data in the form of research findings around 2004 and 2005. The official in charge of employment matters in the labor ministry at the time told me that it was basically not too different from the official data they had. Now it seems that it is also largely consistent with the figures presented by Premier Li Keqiang. Thus, I believe in its legitimacy (Figure 7.1). For many years, many people have been asking about the state of China’s labor market and the surveyed unemployment rate, and yet no one has paid any attention to the figure I had published many years ago. If they wished to know the figure, why did they not take notice when we published it? On the one hand, I did not represent the National Bureau of Statistics, so perhaps people were doubtful about the authoritativeness of the figures and how they were derived. On the other hand, people had the conventional belief that China had an unlimited supply of labor and a dual economy that generated vast amounts of surplus labor, and thus the unemployment rate necessarily had to be high. If the calculated unemployment rate turned out to be low, it was not very newsworthy and did not conform to expectations, thus no one would think it was important. Conversely, when someone occasionally cited a figure without explaining how it was calculated, it would immediately cause huge concern. For instance, at the turn of the century, when someone estimated that the unemployment rate was 20%, with unemployment in some regions (such as northeastern China) reaching 40%, this immediately became important news and was widely cited even though no one explained how the figures were obtained. These estimates in fact did not conform to logic. At the end of the 1990s when living standards in China were still very low and people generally had only one source of income, both spouses had to work. Supposing that the

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unemployment rate was indeed 40%, many families would be out of work as a whole. Without unemployment insurance at the time, people would hardly be able to survive with such a high unemployment rate. Thus, this makes no sense at all. By 2009, the surveyed unemployment rate had dropped considerably but sociologists published another figure stating that the surveyed unemployment rate was 9.6%, which again caused a stir and alarmed decision-makers. It incited much debate on the method of the survey, the definition of the unemployment rate, and the specifications. Since then, State Council leaders have been urging the National Bureau of Statistics to release its own figures if the unemployment rate was not as high as argued. What I am saying is that people have a conventional understanding that China’s unemployment rate is necessarily high, and this mindset should change. At this point, I wish to summarize things a little. People think that developing countries with rich labor resources necessarily have high unemployment rates. This is in fact a misperception because the unemployment rate is not determined by how much labor there is. Instead, it reflects fluctuations in economic development. The macro-economy fluctuates, thus the unemployment rate should be low when the economy is doing well, whereas it would inevitably rise when the economy slows, as the labor utilization rate is certain to drop sharply. There is also another type of unemployment which is not caused by macroeconomic fluctuations but labor market imperfections. For example, if I want to find a job and there is an employer who wants to hire me, but we are unable to connect because the labor market is imperfect, then this puts me in a state of frictional unemployment. Or supposing that I had a particular skill and I hope to find a job that will enable me to use this skill. Even if I managed to be discovered by an employer after much effort, the skills the latter needs may not be what I happen to possess. This puts me in a state of structural unemployment. All of these have to do with how developed the labor market is and how well human capital matches market demand, or they may also be related to the state of the macro-economy, while having nothing to do with how much labor a country has. The unlimited supply of labor causes underemployment and not unemployment. For instance, having rural surplus labor does not mean having many people without any work to do and with the label “surplus labor” stuck to their foreheads. Rather, it is impossible to tell who is surplus labor and who is not, indeed they are all working but there are five people doing the work meant for two and this is underemployment. It is the same case in the cities, usually in the form of surplus manpower or people who are engaged in informal employment, in which they are underemployed and have low income. To cite an example, we could be in a very poor country, say Bangladesh, and staying in a five-star hotel called Oasis in the capital Dhaka. This name is apt as

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the word “oasis” refers to a small place in the endless desert with water and in which some date palms grow. The entrance of the hotel is guarded by people holding guns and as soon as we step out of the hotel, we find ourselves in a sea of poverty. Some of the poor people would start following us, but they would leave if we ignored them. Finally, one person would stay with us for two whole hours and offer an introduction of the place in English. Feeling sorry, we may give this person about half a dollar and he would leave satisfied. Within the week, he would be deemed to be employed by investigators from the statistics bureau, even though this is severe underemployment. Therefore, we say that the unemployment rate has nothing to do with the unlimited supply of labor. Rather, it has something to do with the macro-economy and the functions of the labor market. We should clarify our understanding of this. 2

Separating Developmental Phenomena from Cyclical Phenomena: An Observation of China’s Labor Market

As a phenomenon of development, we have long had a dual economy with an unlimited supply of labor. While in terms of our macroeconomic situation, we may have experienced different macroeconomic circumstances at different points in time. The two are not the same thing. China’s labor market is undergoing a transformation from dualism to neoclassicism. Over the last few years, we experienced two major turning points in our economic development. One of them is the Lewisian turning point. As a development economist, W. Arthur Lewis proposed the theory of the dual economy and generally divided the economies of developing countries into two economic sectors. One is the traditional sector represented by agriculture, in which there is a great deal of surplus labor. For instance, there are five people working but the work is not affected by the departure of two or three people. This goes to show that the two or three people are surplus labor. As the development of the non-agricultural sector continues to absorb such labor, the expansion of employment is not dependent on the number of people seeking employment, but on how quickly the non-agricultural sector develops. This is a long-term process, which was generally what we experienced for the past three decades or so. However, this process of labor absorption will end one day. For instance, when I employed someone in the past, he or she would be happy even if there were no wage increments, while this may not be the case today if you still offered them the same wages. You need to raise your wages, otherwise no one would work for you. The process of moving from a situation of unlimited labor supply to one that necessitates paying higher wages in order to hire someone is known as

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crossing the Lewisian turning point. China crossed this turning point in 2004 when we saw a labor shortage occurring for the first time in the coastal regions, particularly in the Pearl River Delta region. We had initially thought that this was temporary and was baffled by it as we did not know why it happened. But subsequently, this phenomenon spread from the Pearl River Delta region to the Yangtze River Delta region and then nationwide. Today, we can see such a dearth of labor everywhere. The wages of migrant workers have been consistently rising at a rate of 12% per annum since 2004, even after being adjusted for inflation. After 2004, we crossed another major turning point, which made it even clearer to us that there was an absolute labor shortage. The sixth national population census of 2010 indicated that China’s working-age population between the ages of 15 and 59 had peaked that year and would begin to decline yearly from 2011, with absolute decreases from then on. We had never encountered something like this in the past. With the population between the ages of 15 and 59 being our source of labor, we were further convinced that this change in demographic structure meant that the labor shortage was real and unavoidable. The transition from a situation of labor surplus to one of labor shortage is important, but it still has no influence on the unemployment rate (if there is any influence, it is only in terms of lowering the unemployment rate). If we classify unemployment in the labor market into cyclical unemployment, structural unemployment, and frictional unemployment, these would not change. Only changes in hidden unemployment or underemployment due to labor surplus have something to do with the stage of development and the Lewisian turning point. After crossing the Lewisian turning point, the extent of underemployment and labor surplus will be greatly reduced, but this will not affect unemployment itself. This is an important change that we are facing, a process in which labor is continually moving away from the characteristics of a dual economy to that of neoclassicism. What we mean by the neoclassical state is that wages are determined by the marginal productivity of labor and that problems in employment are increasingly due to cyclical and natural unemployment rather than underemployment. Thus, we will increasingly need labor market institutions to adapt to this. We can briefly analyze the point about the significant reduction in surplus labor. Since urban reforms were implemented to scrap the “iron rice bowl” and cut manpower for greater efficiency, there is now no private enterprise that is willing to engage unnecessary manpower, and the same goes for state-owned enterprises. Although there are still some old workers who are difficult to deal with for the time being, but enterprises will generally refrain from employing new workers who are not needed. Thus excess manpower is no longer a

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major phenomenon in the cities. Surplus labor (hidden unemployment) in the rural areas is also experiencing a trend of rapid decline. Official statistics indicate that the current proportion of rural labor is slightly above 30%. If there is indeed still 30% of labor engaged in agriculture, this means that in the past three decades or so of reform and opening up, China’s agricultural labor surplus has not been decreasing very quickly. If we go with this figure, it would mean that the proportions of agricultural labor in Japan and South Korea declined more than twice as fast during their respective three-decade periods of high-speed growth. We are therefore very skeptical about this result. In fact, the great achievement of reform and opening up is not simply increasing the GDP but also enabling industrial restructuring and large-scale rural labor transfers. Westerners say that China’s labor transfer is the largest peacetime migration in human history (with the exception of war, disaster, or the instance when Moses led the Jews out of Egypt, etc.).1 It definitely makes no sense that such a massive change occurred so slowly when compared with similar changes in Japan and South Korea. We found that the problem lay with the definition. Official statistics on agricultural labor included many who left their homes to work and only returned to farm occasionally in its definition. When my colleagues tried their best to define rural work in a reasonable and comparable manner and recalculated the proportion of rural labor based on more reasonable data (this is of course very complex and it is impossible to be perfect), they found that they could reduce the official figure of slightly more than 30% by at least 10 percentage points, so that the proportion of labor still engaged in agricultural labor was only around 22%.2 Figure 7.2 shows the actual labor distribution and situation in the three economic sectors. We encountered another problem when redistributing the labor in the three sectors. Although we managed to reduce the proportion of those engaged in agricultural labor by 10 percentage points when compared with official statistics, we were unable to adjust the number of people working in the secondary and tertiary sectors as we had no idea if the excess labor should go into 1 Kenneth Roberts, Rachel Connelly, Zhenming Xie, and Zhenzhen Zheng, “Patterns of Temporary Labor Migration of Rural Women from Anhui and Sichuan.” The China Journal, 52 (2004): 49–70. 2 Du Yang and Meiyan Wang 都阳、王美艳, “Zhongguo de jiuye zong liang yu jiuye jiegou: Chongxin guji yu taolun 《中国的就业总量与就业结构：重新估计与讨论》 [China’s Total Employment and Employment Structure: Reevaluation and Discussion],” in Fang, Cai (ed.) Zhonguo renkou yu laodong wenti baogao No. 12—“shierwu” shiqi tiaozhan: renkou, jiuye he shouru fenpei《中国人口与劳动问题报告 No. 12—“十二五” 时期挑战：人口、就 业和收入分配》[Reports on China’s Population and Labor No. 12—Challenges during the Period of the “12th Five-Year Plan”: Population, Employment and Income Distribution], Beijing: Social Sciences Academic Press, 2011.

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Distribution of labor by economic sector (million)

900 800

Residual Tertiary industry

Secondary industry Estimated agricultural sector

700

600 500

400 300

200 100 (Year)

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0

Figure 7.2 Recalculation of the sectoral distribution of labor. Source: China Statistical Yearbook (Various Years), National Bureau of Statistics, Du Yang and Wang Meiyan (2011).

the secondary or tertiary sector. Hence, we put them in a dummy sector and called it the “residual.” But in fact, this dummy “residual” sector also has very real significance, i.e. these labor belong to different real sectors under different macroeconomic circumstances. For instance, during the 2009 financial crisis and around the Spring Festival period, official sources initially said that 70 million migrant workers had returned home earlier, but it was later clarified that many of them were simply going home for new year celebrations as usual. Subsequently, it was suggested that 10 million to 20 million migrant workers had returned home because they were affected by the financial crisis. This group of people could thus be added to the pool of agricultural labor, but only very briefly, as they would be out looking for work again shortly after the new year. Soon after, there was a migrant worker shortage. In time of exceptionally rapid economic development and huge demand for migrant workers, these people will probably be absorbed into the secondary and tertiary sectors. Thus, research on the residual effect can be meaningful as it shows how our economic growth is closely related to the distribution of labor. But due to institutional reasons, it is impossible to know which specific sector they enter. In short, the current supply of agricultural labor is indeed not as plentiful as before and surplus labor has definitely decreased considerably. One can do an experiment in a typical village, which is that you would almost never see anyone below the age of 40 except when during the Spring Festival. Although there are still some people who are farming, they are all very old. There is yet another contradictory phenomenon. The government, in its work reports over the last two years, had mentioned that over 10 million jobs

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(employment) would be added to the urban labor market every year, while there were already 10 million jobs created by the third quarter of 2014. This figure is also perplexing. What do we mean by employment? It means those among the working-age population finding a job. How big is the working-age population? The population between the age of 15 and 59 is seeing an absolute decline of a few million people every year. This is not a slowdown in growth but an absolute decrease. How is it possible to have tens of millions of newly employed people when the labor force is shrinking by a few million every year? Where do they come from? We do not import Vietnamese labor nor African labor, thus it is uncertain where they come from. We can only do more data mining to figure out what exactly is going on. In data published by the National Bureau of Statistics on the urban labor force in 2009, slightly more than 12% were migrant workers. The new additions to urban employment therefore come from the constant inclusion of migrant workers in the statistics and this is still the case at present. Our statistics on urban employment is divided along two lines and two systems. The first is the official system that only takes into account employment with household registration and workplace insurance. Migrant workers are not included in the list of employees, which basically consists of urban residents. How then can we know the numbers for migrant workers? According to our monitoring survey of migrant workers, the number of people who have left their hometowns or villages to work for at least half a year currently stand at around 170 million. These people have all entered cities at various levels and become part of the urban labor market, comprising around 35% of current urban employment. Real urban residents only account for 65% of the urban labor market. In the past, these two figures were completely separate and one had to add the numbers of urban residents and migrant workers together in order to know how many people were in fact employed in the cities. In fact, there are already some overlaps and double-counting between the two (Figure 7.3). Some migrant workers are slowly being accepted by enterprises as employees and have signed one or two-year labor contracts and there are also those who have worked for many years and signed contracts with no fixed duration. If we want to recalculate employment numbers and the number of workers in the enterprises, this group of migrant workers should be included. Let us return to look at the unemployment rate. We had earlier talked about the registered and the surveyed unemployment rates, which are about unemployment in reality. We will now turn to unemployment in theory, of which there are three types. One is cyclical unemployment which has to do with macroeconomic fluctuations. If the macro-economy is doing well, then the unemployment rate will be low while it will be high if the macro-economy is not

Number of employees with urban household registration (10,000)

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Figure 7.3 Composition of urban employment and its changes. Source: China Statistical Yearbook (Various Years), National Bureau of Statistics and author’s own calculations.

doing well. It is inevitable for the unemployment rate to fluctuate along with the macro-economy. There are two other types of unemployment that have nothing to do with the macro-economy. One is frictional unemployment, in which where there are still employment opportunities in the labor market but individuals have yet to encounter them. Another is structural unemployment, e.g. when an individual cannot find an employer who needs his or her particular skill. Apart from continuous learning, the individual has to wait for the right opportunity, e.g. for the industrial structure to change. Thus, frictional and structural unemployment are relatively stable forms of unemployment and they are known as natural unemployment. Natural unemployment can therefore be defined as unemployment that is not affected by fluctuations in the macro-economy. It is also easy to calculate. Cyclical unemployment has to do with factors such as the economic growth rate, thus the invariant part of the model will be the natural unemployment rate. This allows us to calculate the natural unemployment rate in theory. Incidentally, that was what my colleagues did and they found our natural unemployment rate in recent years to be around 4%–4.1%,3 which coincides with the registered unemployment rate (Figure 7.1). Is this another

3  Du Yang and Yang Lu 都阳、陆旸, “Zhongguo de ziran shiye lü shuiping ji qi hanyi《中国的 自然失业率水平及其含义》[China’s Natural Unemployment Rate and Its Significance],” Shijie jingji 《世界经济 》Vol. 4 (2011).

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coincidence? It is a logical coincidence. Only urban residents can register themselves as unemployed, while only 4.1% of all urban residents who plan to work are unemployed. Meanwhile, the natural unemployment rate is also 4.1%. This means that urban residents are only affected by natural unemployment and not cyclical unemployment. This is also easy to comprehend. Like college graduates, urban residents cannot find suitable jobs as their skills do not suit the needs of the labor market and this is structural unemployment. In addition to a lack of skills, older urban workers do not know how to go online and they do not have many relatives, friends, or connections who can help them, thus they are unable to find work and remain in frictional unemployment. Should the macroeconomic situation be bad, employers will still be careful about retrenching their urban employees even in times of difficulty, as the latter will register themselves as unemployed and raise the urban unemployment rate, which will draw the government’s attention. Therefore, enterprises will choose to retrench those who are not bound by these restrictions, and these are migrant workers who neither have labor contracts nor can register themselves after losing their jobs. Thus urban residents are only affected by natural unemployment while only migrant workers bear the effects of cyclical unemployment. In times of economic downturn, migrant workers are the first to lose their jobs and they return home when this occurs. The urban unemployment rate is not increased as a result and thus this is easy to comprehend. The coincidence between the two are also logical. In the relationship between surveyed unemployment and natural unemployment (also registered unemployment), the difference is cyclical unemployment. According to Premier Li Keqiang, the current urban surveyed unemployment rate is 5% while the urban registered unemployment rate given by the National Bureau of Statistics is 4.07% and the natural unemployment rate is 4%–4.1%. You will find that the cyclical unemployment rate is less than one percentage point. Every part makes logical sense, thus a cyclical unemployment rate of less than one percentage point does make the government and decision-makers less worried about the economic growth rate and provides us with enough assurance. Not only that, there is some basis for me to assume that our actual unemployment rate is less than 5%. If it is less than 4.1%, then natural unemployment will be in the negative. We conducted a survey in 2010 in which we segmented the urban labor market further into urban residents and migrant workers. We found the surveyed unemployment rate among urban residents to be 4.7% which is largely similar to the official figure. Migrant workers return home when they are unable to find work, thus their surveyed unemployment rate was only 0.75%, which is less than one percentage point. The urban labor

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market is made up of these two types of workers and the urban unemployment rate should be the average of their respective unemployment rates. This is easy to obtain. Urban residents account for 65% of the urban labor market, while migrant workers account for 35%. By using 0.65 and 0.35 as the respective weightages, we calculated the weighted average of the unemployment rate based on the unemployment rates of 4.7% and 0.75, and this is the real surveyed urban unemployment rate, which is 3.3%. This is indeed very low, lower than the natural unemployment rate. Perhaps the actual rate is not so extreme, but this at least shows that the real unemployment rate is indeed very low. If you ask a typical businessman what his greatest difficulty is in running his business, he will tell you that it is the problem of finding workers. The unemployment rate is indeed very low, even lower than the natural unemployment rate. This suggests that the labor market is very robust and that is the bright side of things. On the other hand, the natural unemployment rate has its significance. Let us consider the fact that natural unemployment mainly comprises structural unemployment, which indicates the mismatch in skills offered by workers and skills needed by employers. If there is no structural unemployment, what one learns becomes unimportant as one can simply take any job that is available. Thus, structural unemployment can help enterprises know what kinds of people are difficult to hire and help workers know what skills are not needed in the labor market. This information can in turn be relayed to the education system to make the necessary reforms to the direction and content of instruction. Without structural unemployment, this information cannot be communicated, and this is the problem that we are already encountering in reality. We will not venture to say that the current surveyed unemployment rate of 5% totally excludes migrant workers, but we are also unsure of their proportion in this figure. But to prove that migrant workers are at least not fully represented in this figure, we can look at how well different types of population surveys distinguish the floating population in the cities. We have three types of population surveys, the first is the population census, which targets the entire population. The second is the 1% population sample survey, and the third is the 10% population sample survey. In most cases, the population census is able to discern a larger floating population than the sample survey, which is to say that the 10% population sample survey tends to underestimate the floating population (migrant workers). Or we can say that, the smaller the sample size, the easier it is to neglect the floating population. However, our urban labor survey (from which the urban surveyed unemployment rate was derived) was based on the framework of the population sample survey, while the monthly aggregates of the urban surveyed unemployment rate of 31 big and medium-sized cities were derived from a much reduced sample of the labor survey sample

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under the 10% sampling framework. The migrant workers included in this sample were thus even more disproportionate. Therefore, we have reason to say that the current surveyed unemployment rate has likely overestimated urban unemployment because it mainly represents urban residents and does not fully capture the migrant worker population. This corresponds with the situation of labor shortage that we are seeing now. It was not too long ago that a spokesperson from the Ministry of Human Resources and Social Security held a press conference and a journalist asked a question about the minimum wage. This journalist felt that with a significant slowdown in the economy this year, there had to be great pressure on employment and a very high unemployment rate, and wondered why various local governments were still raising minimum wages considerably. The journalist likened it to jacking up prices when goods could not be sold and was of view that it made no sense. The spokesperson’s specific reply is not important, but he said that the situation was a contradictory one. If he had said instead that economic decline did not necessarily put pressure on employment or cause the unemployment rate to rise, then it would make sense. Of course, one might further wonder if cyclical unemployment would go up since a declining economy was part of the macroeconomic cycle. We can see some fairly heartening trends from the statistics shown in the following figure (Figure 7.4). The indicator used here is known as the job vacancies-to-jobseekers ratio and the data is collected by the Ministry of Human

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Figure 7.4 Ratio of job vacancies to job seekers by educational attainment. Source: Ministry of Human Resources and Social Security, http://www.mohrss.gov.cn/.

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Resources and Social Security in the public labor market. The ratio is obtained by dividing the total number of jobs by the number of jobseekers. If it is greater than one, it means that jobs are plentiful with labor demand exceeding supply. If it is less than one, it suggests that there are people who are unable to find work, with labor supply exceeding demand. We can see that the ratio has been above one for those with less than junior middle school education for a very long time, while lately, the ratio has also been rising for those with college education and is already above one. This goes to show that the employment prospects of college graduates have improved when compared with the past. On the whole, it shows that we are indeed not facing any pressure in terms of employment. It would be a good thing if college graduates face less employment pressure because of a higher quality of education and improved educational content. But if this is simply due to an excessively strong demand in the labor market, and there is no concern about whether the human capital meets the needs of the job, then this would indicate a situation of overemployment. College graduates generally bear the brunt of structural unemployment. If this indicator is too low, then the labor market is not sending out the signals that it should be sending and this is unfavorable to the long-term accumulation of human capital. Why is it the case that a declining economy did not exert pressure on employment? We will talk more about this later. For now, I would like to cite another source of information, which is the employment index in the Purchasing Managers Index (PMI), which is often found in the reports of foreign investment banks, to explain our labor market situation. The PMI is a composite index of several different indices and one of them is the employment index. What I want to say is, this index does not reflect the real employment situation because this is the manufacturing sector’s Purchasing Manager Index, which asks purchasing managers not how many people they want to employ but how many people they actually hired in the last month. Assuming that the number of people hired in the last month fell compared to the month before that, and there could be two reasons for this, one being that production has dropped and less workers were needed and another being that it was more difficult to hire people because of labor shortages, the employment index in the PMI is thus affected by both supply and demand factors, which makes it an unreliable indicator of the relationship between employment and the macro-economy (Figure 7.5). We see two lines in the figure, one is the output index of the PMI, the other is the employment index of the PMI. Theoretically speaking, there should be perfect correlation between the two. The two have been relatively coincident in the past, but due to labor market shortages, they are frequently not so and this is very obvious. The employment index is more stable than

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Figure 7.5 Relationship between the PMI output index and employment index. Source: Wind Info.

the output index. Although it is possible to analyze the economic situation by looking at the PMI, but using the employment index of the PMI to reflect the labor market does not quite explain the problem. Now we can briefly sum up this section. There are some key indicators for the labor market and we need to be clear about the relationship between these indicators. Meanwhile, we must try our best to maintain logical consistency between labor market and macroeconomic indicators. Only then can we arrive at a correct conclusion, otherwise we may often be misled by erroneous information. It is unreasonable to simply assume that some of the indicators for which official data are available or which have been computed are inaccurate. China arguably has the most sophisticated survey system among developing countries in terms of scale and capabilities. Like what some academics from the World Bank concluded, China’s problem is that everything is changing too quickly, from institutional changes, to the rapid economic growth, and rapid changes in the stage of economic development, so much so that the survey system is unable to catch up with these changes.4 If you fail to understand the

4 Ravallion, Martin and Shaohua Chen, “When Economic Reform is Faster than Statistical Reform: Measuring and Explaining Inequality in Rural China,” Oxford Bulletin of Economics and Statistics, 61(1) (1999): 33–56.

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relationship between the various indicators and the survey subject that corresponds to a particular indicator, then you will not be able to explain these data. Thus we have to utilize all our knowledge to understand these issues. 3

Understanding the New Norm of China’s Economy from the Current State of the Labor Market

We can now turn to the question of why economic decline did not cause problems for the labor market. First, we have to look at what we depended on in the past to achieve economic growth to understand why it is declining now. At least until 2010, our country’s long-term economic growth was dependent on the demographic dividend. Many people will argue with me on this, and those who do are usually the ones who take the meaning of the “demographic dividend” at face value, and they say that we have a comparative advantage and international demand for the goods produced by our labor-intensive manufacturing industries because we have rich labor resources. This generates high economic growth rates and produces the demographic dividend. China has had a huge working-age population for a very long time, and it still has a large workforce, thus the demographic dividend will not disappear quickly. But this does not answer the question that we are arguing about. When we talk about the demographic dividend, its deeper significance compared with plentiful labor is that the unlimited supply of labor helps to break the iron law in neoclassical economic theories, i.e. the diminishing returns to capital. There are some Western economists who fail to understand why China can have high growth rates, and they think that there is a labor shortage in which returns will diminish when capital accumulation hits a certain level. Thus they are always saying bad things about the Chinese economy (such as Krugman, 2013).5 However, they are unaware that we have sufficient labor and we have enough of them for the capital that we accumulate. Thus the ratio of the two will remain unchanged and we can maintain a high rate of return to capital for quite some time. Therefore, the unlimited supply of labor breaks the law of diminishing returns to capital and allows China to achieve economic development under circumstances that neoclassical economists are unable to explain, and that is the essence of the demographic dividend. But what they have said is not wrong either, because once we cross the Lewisian turning point, 5 Krugman, Paul, “Hitting China’s Wall,” The New York Times, July 18, 2013.

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demographic changes will cause the demographic dividend to disappear. At this point, the law of diminishing returns to capital will set in. We have experienced two turning points so far: the Lewisian turning point and the disappearance of the demographic dividend. Our comparative advantage in the goods produced by labor-intensive industries therefore begins to decline. Many people say that demand shock is the problem that the Chinese economy is now facing. As the West has yet to recover from the financial crisis, the European and American markets are too weak to sustain demand for the goods produced by our labor-intensive industries. If so, our exports will fall due to decreased international demand. This is no doubt a factor restricting demand, but the key is the extent of its impact and whether it is big enough to cause long-term decline in China’s economic growth. There is at least another factor, and that is the reduced comparative advantage in China’s manufacturing industry. If we calculate the revealed comparative advantage index, we can remove the influence of changes in the international market itself. If it falls, then it means that our costs have risen and the relative demand for our goods has fallen. This index is the ratio of China’s exports of labor-intensive goods to all exports, as compared with the same ratio in world trade. The calculations show that the 11 types of labor-intensive goods for which China traditionally has comparative advantage and which dominate China’s exports, have seen their revealed comparative advantage index fall significantly from 4.4 in 2003 to 3.4 in 2013. Clearly, this means that our comparative advantage in these goods is declining vis-à-vis the world average, i.e. it is not a case of no absolute demand, just that the comparative advantage has declined. The result of a declining comparative advantage is necessarily manifested in a lower growth rate for potential GDP. The potential growth rate is determined by the supply of production factors such as land, resources, labor, and capital and the speed of productivity increases. With changes in these factors and productivity, the potential growth rate of an economy will drop. This is a theoretical growth rate but it is very meaningful. When making projections, people tend to use past growth to extrapolate future growth. If an economy is in a very stable condition with no huge structural changes, significant turning points, or changes in the stage of development, such projections are probably feasible. But if the economy experiences a major turning point in economic growth and various changes, such an extrapolation may not be too reliable. We then have to look at our ability to supply factors of production and determine how much further potential we can unlock in the future, as well as how quickly productivity can be increased, before we can estimate the potential growth rate. I feel this works better than extrapolation.

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Figure 7.6 Potential and actual economic growth rates of the Chinese economy. Source: Lu Yang and Cai Fang (2014).

The results of our calculation show that the potential growth rate of the Chinese economy will drop from close to 10% in the past to an average of 7.6% during the period of the “12th Five-Year Plan.”6 If there are no other changes, this will further drop to 6.2% by the period of the “13th Five-Year Plan.” The actual growth rate for the last two years was 7.7%, while it could be 7.4% in 2014. The actual growth rates were generally consistent with potential growth rates, which is to say that they lay within the range of potential growth, being neither higher nor lower (Figure 7.6). This suggests that even though economic growth rates have dropped, there is full utilization of factors of production and the full potential for productivity increases has also been realized, with no excess factors of production and no underutilization (including labor). Thus there are no obvious signs of unemployment and this is what we refer to the new norm in the labor market and also in economic growth. If there are no issues with employment, then we should not use it as an excuse to get the government to implement measures to stimulate demand and the economy. Although there are structural issues with employment, these can neither be resolved through macroeconomic policy nor GDP growth. Let us do a brief summary at this point. Supposing that the old norm is double-digit growth, some people wonder if the new norm is a growth rate of 7.5%. 6 Lu Yang and Fang Cai, “China’s Shift from the Demographic Dividend to the Reform Dividend,” in Ligang Song, Ross Garnaut and Cai Fang (ed.), Deepening Reform for China’s Long-term Growth and Development. Canberra: ANUE Press, 2014.

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The answer should be no. Given the changes in our demographic structure, China’s working-age population is decreasing yearly and this means a gradual decline in the future potential growth rate. This may even hit 3% as it is a pretty impressive growth rate for developed countries. The more developed an economy, the more reliant it is on technological improvements and productivity increases for further economic growth. With no more demographic dividends and no more latecomer advantage, the growth rate is bound to drop to 3% one day. It is very important to be able to accept this fact. Let us not stimulate the economy and not let actual growth rates outpace potential growth rates. However, it is indeed necessary to change and raise potential growth rates and this has to be done through reform. 4

The Reform Dividend: Increasing Labor Supply to Raise Potential Growth Rates

We now face some difficulties and also great potential. One reason for saying so is because some institutional obstacles remain, but if these can be overcome, then we can increase the supply of production factors and productivity. It is not necessarily a bad thing to have some degree of natural unemployment in the labor market. In the labor market, one is not simply a human in the biological sense of the term, but must also possess human capital, otherwise one will be unable to find work. If demand in the labor market is too strong with employers willing to hire just about any worker, particularly those who are younger, then workers will not bother to learn. We have already discovered the phenomenon of “wage convergence,” i.e. the wages of high-skilled workers and low-skilled workers are increasingly converging. This means that the returns to human capital or education are declining. This creates a negative incentive for pursuing education and poses a long-term risk, both for the individual and the economy as a whole. We will use the human capital stock of migrant workers to explain this point. We had earlier given the educational attainment of migrant workers across different age bands. Most younger migrant workers basically fit the educational requirements of the labor-intensive secondary and tertiary sectors under the current industrial structure, and they are hence the most sought after. This causes parents in the rural areas to feel that nine years of compulsory education are sufficient and want their children to enter the workforce as soon as possible. In some rural areas, many people quit school at the junior middle school level. However, our industrial structure will experience rapid changes in the future. For instance, the capital-intensive secondary sector and the skillsintensive tertiary sector will require higher levels of human capital and higher

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educational qualifications, which the new-generation migrant workers who had at most completed compulsory education will find difficult to meet. There is an old saying in China that “it takes ten years to grow a tree but a hundred years to nurture an individual” and this is not an exaggeration. We have data from the last three population censuses conducted in 1990, 2000, and 2010 respectively for comparison. Education in China experienced its most rapid development over the last two decades, with the implementation of the nine-year compulsory education system and the expansion of higher education occurring during this time, which greatly increased the educational attainment of human capital. But in this two-decade period, the number of years spent in education by adults only increased by 2.7 years on average. Presently, if a typical migrant worker wishes to move from his/her current position to a higher-end sector, he or she may need an additional two to three years or perhaps even four years of education so this takes a long time. In the past, migrant workers had always flocked to the export-oriented manufacturing enterprises, while in recent years, increasing numbers are being drawn to sectors that have been stimulated by economic policies, such as in basic infrastructure and construction, etc. But these sectors are having excess production capacity or even reaching a bubble. Once the economy dips, migrant workers employed in these sectors will face cyclical unemployment. Based on the experiences and lessons of Europe, cyclical unemployment in such a context will become structural unemployment that lasts even longer. For instance, Spain witnessed a surge in the growth of the construction sector in the 1990s, and young people dropped out of school to work as wages continued to rise. Thereafter, the financial crisis and the sovereign debt crisis occurred and the industrial structure changed. Although these changes generated new employment opportunities, the young people did not have the requisite education and human capital to meet the demands of new growth. Hence, Spain now has a youth unemployment rate of 50%. Even though our labor market is now in a golden age, we should think about the future of our migrant workers. Our policies need to be people-centric, and that means preparing ourselves for the future both at the macroeconomic and individual levels. The so-called stimulus policies can only heighten the risks, and creating employment through stimulation is as bad as not doing enough. We have no need for such employment, especially since we are not even facing the problem of employment pressure and cyclical unemployment. Then there is the issue of rising wages, which may be good in the sense that it improves income distribution, but when wages increase too rapidly, it also means that too many enterprises will fold. Where did the drop in 2.5 percentage points come from when GDP growth fell from 10% to 7.5%? This is not the

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result of each producer producing less. Rather, it indicates that some companies had folded due to the inability to cope with high costs. Some degree of creative destruction is necessary as a means for us to improve and increase our productivity. But if this happens too quickly, it will indeed hurt our economy in the short term and we may find it slightly unbearable. Hence, we hope to have a moderate pace of adjustment that can last a little longer. We do not need wages to rise indefinitely. Of course, this does not mean that we want to protect uncompetitive enterprises. So, is there any other way to attract migrant workers to work apart from increasing wages that does not put a heavier burden on enterprises? The answer should be yes, and that is to reform public policy instead of letting wages rise indefinitely. Household registration system reform is of foremost importance in this sort of public policy reform and the reform dividend that it generates has the immediate effect of killing three birds with one stone. From the perspective of the effects on raising potential growth rates through supply-side factors, household registration system reform can stabilize the supply of migrant workers and in turn raise the labor force participation rate. With increased labor supply, potential growth rates will rise. Meanwhile, we can further unleash the potential of surplus labor transfer by moving them from sectors of low productivity to sectors of high productivity, and this helps to reallocate resources efficiently. This reallocation of resources is itself a form of TFP. There are also reform dividends to be reaped from the perspective of demand. When migrant workers have full and secure employment, this means that there is better income distribution. If they are given urban household registration, they will also enjoy equal access to social security and other basic public services, and will cease worrying about their livelihoods. Then there will be no need for them to return home every Spring Festival and they can consume like any other urban resident. The structure of demand in our economic growth will then be more balanced and the macro-economy, more stable. In addition, when migrant workers are urbanized, they are better able and more incentivized to receive education and skills-training, and their reproductive behavior may even change, etc. This will all improve our future economic growth. We ran a simulation on the reform dividend and although simulations are never precise, this is not our aim, as we only wish to point out the general direction. We have made a few assumptions about the effects of reform here, that is, the policy of “two children for only-child parents” can raise our fertility rates from 1.4 to 1.6, ceteris paribus, and that future potential growth rates will exhibit a trend of annual decline. Thereafter, we observe how much TFP can increase with a reasonable increase in the labor force participation rate, the urbanization of migrant workers, and reform of state-owned enterprises.

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Figure 7.7 Simulation of the reform dividend. Source: Lu Yang and Cai Fang (2014).

We also assumed a reasonable increase in education and training. In this way, we obtained different future potential growth rates from the simulation model by making different assumptions about the fertility rate under the premise of adjustments in population policy (Figure 7.7). In any case, having reform is much better than having no reform, especially when it comes to adjusting the population policy. There is not much positive impact in the short term, but neither is there a significant negative impact. But in 20 years’ time, this will have a pull effect on raising the potential growth rate. The conclusion is that reform can bring significant dividends and we need to make it happen. We know that China has always had its fair share of naysayers, with some eminent international economists among them. For instance, Paul Krugman said that China had reached the Lewisian turning point, signaling the end of an era in which it could depend on cheap labor. It thus had to make adjustments to let domestic demand drive economic growth. However, he was skeptical that China could make the transition, and predicted that its economy would hit a wall, and not just a normal wall, but the Great Wall. There were some others who suggested in good faith that China needed to reform, but this entailed some sacrifice in economic growth. To them, a tradeoff between reform and growth was unavoidable, and some even believed that reform was anti-growth. They suggested that the Chinese economy had to slow down even more to accelerate the pace of reform. The International Monetary Fund acknowledged the benefits of reform but it too felt that China’s reform would

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cause its growth rate to fall in the short term, just that this would be offset in the long term.7 But by implementing household registration system reform, the benefits are immediate and there is no impact on growth even in the short term, and we can reap reform dividends in a timely manner. There is very positive significance in recognizing that reform and growth are mutually reinforcing and that the former can generate dividends. First, this is favorable to establishing the consensus and determination for reform, and more importantly, it helps in the selection of the appropriate method of reform and ensure that reform takes place in the important spheres. Household registration system reform and the urbanization of migrant workers have all been outlined in the report of the 18th National Congress as well as the Third Plenary Session of 18th CPC Central Committee, but no substantial progress has been made as yet. This is clearly due to the fact that there is the issue of incentive incompatibility, i.e. local governments are aware of the benefits of reform but are worried about the costs and not being able to reap reform dividends in full. Thus, a “wait and see” attitude is also a sort of free-rider behavior. Now, the central and local governments are having some form of dialogue. Initially, when the central government raised the idea of having a new form of urbanization, local governments earnestly backed the proposal as they had originally thought that the development of urban infrastructure presented a good opportunity to push for land development projects. But soon after when the central government sent a clearer message to indicate that new urbanization was going to be people-centric and then planned for the reform of the household registration system to urbanize migrant workers, the local governments finally began to see what this was all about. In response, they said that there were costs associated with such reform, in which the urbanization of a migrant worker could cost anything from 100,000 yuan to 200,000 yuan and 300,000 yuan, and asked where they could find money to do so. Hence the ball was back in the court of the central government and it proposed exploring a cost-sharing mechanism for urbanizing migrant workers in which financial transfers would henceforth be linked to population transfers. In other words, the government, urban residents, migrant workers, enterprises, and even society would all bear a little of the urbanization costs. Although it is still unclear so far how much each party needs to bear and how the various levels of government will share the costs of reform, this sort of gaming is also part of the reform process. 7 International Monetary Fund, “People’s Republic of China: 2014 Article IV Consultation-Staff Report,” IMF Country Report No. 14/235, 2014.

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If we calculate that reforming the household registration system does bring significant dividends, and this is in terms of the country’s socioeconomic development and political stability in which local governments may not reap all the benefits, the central government should bear part of the financial responsibility to pay for the costs of urbanization so as to drive reform at the local level. By doing so, it can increase the incentive compatibility of household registration system reform, and make it easier to implement. The reforms that we had implemented in the past were known as “Pareto improvements,” which is to say that they benefited some and did not harm the interests of others, hence no one objected to them and this made them fairly easy to implement. However, such opportunities are getting increasingly scarce and we need to explore what are known as “Kaldor–Hicks improvements,” in which the overall benefits of reform are huge enough to induce coordinators and policy designers at the top to use the expected benefits to share the costs with various parties involved, and also to pledge to share the benefits of reform in the future so as to motivate the rest. This way, reform can be implemented in a timely manner. References Du, Yang and Meiyan Wang 都阳、王美艳. “Zhongguo de jiuye zong liang yu jiuye jiegou: Chongxin guji yu taolun《中国的就业总量与就业结构：重新估计 与讨论》 [China’s Total Employment and Employment Structure: Reevaluation and Discussion],” in Fang, Cai (ed.) Zhonguo renkou yu laodong wenti baodao No. 12—“shierwu” shiqitiaozhan: renkou, jiuye he shouru fenpei 《中国人口与劳 动问题报告 No. 12—“十二五” 时期挑战：人口、就业和收入分配》[Reports on China’s Population and Labor No. 12—Challenges during the Period of the “12th Five-Year Plan”: Population, Employment and Income Distribution]. Beijing: Social Sciences Academic Press, 2011. Du, Yang and Yang Lu 都阳、陆旸. “Zhongguo de ziran shiye lü shuiping ji qi hanyi 《中国的自然失业率水平及其含义》   [China’s Natural Unemployment Rate and Its Significance],” Shijie jingji 世界经济 Vol. 4 (2011). Du, Yang and Yang Lu 都阳、陆旸. “Laodongli shichang zhuanbian tiaojian xia de ziran shiye lü bianhua ji qi hanyi 《劳动力市场转变条件下的自然失业率变 化及其含义》[The Natural Unemployment Rate and Its Significance Under the Conditions of Labor Market Transformation],” in Fang, Cai (ed.) Zhonguo renkou yu laodong wenti baogao No. 12—“shi er wu” shiqi tiaozhan: renkou, jiuye he shouru fenpei《中国人口与劳动问题报告 No. 12—“十二五”时期挑战：人口、 就业 和收入分配》 [Reports on China’s Population and Labor No. 12—Challenges

Ushering In The Long-awaited

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during the Period of the “12th Five-Year Plan”: Population, Employment and Income Distribution]. Beijing: Social Sciences Academic Press, 2011. International Monetary Fund. “People’s Republic of China: 2014 Article IV ConsultationStaff Report,” IMF Country Report No. 14/235, 2014. Krugman, Paul. “Hitting China’s Wall.” The New York Times, July 18, 2013. Lu, Yang and Fang Cai. “China’s Shift from the Demographic Dividend to the Reform Dividend,” in Ligang Song, Ross Garnaut and Cai Fang (ed.), Deepening Reform for China’s Long-term Growth and Development. Canberra: ANUE Press, 2014. Minami, Ryoshin. “The Turning Point in the Japanese Economy.” The Quarterly Journal of Economics, Vol. 82, No. 3 (1968): 380–402. National Bureau of Statistics. China Statistical Yearbook. Beijing: China Statistics Press, Various Years. Ravallion, Martin and Shaohua Chen. “When Economic Reform is Faster than Statistical Reform: Measuring and Explaining Inequality in Rural China.” Oxford Bulletin of Economics and Statistics, 61(1) (1999): 33–56. Roberts, Kenneth, Rachel Connelly, Zhenming Xie, and Zhenzhen Zheng. “Patterns of Temporary Labor Migration of Rural Women from Anhui and Sichuan.” The China Journal, 52 (2004): 49–70.

CHAPTER 8

Labor Relations in China: Current State, Problems, and Policy Suggestions Zhou Xiaoguang and Wang Meiyan 1 Introduction The employer-employee relationship (labor relations) is one of the basic relationships in a functioning society and the economy. Cordial labor relations encourage workers to show more initiative in their work and raises the productivity of enterprises. It also helps to increase the level of democratic participation and management in these enterprises and is a cornerstone of social security and economic development. But if problems in labor relations were to occur, the result is intensified conflict between employers and employees, which may eventually manifest itself as a mass incident triggered by this labor conflict. This affects the operations of enterprises and is detrimental to social harmony and sustained economic development. The Chinese government views keeping labor relations peaceful as very important and this is evidentfrom a series of party and state documents outlining the plans for the country. For instance, the Sixth Plenary Session of 16th CPC Central Committee raised the issue of “developing harmonious labor relations,” while the 17th CPC National Congress report proposed “standardizing and coordinating labor relations,” and the Fifth Plenary Session of the 17th CPC Central Committee emphasized the “building of harmonious labor relations.” The outline of the “12th Five-Year Plan” systematically explained how harmonious labor relations could be established, and proposed to “improve the coordination of the tripartite system, enable the government, unions, and enterprises to play their respective roles, strive to create benefit-sharing mechanism for employers and employees, ensure that the system of labor relations is standardized and orderly, fair and reasonable, beneficial to all, as well as harmonious and stable.” The 18th CPC National Congress report also proposed to “improve the system of labor standards and the mechanism for coordinating labor relations, as well as strengthen the monitoring and supervision of labor security and dispute resolution and mediation, so as to establish harmonious labor relations.” The Fourth Plenary Session of 18th CPC Central Committee proposed “improving the mechanisms for rights protection and dispute resolution by law, as well as establishing and improving the social conflict warning mechanism, © koninklijke brill nv, leiden, ���7 | doi ��.��63/9789004342156_009

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mechanisms for the voicing of interests, consultation and communication, providing help and assistance, unimpeded coordination of mass interests, and providing legal channels for rights protection.” China’s strong emphasis on keeping labor relations harmonious has much to do with the status quo of labor relations in the country. In the 30 years or so since China began its reform and opening-up, there have been two distinct periods in which the number of mass incidents triggered by labor conflict surged. The first instance occurred around 1998 during the period of stateowned enterprise reform, and the main protagonists were workers who fought for their rights when offered a retirement buyout or forced to retire early. The second instance happened in 2008 and has persisted up to the present day. The main actors in this second instance are workers fighting for their economic rights, particularly those who are dissatisfied with their wages and welfare benefits. There have been many classical incidents of this sort, for instance the 2005 strike by workers at a Japanese-owned enterprise in Dalian, the 2008 strike by taxi drivers in Chongqing, the 2010 strike by workers at the Honda factory in Nanhai, Guangdong, and the 2014 strike at the Yuyuan shoe factory in Dongguan. There is widespread concern in society over the outbreak of these mass incidents triggered by labor conflict. While they demonstrate that workers have a heightened awareness of their own legal rights, they also indicate that these workers lack unimpeded channels to voice their demands and protect their rights. This chapter will first give an overview of the current state of development in China’s labor relations from two perspectives: the basic situation concerning labor disputes in China and current developments in the outbreak of mass incidents triggered by labor conflict. It will then analyze the causes of changes in China’s labor relations by looking at changes in the domestic and external economic environments, and further examine the problems in existing labor relations mechanisms. The chapter will conclude by giving its prognosis of how China’s labor relations may develop in the future and offer some policy suggestions. 2

The Current State of China’s Labor Relations

The outlook for China’s labor relations remains bleak in recent years, even though the Chinese government has been proactive in reforming institutions and enforcing regulations in this area, including a vigorous push for a collective bargaining and collective agreements system and serious implementation of the Labor Dispute Mediation and Arbitration Law. The number of labor dispute cases has been rising fairly quickly and mass incidents triggered by labor conflict frequently occur.

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The Basic Situation Concerning Labor Disputes: An Analysis of Macro Data According to the Labor Dispute Mediation and Arbitration Law of the People’s Republic of China which came into effect in 2008, there are generally a few ways to resolve labor disputes: negotiation, mediation, arbitration, and litigation. We are unable to obtain complete statistics on these four methods from publicly available statistical sources, and can only refer to the case information from labor and personnel dispute mediation and arbitration organizations at various levels that manage such cases. Statistics show a yearly increase in the number of labor and personnel dispute cases resolved through mediation and arbitration, from close to 1.29 million cases in 2010 to around 1.32 million cases in 2011, and around 1.5 million cases in 2013 (Ministry of Human Resources and Social Security, 2014). But we could only obtain statistics for the past three years for cases resolved through mediation and arbitration, while earlier statistics were unavailable. We had hoped to observe changes in labor disputes over a longer period of time. The China Labor Statistical Yearbook provides data on two types of labor disputes: one involves cases heard by labor dispute arbitration organizations at all levels nationwide; another involves cases resolved by arbitration organizations through out-of-court mediation. These data enabled us to piece together a picture of the labor dispute situation over a longer period of time. 2.1

2.1.1 Surge in the Number of Labor Dispute Cases In the past decade or so, the number of cases heard in court and mediated out of court by labor dispute arbitration organizations at various levels rose and then fell after 2008, thereafter increasing again. In 1999, there were 169,000 labor dispute cases nationwide. From then, the number of cases steadily grew all the way to 2007 and jumped to 931,000 cases in 2008, almost double the number in 2007. In 2009, the number of cases fell slightly to 870,000 and continued to drop in 2010, and it picked up again in 2011 (Figure 8.1). The spike in the number of cases in 2008 probably had much to do with the Labor Contract Law and the Labor Disputes Mediation and Arbitration Law which came into effect in that year. The Labor Contract Law enhanced the scope and degree of protection of workers’ rights. For instance, regulations in the law such as those concerning the “labor contracts with no fixed duration” were even seen by many scholars as being overly protective of workers. The Labor Disputes Mediation and Arbitration Law on the other hand, had the effect of lowering the costs for workers to protect their rights and giving them more time to seek redress. For instance, the law stipulates that “no fees are

Number of labor dispute cases (10,000 cases)

100

Number of cases

Rate of incidence

80

0.35 0.30 0.25

60

0.20

40

0.15

20

19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13

0

0.10 0.05 0 (Year)

Rate of incidence for labor dispute cases (%)

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Note: 1) The labor disputes indicated here refer to cases heard in court and mediated out of court by labor dispute arbitration organizations at all levels nationwide. 2) The incidence rate of labor dispute cases refers to the number of cases as a ratio of total urban employment. Figure 8.1 Number and incidence rate of labor dispute cases from 1999–2013. Source: Calculated based on data from the Department of Population and Employment Statistics of the National Bureau of Statistics, Department of Planning and Finance of the Ministry of Human Resources and Social Security, and the China Labor Statistical Yearbook (Various Years).

to be paid for labor dispute arbitration.” According to the Labor Law that was implemented in 1995, one could apply for arbitration of a labor dispute within 60 days, while the Labor Disputes Mediation and Arbitration Law allowed a “a one-year period in which applications can be made for labor dispute arbitration.” These factors may all have contributed to the increase in labor dispute cases. Changes in the incidence rate and number of labor dispute cases basically follow the same trend. Prior to 2008, the incidence rate of labor dispute cases increased yearly. In 2008, it jumped to 0.29% from 0.16% in 2007. Thereafter, it began to drop gradually but still remained much higher than the level before 2008. It began rising again from 2012. 2.1.2 The Causes of Labor Disputes The causes of labor disputes can generally be divided into those involving labor wages, social insurance, labor protection, employment training, and labor contract changes, dissolution, or termination. As the categories of labor dispute causes in the China Labor Statistical Yearbook vary across different years, with some data missing in certain years, what this chapter has done is to organize

Ratio to the total number of cases (%)

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30

Wages

Social insurance

Dissolution or termination of labor contracts

25 20 15 10 5 0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (Year)

Figure 8.2 Causes of labor disputes. Source: Calculated based on data from the Department of Population and Employment Statistics of the National Bureau of Statistics, Department of Planning and Finance of the Ministry of Human Resources and Social Security, and the China Labor Statistical Yearbook (Various Years).

and summarize the causes to obtain the ratios of cases arising from disputes in labor wages, social insurance, and the dissolution or termination of labor contracts to the total number of cases (Figure 8.2). Labor wage is the main cause of labor disputes. The ratio of cases arising from disputes in labor wage has consistently been above 20% and had nearly reached 30% in 2009 and 2010. Social insurance is another major cause of labor disputes, accounting for around 15% of all dispute cases before 2003 and close to 20% in 2007 and 2011. The dissolution or termination of labor contracts is yet another major trigger of labor disputes, and the ratio of such cases had been consistently slightly higher than those involving social insurance prior to 2003. Thereafter, the ratio of such cases began to fall and was only 5% in 2009 and 4.2% in 2010. However, it rose to 16.8% in 2013. 2.1.3 The Management of Labor Disputes There are three ways of managing labor disputes: mediation, arbitration, and other means. Over the past decade or so, the ratio of cases brought up for arbitration basically saw little change, generally staying at slightly more than 40%. The ratio of cases brought up for mediation was on the rise, climbing to 39% in 2010 and surging to 47% in 2011, while stabilizing at this level thereafter. The ratio of cases resolved through other means saw a steady decline, falling from 39% in 1999 to 11% in 2013 (Figure 8.3).

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Mediation

Arbitration

Other means

80 60 40 20

19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13

0

(Year)

Figure 8.3 Ways to manage labor disputes cases. Source: Calculated based on data from the Department of Population and Employment Statistics of the National Bureau of Statistics, Department of Planning and Finance of the Ministry of Human Resources and Social Security, and the China Labor Statistical Yearbook (Various Years).

The outcomes of labor dispute resolution can be classified into three types: cases won by employers, cases won by workers, and cases in which both parties achieved partial wins. In the past decade or so, there was basically no great change in the ratio of cases won by employers, which generally stayed at 12–14%. The ratio of cases won by workers gradually declined, falling from 54% in 1999 to 33% in 2013. The ratio of cases in which both employers and workers achieved partial wins constantly rose, increasing from 32% in 1999 to 55% in 2013 (Figure 8.4). The above analysis of the data provided by the China Labor Statistical Yearbook only involved labor dispute cases that were arbitrated in court as well as mediated out of court by labor dispute arbitration organizations at various levels nationwide, while the information for cases that were resolved through negotiation, mediation, and litigation was lacking. Therefore, we were unable to obtain more comprehensive information on labor disputes through macro data. In the following section, we will use the labor survey data in six cities to analyze and discuss the basic situation concerning migrant workers and local urban workers who had initiated labor disputes and the influencing factors.

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(%) 100

Cases won by employers Cases won by workers Cases in which both parties achieved partial wins

80 60 40 20

19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13

0

(Year)

Figure 8.4 Labor dispute resolution outcomes. Source: Calculated based on data from the Department of Population and Employment Statistics of the National Bureau of Statistics, Department of Planning and Finance of the Ministry of Human Resources and Social Security, and the China Labor Statistical Yearbook (Various Years).

The Situation Concerning Labor Disputes and Influencing Factors: An Analysis of Survey Microdata on Urban Labor This section will use survey microdata to further explain and underscore the current state of development in China’s labor relations. The microdata used are obtained from a 2010 labor survey conducted in six cities (henceforth referred to as CULS3). In early 2010, the Institute of Population and Labor Economics at the Chinese Academy of Social Sciences conducted a household survey in the six cities of Shanghai, Wuhan, Shenyang, Fuzhou, Xi’an, and Guangzhou. In each city, there were 600 migrant worker households and 700 local urban households participating in the survey and communities participating in the survey were first selected through multistage random sampling. Migrant worker households and local urban households were then randomly sampled from each selected community, and each chosen migrant worker household and local urban household had to complete a questionnaire on their household situation as well as the individual situations of all family members. The survey questionnaire provided a wealth of information, including information on the human capital characteristics (such as gender, age, and educational attainment) and employment characteristics (such as wages, welfare benefits, and labor contracts) of labor. It is worth pointing out that the survey interviewed household members aged 16–60 (who were at home at the time of 2.2

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survey; if the head of the household and spouse were at home, then they would be interviewed first) on the subject of initiating labor disputes. This provided valuable statistical information for our analysis on the state of labor disputes. The first question concerning labor disputes in the labor survey conducted in the six cities was: “Have you ever initiated a labor dispute?” 0.8% of the migrant workers surveyed indicated that they had, while 0.9% of local urban workers did the same. The ratio of migrant workers who had initiated labor disputes was slightly lower than that of local urban workers. 2.2.1 Distribution Over Time For those who had initiated labor disputes, the survey then focused on the timing of the latest dispute initiated. According to macro data at the national level, the number of labor dispute cases jumped after the Labor Contract Law came into force in 2008. According to microdata from the urban labor survey, 36% of the labor disputes initiated by migrant workers occurred after 2008, while for local urban workers, 53% of the cases were initiated after 2008 (Figure 8.5). 2.2.2 Reasons for Initiating Labor Disputes The survey then followed up with a question on the reason for the latest labor dispute initiated. The ratios of migrant workers and local urban workers who cited “wages and benefits” as the main reason were the highest among all the various reasons at 48.6% for migrant workers and 43% for local urban workers (Table 8.1). For migrant workers, other than “wages and benefits,” the ratios Before 2005

2006

2007

2007

2009

2010

(%) 100 80 60 40 20 0

Migrant workers Local urban workers Figure 8.5 Year in which labor disputes were initiated. Note: As the six-city labor survey was conducted in early 2010, there was little coverage of the cases occurring throughout 2010.

162 Table 8.1

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Unit: %

Indicators

Migrant workers

Local urban workers

Wages and benefits Social welfare Working hours Work safety Changes in labor contract Termination of labor contract Others Total

 48.6   1.7   0.0  14.8   0.0   0.6  34.4 100

 43.0   2.6  17.1   7.0   3.8  17.9   8.5 100

source: Calculated based on data from the CULS3.

of those who chose “work safety” and “others” as reasons for initiating labor disputes were also relatively high at 14.8% and 34.4% respectively. The survey required those who chose “others” to specify their reasons for initiating labor disputes. Based on our compilation of the data from this question, we found that all migrant workers who chose “others” gave “unpaid wages” as the reason for initiating labor disputes. As for the local urban workers, other than “wages and benefits,” the ratios of those who chose “working hours” and “termination of labor contracts” were also higher at 17.1% and 17.9% respectively. 2.2.3 The Situation Concerning Labor Dispute Resolution The ratios of migrant workers and local urban workers who sought dispute resolution measures during their latest involvement in a labor dispute were 75% and 59% respectively, with a higher ratio of migrant workers seeking dispute resolution measures. On the outcome of dispute resolution, 67% of migrant workers who sought dispute resolution measures indicated that their disputes had been “completely resolved,” while 24.8% said that their disputes had been “partially resolved.” This means that more than 90% of all migrant workers had “completely resolved” or “partially resolved” their disputes. Among the local urban workers who sought dispute resolution measures, more than half (56.5%) said that their disputes were “unresolved” (Table 8.2). 2.2.4 Survey Results on the Degree of Satisfaction 17.7% of migrant workers indicated that they were “very satisfied” with the outcome of dispute resolution while 53.9% indicated that they were satisfied (Table 8.3). Among the local urban labor, 23% said that they were “not too

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Unit: %

Option

Migrant workers

Local urban workers

Completely resolved Partially resolved Resolved but yet to be enforced Unresolved Others Total

 67.0  24.8   1.0   7.2   0.0 100

 15.4  11.7  12.4  56.5   4.1 100

source: Calculated based on data from the CULS3.

Table 8.3 Degree of satisfaction with the outcome of labor dispute resolution

Unit: %

Option

Migrant workers

Local urban workers

Very satisfied Satisfied Not too satisfied Very dissatisfied Score for the degree of satisfaction Total

 17.7  53.9  21.9   6.5   2.2 100

 15.4  21.3  23.0  40.4   2.9 100

note: The score for the degree of satisfaction was calculated in the following way: assigning the values of 1, 2, 3, and 4 to the options of “very satisfied,” “satisfied,” “not too satisfied,” and “very dissatisfied” respectively, and calculating the mean. source: Calculated based on data from the CULS3.

Table 8.4 Most important reason for being dissatisfied Options

Migrant workers

Local urban workers

Took too long Unfairness in the arbitration process Outcome was not enforced Others Total

 58.0  12.7   9.5  19.9 100

 43.2  23.1  13.0  20.8 100

source: Calculated based on data from the CULS3.

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satisfied” with the outcome of dispute resolution and 40.4% indicated that they were “very dissatisfied.” The score for the degree of satisfaction among migrant workers was 2.2 while it was 2.9 for local urban workers. On the whole, there was a greater degree of satisfaction among migrant workers with the outcome of dispute resolution. Among migrant workers who had initiated labor disputes and sought dispute resolution measures, yet were “not too satisfied” or “very dissatisfied” with the outcome, close to 60% indicated that the most important reason for their dissatisfaction was that it “took too long.” 43.2% of local urban workers gave the same reason and another 23.1% cited “unfairness in the arbitration process” as the most important reason for their dissatisfaction. On the whole, the long time taken to resolve the dispute was the most important reason for dissatisfaction among both migrant workers and local urban workers. Comparison of the Labor Characteristics of Workers Who Had Initiated Labor Disputes and Workers Who Had Not Table 8.5 lists some basic characteristics of workers who had initiated labor disputes and those who had not. In the case of migrant workers, the ratios of female workers who had initiated labor disputes and those who had not were almost the same. The ratio of those in the lower age-bands among migrant workers who had initiated labor disputes was higher than that among migrant workers who had not. The ratio of those with higher educational attainment among migrant workers who had initiated labor disputes was higher than that among migrant workers who had not. The situation for local urban workers was very similar to that of migrant workers. 2.3

2.4 State of Development of Mass Incidents Triggered by Labor Conflict The previous two sections respectively used macro-data and survey microdata to describe the current state of development of labor disputes in China. In this section, we will further analyze the state of development of mass incidents triggered by labor conflict in China. Currently, there are no authoritative figures published by Chinese official sources on mass incidents triggered by labor conflict. The data used by our study come from the mass incidents database managed by the Chinese Academy of Social Sciences. The number of mass incidents in China has risen rapidly since the 21st century. Leaders in the central government, party and state organs at various levels, as well as the various segments of society have all shown unprecedented concern in understanding and managing these incidents. It was in this context that the Chinese Academy of Social Sciences established this database that has since recorded more than 900 cases of mass incidents. There are many causes for these incidents, including

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Table 8.5 Comparison of the basic characteristics of workers who had initiated labor disputes and those who had not Variable

Gender Female Age 16–30 31–40 41–50 51–60 Educational Attainment Primary school and below Junior middle school Senior middle school or technical school College and above

Migrant workers

Local urban workers

Initiated labor disputes

Had not initiated Initiated labor labor disputes disputes

Had not initiated labor disputes

50.56

51.00

48.01

52.57

49.91 32.96 10.26  6.87

39.14 34.89 19.38  6.58

23.59 21.33 30.84 24.24

12.28 21.27 31.01 35.43

 0.00 33.19

10.86 42.49

 0.00 13.69

 7.39 28.80

31.76 35.05

27.03 19.62

43.88 42.43

38.23 25.59

Source: Calculated based on data from the CULS3.

labor conflict, doctor-patient disputes, environmental and resource conflicts, as well as land acquisition and demolition and relocation. This chapter will mainly analyze the data on mass incidents triggered by labor conflict, of which 279 cases were recorded (henceforth referred to as the “mass incidents database”). 2.4.1

Huge Increase in the Number of Mass Incidents Triggered by Labor Conflict According to the data recorded in the mass incidents database of the Chinese Academy of Social Sciences, which is not exhaustive, the number of mass incidents triggered by labor conflict in China rose sharply after 2008 and has continued to increase thereafter (Figure 8.6). These incidents, which are organized by workers on their own initiative, are indicative of serious problems in existing labor relations management mechanisms, and require active countermeasures.

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(%) 35

31.2

30 25 20

16.9

15 10

10.4

7.8

14.7 11.1

7.9

5 0

Before 2008

2008

2009

2010

2011

2012

2013 (Year)

Figure 8.6 Distribution of mass incidents triggered by labor conflict over time. Source: Calculated based on data from the mass incidents database of the Chinese Academy of Social Sciences.

(%) 45 40

41.2

35

36.9

30 25 20 15

14.3

10

7.5

5 0

Below 100 participants

Above 100 and below Above 1,000 and below 1,000 participants 10,000 participants

Unclear

Figure 8.7 The scale of mass incidents triggered by labor conflict. Source: Calculated based on data from the mass incidents database of the Chinese Academy of Social Sciences.

2.4.2

Escalation and Expansion of the Scale of Mass Incidents Triggered by Labor Conflict In terms of the scale of these incidents, 41.2% had several hundred participants and another 36.9% had participants in the thousands, while incidents with less than a hundred participants only accounted for 14.3% of the total (Figure 8.7). Also, in the recent incidents that occurred, more had involved large manufacturing enterprises or established international brands, in which participants numbered more than 10,000.

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2.4.3

Clash over Economic Rights is the Main Cause of Mass Incidents Triggered by Labor Conflict The survey data revealed that close to 85% of the mass incidents triggered by labor conflict occurred due to the clash over economic rights. Specific reasons included low wages or welfare benefits provided by enterprises, unpaid wages by employers, or that employers were unable to satisfy the demands of workers in terms of economic compensation when engaging in a closing-down, relocation, or retrenchment exercise. Another 15% of cases were due to other reasons such as changes in the structure of enterprises, the signing of labor contracts, working hours, and working environment, etc. (Figure 8.8). 2.4.4

Mass Incidents Occurred More Frequently in the Foreign-Funded and Hong Kong, Macau, or Taiwan-Owned Enterprises, and Private Enterprises in the Economically-Developed Eastern Regions In terms of the regional distribution of mass incidents, 68% had occurred in the eastern region, while the central and western regions each accounted for about 16% of the cases. The Guangdong province had the most number of cases in the eastern region, comprising 65% of all cases in that region (Figure 8.9). The main reason why these incidents are currently occurring more frequently in the eastern region is mainly due to economic environment (with wage levels higher than that in the central and western regions and with a bigger floating population) and the industrial structure (a higher concentration of labor-intensive industries). As the eastern region achieves industrial upgrading and there is industrial transfer to the central and western regions,

(%) 100

Wages or fringe benefits Unpaid wages Taxis or public transportation Others

Economic compensation

80 60 40 20 0

Eastern region

Central region

Western region

Nationwide

Figure 8.8 Causes of mass incidents triggered by labor conflict. Source: Calculated based on data from the mass incidents database of the Chinese Academy of Social Sciences.

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Central region, 46, 16%

Eastern region, 187, 68%

Note: The eastern region includes Liaoning province, Beijing city, Tianjin city, Hebei province, Shandong province, Jiangsu province, Shanghai city, Zhejiang province, Fujian province, Guangdong province, and Hainan province; The central region includes Heilongjiang province, Jilin province, Shanxi province, Henan province, Hubei province, Hunan province, Anhui province, and Jiangxi province; the western region includes the Inner Mongolia Autonomous Region, Shaanxi province, Gansu province, Qinghai province, Ningxia Hui Autonomous Region, Xinjiang Uyghur Autonomous Region, Chongqing city, Sichuan province, Guizhou province, Yunnan province, and Guangxi Zhuang Autonomous Region. Figure 8.9 Regional distribution of mass incidents triggered by labor conflict. Source: Calculated based on data from the mass incidents database of the Chinese Academy of Social Sciences.

mass incidents triggered by labor conflict will gradually spread to these regions as well. At the national level, more than 60% of such incidents had occurred in the foreign-funded, Hong Kong, Macau, or Taiwan-owned enterprises, and private enterprises, of which 34% occurred in the foreign-funded and Hong Kong, Macau, or Taiwan-owned enterprises, while 30% occurred in the private enterprises. In the eastern region, these two types of incidents accounted for close to 80% of the total, of which 45% occurred in the foreign-funded and Hong Kong, Macau, or Taiwan-owned enterprises, while 33% occurred in the private enterprises (Figure 8.10). 2.4.5

Current Methods of Managing Mass Incidents Triggered by Labor Conflict in China are Mainly Centered on Administrative Measures Currently, the outbreak of mass incidents triggered by labor conflict are mainly initiated by the workers themselves and the methods of managing these incidents are

169

Labor Relations In China

(%) 100

State-owned enterprises Privately-owned enterprises Enterprises established using investment from other countries, Hong Kong, Macau, or Taiwan Taxis and public transportation Others

80 60 40 20 0

Eastern region

Figure 8.10

Central region

Western region

Nationwide

Distribution of parties involved in mass incidents triggered by labor conflict by ownership structure. Source: Calculations based on data from the mass incidents database of the Chinese Academy of Social Sciences.

mainly centered on administrative measures. In terms of the way these incidents were organized, the unions were seldom involved in pre-event organization, training, and legal briefings, with most incidents organized by the workers themselves or with the participation of some non-governmental labor organizations. These labor conflicts exhibit informal characteristics and are highly spontaneous. In terms of how they were managed, close to 70% were resolved by sending in public security police officers, military police, or getting the top local government leader or department heads to mediate. Less than 5% were resolved through mediation by the company head or employer-employee negotiations (Figure 8.11). We can thus see that the use of administrative power by the government to intervene in labor disputes is the key feature in the resolution of mass incidents triggered by labor conflict. The advantage of using administrative measures in managing these incidents is that resources can be quickly deployed to prevent the situation from escalating and worsening, but its weakness is that the internal conflict between employers and employees is now being passed on to the government, and the underlying logic becomes one in which workers need to use mass incidents to force the government’s hand in resolving the employers’ problems. There is also the potential danger of aggravating the labor conflict by involving public security police officers and the military police in the resolution process.

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No record 85, 30.5%

Mediation by company representatives 6, 2.2% Negotiations between labor and management 6, 2.2% Mediation by top officials in the local government or concerned governmental or departments 33, 11.8%

Involvement of either public security police force or armed police force 110, 39.4%

Mediation by top officials in the local government or concerned governmental or departments, in addition to involvement of either public security police or armed police force 39, 14.0%

Figure 8.11

3

Methods of managing mass incidents triggered by labor conflict. Source: Calculations based on data from the mass incidents database of the Chinese Academy of Social Sciences.

Changes in the State of Labor Relations: Causes and Problems

From the analysis in the previous section, we can see that China witnessed a surge in the numbers of labor dispute cases and mass incidents triggered by labor conflict after 2008. There are mainly two types of causes for this change: One concerns the changes in the domestic and external economic environments, the other has to do with problems in China’s existing systems and institutions for managing labor relations. 3.1 Changes in the Domestic and External Economic Environments 3.1.1 Fluctuations in the Economic Environment Fluctuations in the economic environment mainly come from two areas. First, in the context of economic globalization, the profitability of some multinational firms operating in China are hit by fluctuations in the global economy. More enterprises are forced to fold, retrench employees, relocate, or merge. In the

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process, enterprises have not given their employees adequate information, communicated their plans for affected employees, nor sought their approval in advance, thus causing disaffection among workers and provoking labor unrest. Second, our country’s economic development has slowed down in recent years and there is now massive industrial restructuring occurring nationwide. Against this backdrop of slower economic development, the production profits of most manufacturing enterprises are being squeezed further and this increases their desire to control costs. As a result, workers see slower increases in their benefits. Meanwhile, there are many issues concerning frictional unemployment during the process of industrial restructuring and workers at risk of unemployment need to actively voice their demands. Thus, industrial actions have become frequent in such an economic environment as workers strive to fight for employment stability and improved labor benefits. 3.1.2 Errant Behavior of Enterprises Over the past few decades, there have been some foreign-owned and Hong Kong, Macau, or Taiwan-owned enterprises that have engaged in the illegal practice of failing to meet proper hiring standards in their operations, such as making insufficient contributions to their employees’ social insurance and deducting overtime pay, etc. Also, most of these foreign-owned and Hong Kong, Macau, or Taiwan-owned manufacturing enterprises are engaging in a low-cost competition strategy by adopting stringent methods of performance management, which is an indirect form of labor exploitation. The accumulated pressure of misconduct and harsh management by employers over time, when coupled with an increased awareness among workers of their legal rights (particularly in 2008 when the Labor Contract Law and the Labor Disputes Mediation and Arbitration Law came into effect), makes it very easy for mass incidents to occur. 3.1.3

Structural Shortages in the Labor Supply and Demand Relationship and the Formation of the Industrial Worker Community China’s eastern coastal region began experiencing a migrant worker shortage since 2003, which was caused by a shrinking working-age population, with some regions having structural labor shortages. In addition, there was a significant shift away from agricultural employment and toward waged employment in the employment structure of the labor market, with increasing numbers of people depending on wages for a living. This resulted in the formation of the industrial worker community, who are the main participants in labor relations.

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Those in the community of industrial workers have more similar interests and demands and if not properly channeled or regulated, workers will organize themselves to express them, i.e. in the form of mass incidents. 3.1.4 Wages and Social Benefits of Migrant Workers are Too Low There are 270 million migrant workers in China’s urban labor market and they are the main component of the industrial worker community. Even though their wages have increased substantially in recent years, their average monthly wage was only 2,609 yuan in 2013, much lower than the wages of urban employees. At the same time, migrant workers are at a disadvantage when it comes to enjoying welfare benefits, signing labor contracts, and having the same access to social protection and public services, etc. This has caused the migrant worker community to become more confrontational. Institutional Issues Concerning China’s Labor Relations Management If the abovementioned changes in the domestic and external economic environments are said to be the causes of mass incidents triggered by labor conflict, then the existing problems with how China manages its labor relations will cause these incidents to be ineffectively prevented or managed. Sometimes, they even worsen the conflict and cause smaller issues to escalate into huge problems. To be specific, current methods of managing labor relations in China suffers from the following problems: 3.2

3.2.1 Lack of Guiding Policies on Labor at the National Level Labor policies are not accorded sufficient importance in the process of macroeconomic policymaking. This results in severe inequalities in the distribution of social income and causes social protection policies to lag far behind in the process of rapid economic development, creating a situation of powerful capital and weak labor in China. This is definitely an unsustainable situation that is unfavorable to long-term stable economic development. It can only be changed by innovating the country’s institutions or policies, or through organized protests by workers. Given the current situation in which the country’s labor policies are lagging behind, there is a tendency for workers to become more confrontational. 3.2.2 Inadequate Organization and Representation by Labor Unions Due to the political attributes of China’s labor unions, they are required to defer to the national leadership and government leadership at various levels when selecting their organizational and representational strategies. For

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the past three decades, the labor unions have lacked guidance from national labor policies and have thus represented the interests of workers as guided by economic policies that focus on economic development. Thus, the instances in which labor unions have truly fought on the workers’ behalf for their economic rights are extremely rare. Also, leaders in grassroots-level enterprise unions are usually appointed by the top management of the enterprise, or are headed by the management themselves, and this undermines democratic electoral processes and the trust of workers. Thus, the majority of mass incidents are organized by the workers themselves outside the system of labor unions and are typically informal in nature. As they often occur spontaneously, it becomes more difficult to deal with the aftermath. 3.2.3

Lack of Institutional Design Targeting Labor Relations Management and General Guidelines and Standards, Particularly the Absence of a System of Collective Labor Relations In practice, it is mostly the government that has the say in how to manage labor relations, while existing labor relations institutions, such as tripartism, collective bargaining, collective agreements, collective labor dispute management, and labor monitoring and supervision all fail to function effectively due to the lack of legislative support, organization, and representation by labor unions, and a uniform set of guidelines and standards for managing labor relations. Factors such as the amount of attention given by the leadership, manpower resource allocation, and the caliber of law enforcement personnel also tend to vary among local governments. This results in greater inconsistences in the management of labor relations nationwide, and this is unfavorable to overall stability and uniformity. 3.2.4

The Double-Edged Effect of Non-Governmental Labor Organizations There are quite a few non-governmental labor organizations that have emerged in the developed eastern region of China, with a worker community that needs to make its voice heard in an effective manner and with labor unions playing an inadequate role in organizing and representing workers. These organizations take on the role of organizing and training workers in mass incidents and are involved in the negotiations and rights protection processes. While they have played their part in guiding workers to defend their rights in a reasonable manner during these mass incidents triggered by labor conflict, their existence has also heightened the workers’ tendencies to be more confrontational when collectively defending their rights.

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3.3 The Enforcement of the Labor Contract Law and Its Impact Many scholars have observed that the number of labor disputes in China had been rising yearly since 2000, with a huge spike in 2008. When explaining this phenomenon, most of them point to the labor market laws that came into force (such as the Labor Contract Law, and the Labor Disputes Mediation and Arbitration Law) and the deepening financial crisis in 2008, as well as the greater awareness among new-generation migrant workers on defending their rights.1 In this section, we will mainly focus on the enactment of the Labor Contract Law and its impact. 3.3.1 Explaining the Survey Results We mainly used data from the three rounds of surveys on China’s urban labor (henceforth referred to as CULS1, CULS2, and CULS3) in our analysis. These three surveys were conducted in 2001, 2005, and 2009 respectively. The Institute of Population and Labor Economics at the Chinese Academy of Social Sciences conducted a labor survey in the five cities of Shanghai, Wuhan, Shenyang, Fuzhou, and Xi’an at the end of 2001 and another follow-up survey at the end of 2002 (collectively referred to as the CULS1). The survey selected 700 urban households in 70 communities from each city using multistage random sampling and had them complete questionnaires on the household situation as well as the situation of individual household members above the age of 16 1  Cheng, Yanyuan and Puxi Wang 程延园、王甫, “Biangezhong de laogong guanxi yanjiu: Zhongguo laodong zhengyi de tedian yu quxiang 《变革中的劳动关系研究：中国劳 动争议的特点与趋向》 [Research on Changing Labor Relations: The Characteristics and Trends of China’s Labor Disputes],” Jingji lilun yu jingji guanli《经济理论与经济管理》, Vol. 8 (2012); Guo, Jinxing and Qingfang Wang 郭金兴、王庆芳, “Woguo laodong zhengyi de dao U xing jiashuo ji qi jianyan: jiyu woguo sheng ji mianban shuju de yanjiu《我国劳动 争议的倒Ｕ型假说及其检验：基于我国省际面板数据的研究》 [The Kuznets Curve Hypothesis of China’s Labor Disputes and Its Examination: A Study of Panel Data across China’s Provinces],” Laodong jingji yanjiu《劳动经济研究》, Vol. 1 (2014); Qiao, Jian 乔健. “lue lun woguo laodong guanxi de zhuanxing ji dangqian tezheng 《略论我国劳动关系 的转型及当前特征》 [Analysis of the Transformation in China’s Labor Relations and Its Current Characteristics],” Zhongguo laodong guanxi xueyuan xuebao《中国劳动关系学 院学报》, Vol. 2 (2007); All-China Federation of Trade Unions Study Group 全国总工会课 题组. “Guanyu dui xinshengdai nongmingong xianzhuang de diaocha yu duice jianyi 《关 于对新生代农民工现状的调查与对策建议》 [Survey on the Current State of New-Generation Migrant Workers and Suggestions on Policy Responses],” Laodong guanxi yu gong­hui yundong yanjiu yu dongtai 《劳动关系与工会运动研究与动态》, Vol. 6 (2010).

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who were not schooling. In each city, the survey further selected 600 migrant workers who had come from the countryside to work in the cities using multistage random sampling and had them complete a labor questionnaire. The study collected a wealth of information on the human capital characteristics, employment, wages, and various welfare benefits of the labor force. In 2005, the Institute of Population and Labor Economics at the Chinese Academy of Social Sciences conducted another labor survey (CULS2) in the five cities of Shanghai, Wuhan, Shenyang, Fuzhou, and Xi’an and another seven cities (Wuxi, Yichang, Benxi, Zhuhai, Shenzhen, Baoji, and Daqing). The survey selected 500 urban households and 500 migrant worker households using multistage random sampling in the five cities of Shanghai, Wuhan, Shenyang, Fuzhou, and Xi’an, and 400 migrant households in the other seven cities. The questionnaire not only asked for household information but also individual information and was very similar in content to the 2001 survey. For the needs of this study, we will only use the data collected in the five cities of Shanghai, Wuhan, Shenyang, Fuzhou, and Xi’an for the 2005 survey in order make comparisons with the data collected in 2001. We have talked about the CULS3 earlier and will not repeat ourselves here. For the needs of this study, we will also only use the data collected in the five cities of Shanghai, Wuhan, Shenyang, Fuzhou, and Xi’an in order to make comparisons with the data collected in 2001 and 2005. 3.3.2 Workers’ Understanding of the Labor Contract Law In CULS3, there were some questions (six in total) on the provisions of the Labor Contract Law and respondents were given several option to choose from. The first five rows of Table 8.6 list the ratios of migrant and local urban workers who selected the correct option for these questions. The ratios of migrant workers who gave the correct answer for the six questions did not differ too much from that of local urban workers. For instance, when asked the question “Do you think your employer should sign a labor contract with you upon employment?”, 89.48% of the migrant workers surveyed gave the correct answer and said they thought this should be the case, while 95.34% of the local urban workers surveyed gave the correct answer. When asked the question “Within what period of time do you think your employer should sign a labor contract with you upon employment?”, 43.55% of the migrant workers surveyed gave the correct answer of one month, while 38.45% of the local urban workers surveyed gave the correct answer. On the whole, the two types of labor had more or less the same level of understanding of the Labor Contract Law.

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Table 8.6 Workers’ understanding of the Labor Contract Law

Unit: %

Question

Migrant workers

Local urban workers

Q1. Do you think your employer should sign a labor contract with you upon employment? (Correct answer: Yes) Q2. Within what period of time do you think your employer should sign a labor contract with you upon employment? (Correct answer: One month) Q3. Do you think that your employer should pay you double wages every month during your first year of work if they fail to sign a labor contract with you within the stipulated period of time? (Correct answer: Yes) Q4. What do you think is the maximum probation period for a one-year labor contract? (Correct answer: Two months) Q5. Do you think the company can dissolve the contract if an individual violates the company’s rules and regulations? (Correct answer: Yes) Q6. Do you think the employer should agree if you fulfill the stipulated criteria and wish to sign a labor contract with no fixed duration? (Correct answer: Yes) Average score of understanding

89.48

95.34

43.55

38.45

73.26

78.49

23.75

22.04

73.60

70.19

67.76

70.17

 3.69 points

 3.73 points

note: This table analyzes the situation of workers between the ages of 16 and 60. source: Calculated based on data from the CULS3.

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The last row of Table 8.6 gives the average score of understanding.2 Looking at the absolute scores of the average score of understanding for the two types of workers, the scores of 3.69 and 3.73 indicate that for the six questions that were asked, the migrant workers and local urban workers respectively answered close to four questions correctly. At the same time, the differences in the average scores of understanding for the two types of workers were minute. This indicator is further proof that both types of workers have very similar levels of understanding of the Labor Contract Law. There were some differences across different cities when it came to answering the questions on the Labor Contract Law provisions (Table 8.7). For instance, for the question “Do you think your employer should sign a labor contract with you upon employment?”, 94.62% of the migrant workers surveyed in Shanghai gave the correct answer that the employer should sign a labor contract with them upon employment, while only 72.6% of the migrant workers surveyed in Wuhan gave the correct answer. For the question “What do you think is the maximum probation period for a one-year labor contract?”, 31.6% of the migrant workers surveyed in Wuhan gave the correct answer of two months while only 13.8% gave the correct answer in Fuzhou. However, looking at the average score of understanding for all questions, there were no significant differences in the understanding of workers across different cities. For migrant workers, the average scores of understanding for all six cities were above 3.3 points. Guangzhou had the highest score at 3.78 points and Shenyang had the lowest score at 3.33 points. For local urban workers, the average scores of understanding for all six cities were above 3.5 points, and the city with the highest score was still Guangzhou at 3.94 points and Shenyang had the lowest score again at 3.57 points. On the whole, whether for migrant workers or local urban workers, those in Guangzhou had a better understanding of the Labor Contract Law, while those in Shenyang had a slightly poorer understanding. What we are interested in are the factors that influence the workers’ level of understanding of the Labor Contract Law. As such, we standardized the ­worker’s score of understanding to derive the score Z and conducted a regression analysis using the Generalized Least Squares method in order to discuss the factors affecting the level of understanding that workers have about the Labor 2  The average score of understanding is calculated by assigning a score of one to the correct answer for each question and a score of zero to the wrong answer. We can then calculate the score of understanding of each individual respondent for the six questions by adding these up, with the full score being six points and the lowest score being zero points. After calculating the score of understanding for each worker, we can then calculate the average score of understanding for all workers.

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Table 8.7 Workers’ understanding of the Labor Contract Law across different cities Q1

Q2

Q3

Q4

Q5

Q6

Average score of understanding

96.42 72.60 77.26 97.26 91.85 89.31 89.48

39.08 41.03 30.75 45.10 39.44 49.11 43.55

77.92 69.76 59.03 79.76 68.53 71.08 73.26

25.85 31.60 18.57 13.80 20.41 23.86 23.75

78.29 65.08 76.72 59.31 73.16 74.72 73.60

53.65 73.65 71.19 75.83 73.46 74.54 67.76

3.68 3.52 3.33 3.65 3.66 3.78 3.69

Local urban workers Shanghai 99.24 Wuhan 91.68 Shenyang 89.33 Fuzhou 94.48 Xi’an 94.22 Guangzhou 96.18 Total 95.34

31.50 39.53 35.01 45.52 42.27 51.16 38.45

88.24 66.07 73.14 72.45 78.66 76.23 78.49

22.50 27.06 17.14 17.85 18.17 24.53 22.04

75.59 61.37 73.37 51.80 70.42 75.67 70.19

61.98 75.28 70.61 78.69 76.99 73.04 70.17

3.77 3.60 3.57 3.60 3.80 3.94 3.73

Migrant workers Shanghai Wuhan Shenyang Fuzhou Xi’an Guangzhou Total

note: This table analyzes the situation of workers between the ages of 16 and 60. source: Calculated based on data from the CULS3.

Contract Law. The dependent variable is the Z score which is the workers’s score of understanding of the Labor Contract Law and independent variables include those to do with the workers’ individual characteristics (including gender, age, and educational attainment), employment characteristics (including whether a labor contract was signed, the ownership structure of the firm, the sector of work, and the firm size) and the city dummy variable (Table 8.8). The equation is as follows: zscore = β0 + β1 female + β2 age + β3 edu + β4 contract + β5 ownership + β6 sector + β7 firmsize + β8 city + ε (Equation 8.1) The zscore is the standardized Z score for the worker’s score of understanding of the Labor Contract Law, female is the dummy variable for females, age is a group of dummy variables for the age group, edu is a group of dummy variables for

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Labor Relations In China Table 8.8 Glossary of variables used in the model Variable

Type

Significance

Dependent variable Z score of workers’ score Continuous variable The Z score that is derived after standardizing the workers’ score of understanding of the Labor of understanding of the Contract Law Labor Contract Law Independent variable Female (Gender) 31–40 years old (Age) 41–50 years old (Age) 51–60 years old (Age) Junior middle school

Dummy variable Dummy variable Dummy variable Dummy variable Dummy variable

Senior middle school or Dummy variable technical school College and above Dummy variable Signed a labor contract

Dummy variable

State-owned enterprise

Dummy variable

Collective enterprise

Dummy variable

Private enterprise and sole-proprietor Foreign-invested enterprise and joint venture Other industrial sectors Wholesale, retail, accommodation, and F&B Rental, commercial, residential, and other services Other service sectors Firm size = 2–7 people

Dummy variable Dummy variable

Female = 1, Male = 0 31–40 years old = 1, 16–30 years old = 0 41–50 years old = 1, 16–30 years old = 0 51–60 years old = 1, 16–30 years old = 0 Junior middle school = 1, Primary school and below = 0 Senior middle school and technical school= 1, Primary school and below = 0 College and above = 1, Primary school and below = 0 Signed a labor contract = 1, Did not sign a labor contract = 0 State-owned enterprise = 1, Government department and institution = 0 Collective enterprise = 1, Government department and institution = 0 Private enterprise and sole-proprietor = 1, Government department and institution = 0 Foreign-invested enterprise and joint venture = 1, Government department and institution = 0

Dummy variable Dummy variable

Other industrial sectors = 1, Manufacturing = 0 Wholesale, retail, accommodation, and F&B = 1, Manufacturing = 0

Dummy variable

Rental, commercial, residential, and other services = 1, Manufacturing = 0

Dummy variable Dummy variable

Other services sectors = 1, Manufacturing = 0 Firm size = 2–7 people = 1, Firm size = 1 person = 0

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Table 8.8 Glossary of variables used in the model (cont.) Variable

Type

Firm size = 8–19 people Dummy variable Firm size = 20 people or more Wuhan Shenyang Fuzhou Xi’an Guangzhou

Dummy variable Dummy variable Dummy variable Dummy variable Dummy variable Dummy variable

Significance

Firm size = 8–19 people = 1, Firm size = 1 person = 0 Firm size = 20 people or more= 1, Firm size = 1 person = 0 Wuhan =1, Shanghai = 0 Shenyang =1, Shanghai = 0 Fuzhou=1, Shanghai = 0 Xi’an =1, Shanghai = 0 Guangzhou =1, Shanghai = 0

note: Other industrial sectors refer to those other than manufacturing, such as mining, generation and supply of power, gas, and water, and construction. Other service sectors refer to services other than wholesale, retail, accommodation, and F&B; and rental, commercial, residential, and other services; such as transportation and shipping, warehousing and postal services; telephony, computer and software services; financial services; property services; scientific research, technical services, and geological surveying; water, environmental resources, and public facilities management; education, healthcare, social protection, and welfare; culture, sports, and entertainment; as well as public management and social and international organizations.

educational attainment, contract is the dummy variable for the signing of a labor contract, ownership is a group of dummy variables for the ownership structure of the firm, sector is a group of dummy variables for the sector of work, firmsize is a group of dummy variables for the size of the firm and city is a group of dummy variables for the cities that were surveyed. ε is the random error term. Table 8.9 shows the results of the regression. We ran three regression models on the migrant workers and local urban workers respectively. Model 1 included only the workers’ individual characteristics, while Model 2 included the variables of employment characteristics on top of individual characteristics. Model 3 is similar to Model 1 except that it used the same sample as Model 2 for the purposes of comparison with the latter. The independent variables had very similar effects on the score of understanding for migrant workers and local urban workers. Age and gender had no effect on the score of understanding for both migrant and local urban workers. For migrant workers, those who had at least attended college understood the Labor Contract Law better than those who were educated up to primary school.

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Labor Relations In China Table 8.9 Regression equation (Generalized Least Squares) of the Z value of workers’ understanding of the Labor Contract Law Source

Migrant workers

Model  1 Male (Gender) Female(Gender)  0.0230 16–30 years’ old (Age) 31–40 years’ old  0.0204 (Age) 41–50 years’ old –0.0068 (Age) 51–60 years’ old –0.0170 (Age) Primary school and below Junior middle school  0.0874 Senior middle school or technical  0.0984* school College and above  0.3070*** Did not sign a labor contract Signed a labor contract Government department and institution State-owned enterprise Collective enterprise Private enterprise and sole-proprietor Foreign-invested enterprise or joint venture Manufacturing Other industrial sectors Wholesale, retail, accommodation, and F&B Rental, commercial, residential, and other services Other services sectors Firm size = 1 person Firm size = 2–7 people

Local urban workers

2

3

1

2

3

 0.0078

 0.0096

–0.0394

–0.0451

–0.0512

 0.0346

 0.0190

–0.0509

–0.0349

–0.0446

 0.0124

–0.0126

–0.0436

–0.0282

–0.0391

–0.0308

–0.0663

 0.0001

–0.0136

–0.0324

 0.0667  0.0377

 0.0738  0.0787

–0.0977 –0.0234

–0.0975 –0.0665

–0.0896 –0.0411

 0.2014***  0.3064***  0.0305

–0.0252

 0.006

 0.0962**

 0.1476***

 0.2017** –0.1133  0.1857**

 0.1097** –0.0480  0.0934

 0.1577

 0.1602**

–0.0653  0.0529

–0.0206 –0.0558

 0.0354

–0.0256

 0.1052

–0.0268

–0.2362***

–0.1083

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Table 8.9 Regression equation (Generalized Least Squares) of the Z value of workers’ understanding of the Labor Contract Law (cont.) Source

Migrant workers

Firm size = 8–19 people Firm size = 20 people or more City dummy variable Constant term Number of observations Pseudo R2

–0.0347 –0.0481 omitted omitted –0.2302*** –0.3149** 4939 4328 0.016 0.030

Local urban workers

omitted –0.1966*** 4328 0.020

omitted 0.1211 5090 0.015

–0.0680 –0.1429 omitted 0.074 3264 0.014

omitted 0.1158 3264 0.011

note: 1. For the sake of simplicity, we have omitted the estimation results for the city dummy variable; 2. *** denotes statistical significance at the 1% level; ** denotes statistical significance at the 5% level; * denotes statistical significance at the 10% level. source: Calculated based on data from the CULS3.

For both migrant workers and local urban workers, those who had signed labor contracts understood the Labor Contract Law better than those who had not. Workers employed in state-owned enterprises had a better understanding of the Labor Contract Law, while sector and firm size had no significant effect on the workers’ understanding of the law. 3.3.3 The Effects and Progress of Implementing the Labor Contract Law In recent years, there has been a more obvious shift toward informal employment in China’s urban labor market. One of the main reasons for this is that employers and employees failed to put the signing of labor contracts into practice. Let us look at the changes in the ratio of workers signing labor contracts. Table 8.10 lists the ratios of migrant workers and local urban workers who had signed and who had not signed labor contracts in 2001, 2005, and 2010. We can mainly draw two conclusions by looking at the table. One, the ratios of workers signing labor contracts had steadily increased for both migrant workers and local urban workers. Only 14.77% of migrant workers had signed labor contracts in 2001 while 25.69% did so in 2010. As for local urban workers, 48.36% had signed labor contracts in 2001 while 59.69% did so in 2005. By 2010, this had further increased to 64.57%. We can say that the ratios of workers signing labor contracts had increased significantly after the Labor Contract Law came into force in 2008, and this is especially true for migrant workers.

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Labor Relations In China Table 8.10 Ratios of workers who had signed labor contracts and those who had not Source

Migrant workers

Local urban workers

Indicator Signed a labor contract

Had not signed a labor contract

Signed a labor contract

Had not signed a labor contract

2001 2005 2010

85.23 88.06 74.31

48.36 59.69 64.57

51.64 40.31 35.43

14.77 11.94 25.69

note: 1) This table examines the situation of workers between the ages of 16 and 60 signing labor contracts; 2) In order to compare the results of the three rounds of surveys, we only looked at the five cities of Shanghai, Wuhan, Shenyang, Fuzhou, and Xi’an; 3) Self-employed persons were treated as workers who had not signed labor contracts. source: Calculated based on data from the CULS1, CULS2, and CULS3.

Two, the ratio of migrant workers who had signed labor contracts was much lower than that of local urban workers, and this was true for every year of survey. In 2001, the ratio of migrant workers who did so was 14.77% while it was 48.36% for local urban workers. The gap between the two was 33.59 percentage points. This grew to 47.75 percentage points in 2005. In 2010, the difference between two was 38.88 percentage points. According to the Labor Contract Law, there are a few types of labor contracts: labor contracts with a fixed duration of employment, labor contracts without a fixed duration of employment, labor contracts that only cover the duration of a specific work task, and labor dispatch contracts. By asking about the type of contract signed in CULS3, we were able to analyze if there were any differences in the types of contracts signed by migrant workers and local urban workers (Table 8.11). In the case of migrant workers, three quarters had signed a labor contract with a fixed duration of employment, while 19.93% had signed a labor contract with no fixed duration of employment. When added together, 95.29% of migrant workers had signed these two types of labor contracts. In the case of local urban workers, 53.48% had signed a labor contract with a fixed duration of employment, while 44.58% had signed a labor contract with no fixed duration of employment. When added together, 98.06% had signed these two types of labor contracts.

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Table 8.11 Ratios of workers signing the different types of labor contracts Source

Labor contract with a fixed duration of employment Labor contract without a fixed duration of employment Labor contract that only covers the duration of a specific work task Labor dispatch contract Total

Migrant workers

Local urban workers

75.36

53.48

19.93

44.58

3.11

1.49

1.60 100

0.45 100

note: 1) This table examines workers between the ages of 16 and 60 and the types of labor contracts they had signed; 2) This table surveys the situations in the five cities of Shanghai, Wuhan, Shenyang, Fuzhou, and Xi’an. source: Calculated based on data from the CULS3.

This meant that most migrant workers and local urban workers had signed either a labor contract with a fixed duration of employment or a labor contract with no fixed duration of employment. However, an important difference between the two is that the ratio of migrant workers who had signed a labor contract with a fixed duration of employment was higher than that of local urban workers by 21.88 percentage points, while the ratio of local urban workers who had signed a labor contract with no fixed duration of employment was higher than that of migrant workers by 24.65 percentage points. In the case of migrant workers, the ratios who had signed labor contracts that only covered the duration of a specific work task or labor dispatch contracts were only 3.11% and 1.6% respectively, while the respective ratios of local urban workers who had signed these two types of labor contracts were 1.49% and 0.45% respectively. The ratios of workers who had signed these two types of labor contracts were very low for both. In terms of the duration of the labor contract signed, 21.64% of migrant workers had signed a labor contract of one year or shorter, while half had signed a labor contract of one to three years, and 28.41% had signed a contract of three years or longer. On the other hand, only 8.05% of local urban workers had signed a labor contract of one year or shorter, while 27.34% had signed a labor contract of one to three years, and 64.61% had signed a contract of three years or longer (Table 8.12).

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Unit: %

Duration of labor contract

Migrant workers

Local urban workers

One year or shorter One to three years Three years or longer Total

21.64 49.95 28.41 100

8.05 27.34 64.61 100

note: 1) This table examines workers between the ages of 16 and 60 and the duration of the labor contracts they had signed; 2) This table looks atthe situations in the five cities of Shanghai, Wuhan, Shenyang, Fuzhou, and Xi’an; 3) A labor contract with no fixed duration is classified as a contract that is “three years or longer”. source: Calculated based on data from the CULS3.

If we compare the two types of workers, the ratio of migrant workers who had signed labor contracts of longer durations was relatively smaller, while the ratio of those who had signed labor contracts of shorter durations was relatively bigger. Less than a third of migrant workers had signed labor contracts that were three years or longer in duration, while close to two-thirds of local urban workers did so. More than 20% of migrant workers had signed labor contracts that were one year or shorter in duration while less than 10% of local urban workers did so. There were significant differences in the wages of workers who had signed labor contracts and those who had not (Table 8.13). For both migrant workers and local urban workers, the wages of those who had signed labor contracts from 2001–2010 were significantly higher than those who had not. For instance in 2010, the hourly wage of migrant workers who had signed labor contracts was 13.91 yuan while this was 8.23 yuan for those who had not done so, with the former higher than the latter by 69%. For both migrant workers and local urban workers, hourly wages had increased significantly from 2001–2010 for those who had signed labor contracts. The hourly wages of migrant workers who had signed labor contracts was 4.71 yuan in 2001 and this had increased to 6.61 yuan by 2005, and 13.91 yuan in 2010. The hourly wages of local urban workers who had signed labor contracts was 6.13 yuan in 2001, and this had increased to 8.07 yuan in 2005, and 14.4 yuan in 2010. For both types of labor, the increase in hourly wages from 2005 to 2010 was much greater than that from 2001 to 2005. For both migrant workers and local urban workers, the hourly wage for those who had not signed a labor contract did not change much from 2001–2005, but

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Table 8.13 Hourly wages of workers who had signed labor contracts and those who had not Unit: Yuan Source

Migrant workers

Local urban workers

Indicator

Signed a labor contract

Had not signed a labor contract

Signed a labor Had not signed a contract labor contract

2001 2005 2010

 4.71  6.61 13.91

3.82 3.70 8.23

 6.13  8.07 14.40

4.96 4.93 8.82

note: 1) This table examines the situation of workers between the ages of 16 and 60 signing labor contracts; 2) Self-employed persons were treated as workers who had not signed labor contracts. source: Calculated based on data from the CULS1, CULS2, and CULS3.

Table 8.14 Workers’ evaluations of their employers’ compliance with the Labor Contract Law Option

Very good

Satisfactory

Fair

Relatively poor

Very poor

Migrant workers Local urban workers

8.46 10.35

47.63 46.07

37.86 40.16

5.21 2.85

0.84 0.57

source: Calculated based on data from the CULS3.

increased significantly from 2005–2010. In 2010, the hourly wage of migrant workers who had not signed labor contracts grew to 8.23 yuan while this was 8.82 yuan for local urban workers who had not signed labor contracts. Table 8.14 shows how migrant workers and local urban workers evaluated their employers’ compliance with the Labor Contract Law. 56.09% of migrant workers judged their employers to be “very good” or satisfactory” in this respect, while 56.42% of local urban workers felt the same. That is to say that more than half of both migrant workers and local urban workers felt that their employers were “very good” or “satisfactory” in their compliance with the Labor Contract Law. The levels of satisfaction of both types of workers with regards to their employers’ compliance with the Labor Contract Law did not differ by much. We are interested in knowing the factors that affect how workers evaluated their employers’ compliance with the Labor Contract Law. For this purpose,

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we ran the ordered logit model to discuss the factors that affected how workers evaluated their employers’ compliance with the Labor Contract Law. The dependent variable of the model was how workers evaluated their employers’ compliance with the Labor Contract Law and there were five options: 1 = Very good; 2 = Satisfactory, 3 = Fair, 4 = Relatively poor; 5 = Very poor. The independent variables includes the workers’ individual characteristics (such as gender, age, and educational attainment), employment characteristics (whether they had signed a labor contract, the ownership structure of the firm, the sector of work, and the firm size) and the city dummy variable. The equation is as follows: evaluation = β0 + β1 female + β2 age + β3 edu + β4 contract + β5 ownership + β6 sector + β8 firmsize + β9 city + ε    Equation 8.2 In this model, evaluation refers to the workers’ evaluation of their employers’ compliance with the Labor Contract Law, female is the dummy variable for female workers (gender), age is a group of dummy variables for age, edu is a group of dummy variables for educational attainment, contract is the dummy variable for signing a labor contract, ownership is a group of dummy variables for the ownership structure of the firm, sector is a group of dummy variables for the sector of work, firmsize is a group of dummy variables for the size of the firm, city is a group of dummy variables for the cities that were surveyed, and ε is the random error term. The regression results are shown in Table 8.15. We ran three models respectively for both migrant workers and local urban workers. Model 1 included only the workers’ individual characteristics, while Model 2 included employment characteristics on top of individual characteristics. Model 3 is similar to Model 1 except that it used the same sample as Model 2 for the purposes of comparison with the latter. The independent variables had very similar effects on how migrant workers and local urban workers evaluated their employers’ compliance with the Labor Contract Law, with age and gender having no effect for both, while those who had at least attended college rated their employers better than those who had attended primary school at the most. For both types of workers, those who had signed labor contracts rated their employers better than those who had not. The ownership structure, sector, and firm size had little impact on how both types of workers rated their employer’s compliance with the Labor Contract Law.

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Table 8.15 Ordered logit model for workers’ evaluations of their employers’ compliance with the Labor Contract Law Source Model

Migrant workers Local urban workers 1 2 3 1 2 3 odds ratio odds ratio odds ratio odds ratio odds ratio odds ratio

Male (Gender) Female (Gender) 1.0837 16–30 years’ old (Age) 31–40 years’ old 1.0181 (Age) 41–50 years’ old 1.0693 (Age) 51–60 years’ old 1.0765 (Age) Primary school and below Junior middle school 0.9379 Senior middle school or 0.9321 technical school College and above 0.5469*** Did not sign a labor contract Signed a labor contract Government department and institution State-owned enterprise Collective enterprise Private enterprise and sole-proprietor Foreign invested enterprise or joint venture Manufacturing Other industrial sectors Wholesale, retail, accommodation and F&B Rental, commercial, residential and other services Other service sectors Firm size = 1 person

1.1274*

1.0982

1.0347

0.9792

1.0081

1.0289

1.0483

0.8585

0.8649

0.8676

1.0365

1.1016

0.8732

0.9193

0.9169

1.0782

1.1781

0.7841** 0.8303

0.7892*

0.943 1.0214

0.9118 0.8995

0.8907 1.3349 0.7250** 1.0984

1.2041 0.8396

0.7332** 0.5501*** 0.3763*** 0.8070 0.4845***

0.4908***

1.1312 2.2935*** 1.1595

1.1731 1.1674 1.2414*

0.9179

0.9106

1.5116*** 1.0463

0.9044 0.9148

1.3040**

0.8135

1.2168

0.7921**

0.4953***

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Source Model

Firm size = 2–7 people Firm size = 8–19 people Firm size = 20 people or more City dummy variable N Pseudo R2

Migrant workers Local urban workers 1 2 3 1 2 3 odds ratio odds ratio odds ratio odds ratio odds ratio odds ratio

1.0608 1.2371 1.2133 Omitted 4271 0.017

Omitted 3857 0.03

1.3305 1.3240 1.1547 Omitted 3857 0.017

Omitted 4442 0.022

Omitted 3090 0.039

Omitted 3090 0.021

note: 1. For the sake of simplicity, we have omitted the estimation results for the city dummy variable; 2. *** denotes statistical significance at the 1% level; ** denotes statistical significance at the 5% level; * denotes statistical significance at the 10% level. source: Calculated based on data from the CULS3.

3.3.4 Main Problems in the Implementation of the Labor Contract Law The above analysis used survey microdata from different sources to examine the state of implementation of the Labor Contract Law in detail. The analysis revealed the following main problems in its implementation: First, workers still had a relatively poor understanding of the Labor Con­tract Law. The government should pay adequate attention to this issue, parti-­ cularly the workers’ poorer understanding of some finer clauses in the Labor Contract Law, as some employers often avoid complying with the Labor Con­tract Law to save labor costs. Raising the workers’ awareness of the Labor Contract Law increases their ability to protect themselves through legal means. The government should step up its publicity of the Labor Contract Law and increase societal awareness of the law. In addition, it should take a targeted approach in highlighting specific parts of the Labor Contract Law that the general public is most concerned about, e.g. the provision on the labor contract with no fixed duration” is one that draws the most attention. Such a provision favors employment stability but some have also questioned if this would cause the “common rice pot” and “iron rice bowl” phenomena of the past to reemerge and produce “idle” workers. If this really results in “a system of lifelong employment,” then the above concerns may become real. But they are unfounded because the “contract with no fixed duration” is not a contract that cannot be terminated and similar issues can be resolved by issuing the relevant legal documents.

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Second, there is still a significant proportion of workers who have yet to sign labor contracts with their employers. Although the ratio of workers who did so had increased significantly after the Labor Contract Law came into effect, there is still a sizeable number who did not. The CULS3 tells us that in 2010, only a quarter of all migrant workers had signed a labor contract while about 65% of local urban workers did so. It is very difficult for the legal rights of workers to be protected if they do not sign labor contracts, and this also has a huge impact on labor wages and welfare benefits. The CULS3 also found that the wages of those who had signed a labor contract were far higher than those who did not. It thus seems that we need to further strengthen the enforcement of the Labor Contract Law and be tough in its implementation, so as to give resolute protection to the legal rights of both employers and employees in the employment relationship. We must define the substance of the relevant provisions in this law more precisely so that it can become a truly authoritative force in shaping and maintaining harmonious labor relations. As the Labor Contract Law has triggered strong reactions among various segments of society, the issuing of legal documents such as the Regulations on the Implementation of the Labor Contract Law helps us to better implement the law and dispel unnecessary worries, as well as further regulate the labor market. Third, there are relatively huge differences in the ratios of migrant workers and local urban workers who had signed labor contracts and this is a situation that persists. According to the CULS3, only 14.77% of migrant workers had signed a labor contract in 2001 while 48.36% of local urban workers did so. In 2005, the ratios of migrant workers and urban local workers who had signed labor contracts were 11.94% and 59.69% respectively, with a difference of 47.75 percentage points. By 2010, although the ratios of those who had signed labor contracts had increased significantly for both types of workers, the difference was still 38.88 percentage points. The Labor Contract Law applies to all workers and there should not be any differences in implementation based on the worker’s gender, identity, or the region that he or she is in. In order to reduce and eliminate the gap between the ratios of migrant workers and local urban workers who had signed labor contracts, we need a complete reform of the household registration system apart from better enforcement of the Labor Contract Law. However, the series of problems that have emerged during the reform of the household registration system suggests that it cannot work in isolation but must be complemented by other relevant policies.3 We have to implement a 3 Wang, Meiyan and Fang, Cai 王美艳、蔡昉, “Huji zhidu gaige de licheng yu zhanwang《户 籍制度改革的历程与展望》 [The Course and Outlook of Household Registration System Reform],” Guangdong shehui kexue 《广东社会科学》, Vol. 6 (2008).

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basket of complementary reforms to make the various institutions mutually adaptable and compatible. We must first remove the policy measures that have caused the household registration system to become a means of segregating the urban and rural populations. Then the system has to be completely reformed to put the focus back on population registration, which is its basic function, instead of being something that is used to distinguish between different “identities.” 4

Developmental Trends and Policy Suggestions

As the supply and demand relationship in the labor market continues to change, and there is further upward pressure on wages and increasing awareness among workers to unite in defense of their legal and economic rights, the balanced situation in labor relations during the early period of low wages is likely to be upset during the period of the “13th Five-Year Plan,” with labor conflicts spreading to the central and western regions of China along with industrial transfer and gradually increasing in magnitude. In light of this situation, we make the following policy suggestions: The Importance of Labor Policy-Making and Strengthening Labor Laws We should devote more attention to labor policy in our overall macroeconomic policymaking and increase our protection of the labor force. A committee for managing labor relations should be established at the national level to accelerate the process of legislating collective labor relations. We should accelerate the development of a labor standards system and have overall planning for labor policy that complements policies on income distribution, employment, and social security. We should also establish a nationwide monitoring and warning system for labor relations. 4.1

Promote Institutional Reform of Labor Unions and Establish a System of Social Management for Labor Relations We should enable the labor unions to perform their market functions and delegate the powers of organizing workers, conducting negotiations, and holding strikes to them. We must curb the bureaucratic tendencies of labor unions so as to enhance their image and credibility in the eyes of workers and enterprises. We should reform the management structure of labor unions to ensure transparency in funds management and better performance. The various trade and grassroots-level unions should also institute democratic reforms to get 4.2

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more workers to participate. The tripartite system should be improved and optimized and we should establish a multi-level mechanism for coordinating labor relations, with labor unions as one of the main entities. Experimenting with Local Labor Relations Management and Studying the Collective Bargaining Experience We should clarify the aims, principles, and operational rules for collective labor relations management. Local governments should standardize their management principles, organizational set-up, management procedures, participants, as well as the scope and means of management as soon as possible. The mechanisms, timing, and respective responsibilities of labor unions and other relevant labor departments to intervene in mass incidents must be made clear. We should study the collective bargaining experience and conduct a nationwide pilot of this process in different areas. We can pilot the industry collective bargaining process in the public service sector and an employer-centric collecting bargaining process in the larger or medium-sized as well as foreign-owned and Hong Kong, Macau, and Taiwan-owned enterprises. We should actively promote the model of cooperative labor relations management, cultivate model enterprises that maintain harmonious labor relations, and reward such enterprises in terms of tax benefits, government procurement, public utility contracts, and technological support. We should modify and optimize the current mediation and arbitration mechanisms to include mechanisms for resolving collective labor disputes. 4.3

Strengthening Training and Building a Talent Pool in Labor Relations Management We should mobilize the All-China Federation of Trade Unions, various institutes of higher education, and training organizations to strengthen labor law and policy training for enterprise employers as well as help the latter enhance their relevant rules and regulations and establish a robust system of internal communication. For the workers, we should strengthen their awareness of obeying the law and guide them in protecting their rights through legal means. We should formulate plans to accelerate the training of professionals to intervene, mediate, and arbitrate in labor disputes. 4.4

References All-China Federation of Trade Unions Study Group 全国总工会课题组. “Guanyu dui xinshengdai nongmingong xianzhuang de diaocha yu dui ce jianyi《关于对 新生代农民工现状的调查与对策建议》 [Survey on the Current State of New-

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Generation Migrant Workers and Suggestions on Policy Responses].” Laodong guanxi yu gonghui yundong yanjiu yu dongtai《劳动关系与工会运动研究与动 态》, Vol. 6 (2010). Cheng, Yanyuan and Puxi Wang 程延园、王甫. “Biange zhong de laogong guanxi yanjiu: Zhongguo laodong zhengyi de tedian yu quxiang 《变革中的劳动关系 研究：中国劳动争议的特点与趋向》 [Research on Changing Labor Relations: The Characteristics and Trends of China’s Labor Disputes].” Jingji lilun yu jingji guanli《经济理论与经济管理》, Vol. 8 (2012). Guo, Jinxing and Qingfang Wang 郭金兴、王庆芳. “Woguo laodong zhengyi de dao U xing jiashuo ji qi jianyan: jiyu woguo sheng ji mianban shuju de yanjiu《我国 劳动争议的倒Ｕ型假说及其检验：基于我国省际面板数据的研究》[The Kuznets Curve Hypothesis of China’s Labor Disputes and Its Examination: A Study of Panel Data across China’s Provinces].” Laodong jingji yanjiu 《劳动经济研究》, Vol. 1 (2014). Ministry of Human Resources and Social Security 人力资源和社会保障部. Renli ziyuan he shehui baozhang shiye fazhan tongji gongbao《人力资源和社会保障 事业发展统计公报》 [China’s Statistics for Human Resource and Social Security Development], Various Years. http://www.mohrss.gov.cn/SYrlzyhshbzb/zwgk/szrs/ ndtjsj/tjgb/. Qiao, Jian 乔健. “Lue lun woguo laodong guanxi de zhuanxing ji dangqian tezheng 《略论我国劳动关系的转型及当前特征》   [Analysis of the Transformation in China’s Labor Relations and Its Current Characteristics].” Zhongguo laodong guanxi xueyuan xuebao《中国劳动关系学院学报》, Vol. 2 (2007). Wang, Meiyan and Fang, Cai 王美艳、蔡昉. “Huji zhidu gaige de lichen yu zhanwang《户籍制度改革的历程与展望》 [The Course and Outlook of Household Registration System Reform].” Guangdong shehui kexue 《广东社会科学》, Vol. 6 (2008).

Index 10th Five Year Plan 72 11th Five Year Plan 72, 75, 84 12th Five Year Plan 24, 30–32, 35, 72, 75, 81, 83–84, 99, 104, 146, 154 13th Five Year Plan 30, 69–73, 75–77, 80–83, 85–86, 146, 191 17th CPC National Congress 154 18th CPC National Congress 154 2SLS estimation 57 Abenomics 23 accommodation 8, 12–13, 20 accumulation 33, 35, 61, 65, 70–71, 73, 77–78, 85, 142, 144 actual economic growth rate/s 25 actual growth rate/s 146–147 administrative townships 109 advanced economies 23 age structure 48, 50, 59 aged population 89–90 aging and shrinking population 24 aging population 30, 48, 90, 105 agricultural employment 171 labor input 72 surplus 31, 59, 72 supply of 131–133, 144 transfer to economic growth 72 modernization 31, 38 surplus labor supply of 72 agricultural and non-agricultural sectors converge 72 agriculture 38, 72, 133, 135 All-China Federation of Trade Unions 192 allocates resources 38 allocation efficiency of 71 of various production factors 71

American firms 35, 38 Anhui 99, 168 Argentina 25 Asia 69 Asian financial crisis 90, 125, 130 Australia 78 Bangladesh 132 Baoji 175 basic medical insurance scheme for urban employees 92, 105 for urban residents 93 basic medical insurance system 93 basic medical services 110 basic old-age insurance scheme for urban employees 91, 96, 99, 104 for urban residents 99 basic old-age insurance system for urban and rural residents 97, 104 basic public services, access to 26, 48, 107–109, 113–114, 117–118 basic social insurance for urban employees  110 basic urban public services 66, 109 basic welfare and rights 109 Beijing 57, 116–118, 168 benefit/s of reform 26–27, 64, 150–152 universal 106, 119 Benxi 175 big and capital-intensive firms 39 big and medium-sized cities 19, 127 big cities 109, 117 big or medium-sized cities at the prefectural level 6, 19 bureau of statistics 54 Cai Fang 23–25, 27, 29, 44, 46, 89, 125, 146, 150 Canada 78

196 capital accumulation 70, 78, 85, 144 allocation of 39 and labor 28, 56 formation 24, 53–54 formation rate 24, 28 input 24 stock 52–54, 147 supply  24, 28 that we accumulate 144 capital-intensive secondary sector and the skills-intensive tertiary sector 147 capital-output ratio 51, 53, 57, 60–62, 64–66 causes of labor disputes 157 central government 38, 49, 94, 96, 99–100, 114–115, 118–119, 121, 130, 151–152, 164 subsidizes 6 central region 5–6, 9, 16–17, 84, 94, 96, 99–100, 118–119, 167–168, 191 changes in the industrial structure 75 characteristics 23, 55, 74, 76, 85, 89, 94, 103, 112, 119, 128, 134, 160, 164, 169, 175, 178, 180, 187 cheap labor 150 Cheng Jie 46, 107 Chengdu 57 China City Statistical Yearbook 52 China Development Research Foundation  89 China Labor Statistical Yearbook 156–160 China Statistical Yearbook 84, 126, 136, 138 Chinese Academy of Engineering 127 Chinese Academy of Sciences 127 Chinese Academy of Social Sciences 160, 164–170, 174–175 Chinese firms 35 Chinese Urban Labor Market Survey 76 Chongqing 155, 168 Chow, Gregory 53 Ciccone, Antonio 55 citizen’s pension 104, 106 citizens’ rights 119 city/ies 6–7, 11–14, 19, 31, 38, 47–48, 50–55, 57, 61–62, 64, 66, 86, 92–93, 95, 98, 102–103, 107–109, 111–120, 127, 130, 132,

index 135, 137, 140, 159–161, 168, 174–175, 177–178, 180, 182–185, 187, 189 collective agreements system 155 collective bargaining 155, 173, 192 collective enterprise 179, 181, 188 collective labor dispute management 173 college education, returns to 77 graduates 110, 139, 142 gross enrollment rate 79 combination of policies 36 community health center/s 110, 112–113 Community Public Health Service Package  110 comparative advantage 76, 144–145 competition 38–39, 46, 49, 51, 55, 61, 114, 171 competitiveness 39, 60, 70, 73, 76 comprehensive household registration system reform 59, 66 comprehensive national power 80 compulsory education 70–71, 77–80, 82–84, 86, 109, 118, 120, 147–148 compulsory education system 77, 80, 82–83, 148 consume 149 consumption, rate of 28 contract/s with no fixed duration 137, 156, 183–184, 189 contracted land 117, 120–121 contractual management of land 121 contribution/s 33, 35, 52, 66, 72, 91–96, 98, 101–104, 106, 110, 115, 117, 171 contribution rate for employers 91 control population 119 converged 72 convergence 98–99, 101, 103–105, 116–117, 121, 147 in the urban and rural systems 117 of the various schemes 103 converging wages 72 cost/s 26–27, 35, 38–40, 47, 49, 66, 72, 76, 80, 82, 91, 100, 113–115, 118, 145, 149, 151–152, 156, 171, 189 cost-and-benefit 47

index costs and benefits of reform 26–27 cost-sharing 38, 118, 151 county-level cities 52 coverage 17, 38, 90, 92–95, 97–99, 101–105, 120, 161 CPC Central Committee 101, 108, 151, 154 creative destruction 39, 149 CULS1 174 CULS2 174–175 CULS3 160, 162–163, 165, 174–176, 183–184, 190 cyclical unemployment 134, 137, 139, 141, 148 Dalian 155 Daqing 175 declining economy 141–142 deep water zone/s 46, 65 demand in the labor market 142, 147 shock 145 demographic/s dividend/s 23–27, 36–40, 144–145, 147 structure 23–24, 27–28, 40, 48, 59, 76, 80, 89, 134, 147 transition 23–24 trend 89 Department of Planning and Finance of the Ministry of Human Resources and Social Security 157–160 Department of Population and Employment Statistics of the National Bureau of Statistics 157–160 dependency ratio 23–25, 28, 30 dependent population 28 depreciation rate of China’s fixed assets 53 depressed wages 46 “depressive effect” of welfare 115 developed 35, 46, 56, 77–78, 89–90, 114–115, 120–121, 132, 147, 173 developed countries 35, 56, 77, 89, 147 development economics 77 of the economy 49 Development Research Center of the State Council 102, 104

197 Dhaka 132 different types of cities 11–13, 66 difficulty 47, 97, 139–140 diminishing returns to capital 144–145 discrimination in institutional design 119 discriminatory polices 116 discussions 49, 90, 104, 107 disposable income 92 dispute resolution 154, 159, 162, 164 diversification 73 diversified 74, 111 domestic and external economic environments 155, 170, 172 domestic demand 150 Dongguan 155 Du Yang 46, 56, 69, 126, 136 dual economy 71–72, 93, 131, 133–134 duration/s 82, 137, 156, 183–185, 189 East Asian 71 eastern coastal region 171 region 5–6, 9, 17, 19, 94, 96, 100, 167–168, 173 economic bubble 23 decline 126, 141, 144 development 23, 26, 37–38, 47, 49, 51–52, 56, 59, 62, 65–66, 69–71, 74, 77, 85, 89, 92, 113–114, 132–133, 136, 143–144, 154, 171–173 downturn 139 efficiency 51–52, 57, 60–61, 66, 71, 77 environment 167, 170–171 globalization 170 growth model 61–62, 66, 76 rate/s 25–26, 69, 125, 138–139, 144, 146 theories 77 performance 46, 70 policy/ies 25, 148, 173 reform/s 25, 105 restructuring 73 rights 120, 155, 167, 173, 191 sectors 133, 135

198 economic (cont.) situation 127, 143 slowdown 23, 25–26, 107 structure 51, 59, 70, 73–77, 85 transformation 97 economy to grow rapidly 70 economy/ies 23, 25, 39–40, 46, 49–51, 55–56, 62–63, 66, 69–72, 76–77, 85, 93, 97–98, 102, 125, 130–134, 137–138, 141–142, 144–150, 154, 170 educated 50, 55, 119, 180 education development 80 policies 33 public spending on 80, 82 reform policies 113 system 77, 80, 82–83, 120, 140, 148 educational attainment 33–34, 55, 78, 147–148, 160, 164, 178, 180, 187 development 78 opportunities 117 qualifications 148 resources 84, 86, 117 effect on growth 29 efficient allocation of resources 41 Egypt 135 Eichengreen, Barry 25 elasticity 55–57, 60–64 elderly population 92, 98 employee/s annuity schemes 102 contributions 91 employer/s contribution 91, 98 compliance with the Labor Contract Law  186–187 employment characteristics 160, 178, 180, 187 demand 48 difficulties 70 distribution of 74 duration of 183–184 equality 50 opportunity/ies 47–48, 60, 74, 120, 138, 148

index policy/ies 90, 113–114 pressure 142, 148 prospects 46, 142 reform 93 rights 108, 119 services 109, 128, 130 situation 75, 127, 129, 142 stability 171, 189 structure/s 60, 74–75, 135, 152, 171 training 128, 157 enrollment rate 33, 36, 44, 78–81, 83–85 enterprises 39–41, 90–91, 93, 98, 117, 130, 134, 137, 139–140, 148–149, 151, 154, 166–168, 170–171, 182, 191–192 equal access 26, 107–110, 112–119, 121, 149 equal employment opportunities 48 Europe 78, 127, 148 European firms 35 expenditure 13, 20 expenses 3, 10–11, 13–14, 20, 93, 100 factor/s accumulation 61, 65 inputs 77 mobility 39 of production utilization of 146 family planning 113 family-planning policy/ies 40 Fan Gang 53 fertility rate/s 23, 27, 89, 149–150 Fifth Plenary Session of the 17th CPC Central Committee 154 financial crisis 36, 62, 90, 125, 127, 129–130, 145, 148, 174 security 105 spending 106 sustainability 100–101 system reform 39, 41 Financial Times 127 firm/s size of the 180, 187 within the Chinese sector 39 first-tier and second-tier cities 115

index fixed asset investment 54 floating population 140, 167 flow of labor 59, 64, 66 flows of migrant workers 6 fluctuations in the economic environment  170 fluctuations in the macro-economy 138 foreign invested enterprise 179, 181, 188 joint venture 179, 181, 188 foreign-funded 168 forest land 121 Foster, Lucia 38 Fourth Plenary Session of 18th CPC Central Committee 154 fourth-tier 115 frictional unemployment 132, 134, 138–139, 171 funding 82–83, 94–95, 100, 103, 110, 120 Fuzhou 160, 174–175, 177, 183–185 Gao Wenshu 107 GDP growth 50, 146, 148 growth rate 65 per capita 69, 89 gender 27–28, 160, 178, 180, 187, 190 generalized least squares 177 global financial crisis 125 Gong Liutang 54 government department 107–108, 127, 130, 179, 181, 188 institution 179, 181, 188 subsidies 93–96, 100, 102, 104 graduation rate/s 27, 33, 35, 37, 44 granting residence 119 gross enrollment rate 79–81, 83–85 growing old before growing rich 25, 90, 105 growth accounting equation 25 growth effect/s 25, 27, 30–34, 36–38, 40 Guangdong 98, 111, 155, 167–168 Guangxi 115, 168 Guangzhou 57, 160, 177 Guo Zhigang 28

199 healthcare 103, 107, 109–110, 112–114, 117–118, 120, 180 hidden unemployment 134–135 high income countries 89 higher education sector 79 high-income economies 66, 69–70 high-skilled urban labor 50 workers 55, 60, 147 high-speed growth 135 homestead land 117, 120–121 Hong Kong-owned enterprise/s 167–168, 171, 192 hours of work 50 household registration/s management 117 system, reform of 31, 38, 49–51, 59, 64–66, 86, 108–109, 111, 117, 149, 151–152 housing security 109, 118, 120 Hsieh, Chang-Tai 39 Hu Ying 92–93 human capital 24, 27, 29, 33–37, 40–41, 44, 59, 70–71, 73–78, 82, 85, 116, 132, 142, 147–148, 160, 175 accumulation of 33, 35, 70–71, 73, 77, 142 characteristics 160, 175 investment/s 33 is accumulated 37 returns to 147 stock 147 Hunan 100, 168 imbalances in urban and rural educational development 78 Imbs, Jean 73 implementation 40, 80, 82, 84, 90, 92, 96–97, 104–105, 109, 113–114, 116, 118, 148, 155, 189–190 incentive compatibility/incompatibility 26, 38, 151–152 incidence rate 157 incidents triggered by labor conflict 155, 164–165, 167–170, 172–173 income/s distribution 26, 148–149, 191

200 income/s (cont.) per capita 25, 93, 96, 100, 102–103 individual accounts 91–92, 95–96, 101–102, 106 individual contribution/s 91, 93, 95–96, 102–104 individual’s contribution 115 industrial restructuring 135, 171 sector/s 8, 74 structure 75, 147, 167 structure changed 138, 148 transfer 167, 191 upgrading 38, 85 167 worker community 171–172 industrialization 46, 70, 73, 80 inflow of migrant labor 57, 62 informal economy 98 employment 92, 132, 182 work 119 informally employed 92 innovate 35, 107 innovating its systems and institutions 31 innovating the country’s institutions or policies 172 innovation 30, 77, 85, 111 innovation and technological improvements  77 innovation in the management model 111 innovative 39 input of production factors 30 instability 98, 130 Institute of Population and Labor Economics  160, 174–175 institutional barriers 25, 38 changes 26, 143 design 90, 98–99, 101, 105, 119, 173 dividend/s 36–40, 49–51 exclusion 116 fragmentation 105 framework 47, 99, 105 functions 47 improvements 116

index intervention 82 issues 172 legacy/ies 46, 97 obstacles 147 policies 108 reform 25, 50, 90 segmentation 105 institutional and historical legacies 90 institutionalizes coverage 90 institution-building 82, 98 institutions related to China’s old-age insurance system 90 institutions to do with social protection 50 insurance coverage 17, 90, 92, 97, 99, 102, 104 integrated basic old-age insurance scheme/ system for rural and urban residents/ populations 104, 106 integrated planning 49 integrated rural and urban development 66 integrated rural-urban development 108 integrated rural-urban planning 86 integrated system for rural and urban residents 104 of basic protection for urban and rural populations 104 integrating the urban and rural labor markets 108 integrating urban and rural 86 interest rate liberalization 39 International Labor Organization 127–128 International Monetary Fund 150 investment/s in education 81 in human capital 77, 82 of public resources 85 in the various stages of education 77 Ireland 25 iron rice bowl 130, 134, 189 Israel 25 Japan 23, 30, 71, 77, 135 Jiangxi 115, 168 job vacancies-to-jobseekers ratio 141 job-quality decile 74

index junior and senior middle school graduation rates 37 junior middle school eductation 18–19, 77, 83, 142 Kaldor–Hicks improvement/s 27, 152 knowledge 33, 51, 61, 85–86, 144 Krugman, Paul 144, 150 Kuijs, Louis 24 labor allocation of 47 benefits 171 characteristics 164 conflicts 154–155, 164–165, 167–170, 172–173, 191 contract/s duration of 183–184 Contract Law complying with 189 enforcement of 190 implementation of 189 understanding of 175, 177–178, 182, 189 costs 76, 189 crunch 59 demand exceeding supply 142 dispute/s arbitration 156–159, 164, 192 cases 155–159, 161, 170 Mediation 155–156 Resolution 154, 159, 162, 164 Arbitration Law 155–157, 171, 174 distribution of 136 exploitation 171 flows 48, 59, 63, 71–73 force participation rate 24–25, 27, 29–31, 37–38, 64, 78, 126, 129, 149 inflows 60 law/s 157, 192 market conditions 50, 72 environment 49 imperfections 132 institutions 48, 134

201 is undergoing a transformation 55, 133 restrictions 59 returns 76–77 situation/s 85, 125–128, 142 migration 52, 57, 59, 61, 119 ministry 131 mobility 38, 47–49, 51, 66 policy/ies 172–173, 191 protection 157 relations institutions 173 management 165, 192 mechanisms 155 resources 59, 132, 144 security 154 shifts 71–72 reallocation 72–73 shortage/s 30, 60, 75, 134, 141–142, 144, 171 standards 154, 191 supply 25, 27–31, 38, 50–51, 58, 78, 133, 142, 149 supply and demand 51 surplus 134–135 survey 3, 140, 159–161, 174–175 transfer 23, 52, 72, 107, 135, 149 unions 172–173, 191–192 utilization of 132 wages 157–158, 190 labor-intensive economy 70 industries 145, 167 manufacturing industries 144 secondary and tertiary sectors 147 sectors 51, 73–74, 76 land appropriated 103 security 95 use rights 121 system reforms 121 latecomer advantage 31, 147 Latin American 71 layoffs 130

202 left-behind children 48, 59 elderly 48, 59 legal rights of workers to be protected 190 less-developed countries 77 Lewis, Arthur W. 133 Lewisian dualistic economy 55 turning point 51, 59, 133–134, 144–145, 150 Li Keqiang 26, 41, 127, 131, 139 Liaoning 91, 168 litigation 156, 159 Liu Mingxing 54 living arrangements 12 living expenses 3, 10–11, 13–14, 20 local government/s 38, 48–49, 92, 94, 96, 114–119, 121, 130, 141, 151–152, 169, 173, 192 migrant worker/s population 3 urban households 51, 160 workers 63, 159, 161–162, 164, 175, 177, 180, 182–187, 190 low income 132 lower-middle-income 89 lowly-skilled 51, 61 low-skilled labor 60 workers 55, 60, 147 Lu Yang 23–25, 27, 29, 44, 126, 146, 150 Macau-owned enterprise/s 167–168, 171, 192 macroeconomic 90, 125–126, 132–133, 136–137, 139, 141, 143, 146, 148, 172, 191 circumstances  133, 136 cycle 141 fluctuations 132, 137 policy/ies 125, 146 policymaking 172, 191 slump 90 macro-economy 125, 130, 132–133, 137–138, 142, 149

index managing labor relations 170, 172–173, 191 mass incidents triggered by labor conflict 168 the population 47, 49 manufacturing 8–10, 16, 19, 56, 70, 74, 142, 144–145, 148, 166, 171, 180 marginal productivity of agricultural labor 71–72 of labor 71–72, 134 market demand 132 economy 92 failures 82 mass incident/s database of the Chinese Academy of Social Sciences 165 triggered by labor conflict 155, 164–165, 167–170, 172–173 triggered by this labor conflict 154 material capital 33 maternity insurance 16–17 mature economies 56 mediate/d 156–157, 159, 169, 192 mediation 154–159, 169, 171, 174, 192 medical and old-age insurance systems 94 medical insurance 16–17, 109–110, 115 scheme for migrant workers 101 for urban employees 90–94, 101, 105 for urban residents 90–94, 105 offered to urban employees 98 system for migrant workers 113 medium-sized cities 6, 19, 109, 117, 127, 140 megacities 109, 117–118 Mexico 78 middle-income trap 65, 70–71 middle school 18–19, 33, 37, 44, 55, 70, 72, 75–86, 93, 109, 142, 147 migrant employment  56 inflows 46, 66, 119 labor 54–55, 57–58, 61–63, 98, 110, 114 population 48, 107–110, 112–120

index worker/s 175, 180 (nongmingong) population 3 Flows 6 household/s 111, 160, 175 shortage 136, 171 supply of 149 migration rate 48, 59 minimum living standard scheme 101, 105, 115 minimum package of reforms 40 minimum wages 141 Ministry of Human Resources and Social Security 127, 141, 156–160 Ministry of Labor 130 Ministry of Public Security 47 mismatch in skills 140 mixed ownership reform 39 mobility 38–39, 47–49, 51, 66, 73, 98, 104 moderately prosperous society 107 monitoring survey of migrant workers 137 multinational firms 170 multistage random sampling 160, 174–175 municipalities 6, 11–13, 97 National Bureau of Statistics 3, 55, 59–60, 126, 129–132, 136–139, 157–160 National New Urbanization Plan 59, 64–66, 108 National People’s Congress 47 nationwide migrant worker monitoring survey 58 nationwide monitoring and warning system 191 nationwide monitoring survey report on migrant workers 3 natural unemployment 24, 134, 138–140, 147 negotiation/s 156, 159, 169, 173, 191 neoclassical economic theories 144 economy 55, 144 growth theory 30, 50, 60 neoclassicism 133–134 new form of urbanization 151 new model of urbanization 48, 65 new norm in the labor market 146

203 new old-age insurance scheme for rural residents 90, 93, 95, 97–99 new rural cooperative medical scheme 90, 94 new rural cooperative scheme 94–95, 100–101, 104–105 new rural old-age insurance scheme 95–97, 99, 102–104 new technologies 35, 39 new urbanization strategy 107–109 New Zealand 78 new-generation migrant workers 3, 18–19, 148, 174 non-agricultural employment 74 jobs 74 sector 72, 133 non-governmental labor organizations 169, 173 non-material capital 33 Norway 25 OECD countries 78 of productivity 76, 145 old-age and medical insurance for urban employees 90 schemes for residents 115 system/s 89–90, 93, 95, 97, 99, 101, 103, 105–106 dependency ratio 23–25, 28, 30 insurance scheme/s for migrant workers 101, 103 for rural and urban residents 104, 106 for urban employees 90–92, 96–99, 101, 104–106 for urban employees and residents  103 for urban residents 90, 92–93, 97, 99, 102, 105 insurance system 90–92, 98 population/s 29, 98 security 30, 102, 118 support 48, 93, 105, 109, 112 older-generation migrant workers 19–20

204 OLS regression 57 one child policy 40 one percent population survey in 2005  74–75 open competition 46 ordered logit model 187 outflow/s of labor 48, 93 outgoing migrant worker/s populations 3–4 Outline of China’s National Plan for Medium and Long-Term Education Reform and Development (2010–2020) 78, 83 output 24, 50–54, 57, 60–62, 64–66, 72, 142–143 overemployment 142 ownership structure of the firm 178, 180, 187 Pareto improvement/s 152 participants 91–93, 95–97, 99–101, 103, 105, 119, 166, 171, 192 participated 92, 98 participating 16, 64, 91–92, 98, 105, 110, 160 participation in labor 50 rate 16–18, 24–25, 27, 29–31, 37–38, 41–44, 64, 78, 95, 103, 126, 129, 149 pay as you go 105 payout/s 92, 96, 98–102, 104–105 Pearl River Delta region 134 per capita incomes 25 Peri, Giovanni 46 n. 3, 55 n. 17 performances 62 Perkins, Dwight 53 n. 9 perpetual inventory method 53–54 plan 103, 109, 139 planned economy 46, 97 points system for household registration 111 policy/ies combination 36–37 differentiation 118 discussion/s 90, 101 framework 110, 116 implementation 113 measures 43–44, 71, 73, 95, 109, 118, 191 of “two priorities” 116

index research 108 simulations 41–42, 89 suggestions 90, 101–102, 155, 191 trends 90 Politburo of the CCCPC 66 polytechnics 93 population aging 24, 30, 48, 89–90, 93, 97, 105 ages 24, 29, 33, 35, 79, 89, 97, 100, 134, 176, 178, 183–186 censuses 78, 148 control/s policy 27–30, 37 development 40 flow/s 46, 48, 52, 59, 98, 119–120 growth 23 management 49, 115, 120 migration 52 mobility 48, 104 movement 64 policy 89, 150 projection 27–28, 81 registration 47–49, 191 surveys 140 transfers 151 transformation 86, 89–90 Portugal 25 potential economic growth rate 31, 43 potential GDP 145 potential growth effect 33 potential growth rate/s 24–42, 145–147, 149–150 prefectural cities 6–7, 12–13 prefectural level 6, 19, 53–54 premium/s 91–94, 96–97, 99–100, 104, 117 pressure on employment 126, 141–142 primary school 33, 44, 180, 187 priority in reform 40 prisoners’ dilemma 118 private enterprise/s 134, 168 private firms 39 private non-enterprise units 91 production, efficiency of 39 production factors accumulation of 71 supply of 25, 38, 145, 147

index productive efficiency 31, 35, 38–39, 65, 71 productivity 24, 38–39, 46, 49, 51–52, 55, 71–73, 76–77, 134, 145–147, 149, 154 progress of reform 115 property rights of rural migrants 120–121 proportion of females 48 protect their rights 3, 155–156 protection of the labor 191 of workers’ rights 156 to the legal rights 190 provincial capitals 6–7, 11, 13 public finance 82–83 public institutions 91, 104 public policy reform 149 public resources investment 83–84 public service/s equal access to 112–119, 121 policies 114, 118 sector 192 standards 51, 114, 118 spending on education 80, 82 Purchasing Manager/s Index (PMI) 142 Qu Xiaobo 46 quotas 111 raising human capital 34, 36 rapid economic growth 74, 78, 143 rapid growth of the Chinese economy 69 rapidly-growing economies 69 rate of return on capital 23 rate of return to capital 39, 144 reallocate resources 149 reallocation 38, 71–73, 149 effects of labor flow/s 71–73 of labor 71–73 reason 23, 26, 38, 51, 61, 98, 130, 141, 147, 161–162, 164, 167 reemployment service centers 130 reform and opening up 66, 71, 74, 78, 135 reform dividend/s 23–28, 30, 32, 36–40, 147–152 reform objective/s 47, 66 reform priorities and methods 38

205 reform process 47, 118, 151 reforming institutions 155 the household registration system 47, 152 the old-age insurance system 91 reform/s costs of 91, 118, 151 in areas such as employment 108 to the economic system 71 regional barriers 111 differences 100, 104, 106, 111, 118 distribution 167–168 GDP 52–53 GDP deflator 52 imbalances 107, 114–115 inequalities 114 registered and rural migrant populations 110 and the surveyed unemployment 137 population 59, 64, 66, 86, 110 unemployment 126, 128, 130–131, 138–139 Regulations on the Implementation of the Labor Contract Law 190 reimbursement/s benefits 100 replacement level fertility 28 reservation wage 50, 59 residence permit 120 policy/ies 111, 117, 119 registration 47, 109, 111, 113 resident population 48, 50, 59, 64, 66, 109–110 resolution of mass incidents triggered by labor conflict 169 resource/s allocation 26, 30, 71, 173 reallocation efficiency 38 restructuring 60, 135, 171 retirees 91–92 retirement age 29–30, 35 retrench 139, 170 retrenchment 130, 167

206 revealed comparative advantage index 145 rights 3, 101, 108–109, 117, 119–121, 154–156, 167, 171, 173–174, 190–192 Rights and Benefits Protection 15, 17 rights protection 154–155, 173 rural and urban household registrations 111 and urban populations 99, 109 and urban residence 109 construction land 121 household registration 47, 116 income per capita 100, 102 labor mobility 48 survey 3 transfers 135 migrant/s and registered populations 110 inflows 119 labor 58 population, equal access to basic public services 107 worker population 108 to education 119 old-age and medical insurance 89, 93, 97, 109 population transfer 50 was aging 93 will move to the cities 103 regions 84 resident population 48, 59 residents 38, 47–48, 90, 93–99, 102, 104–106 surplus labor 132 workers 3, 60, 64 Workforce 3, 5 rural-urban 48, 97–99, 107–108, 121 and regional convergence 121 income gap 98 integration 98 labor transfer 107 planning 86 pooling 102 segregation 97

index savings rate 24, 28 school enrollment rates 33, 36, 77 secondary and tertiary sectors 51, 135–136, 147 secondary education 118 sectoral distribution 9–10 sector/s 8, 11, 16, 18, 39, 51–52, 61, 71–74, 76, 79, 82, 103, 133, 135–136, 142, 147–149, 178, 180, 182, 187, 192 segmented labor market 51 segregating the urban and rural populations  191 self-employed migrant workers 8 self-employment 9 senior middle school/s education compulsory 78, 80, 82, 84 universalizing 80, 82 enrollment rate/s 77–78 service sector/s 8, 180, 192 Shaanxi 100, 168 Shan Haojie 54 Shanghai 57, 107, 113, 116–118, 160, 168, 174–175, 177, 183–185 Shanxi 100, 168 share the costs 151–152 Shenyang 160, 174–175, 177, 183–185 Shenzhen government 112 shortages in the labor supply and demand relationship 171 simulation/s 27–28, 30, 32–33, 35–36, 40–42, 89, 149–150 Singapore 25, 71 sixth national population census 28, 55, 78, 134 Sixth Plenary Session of 16th CPC Central Committee 154 skill intensity index 55, 57, 62, 64 skilled 50–51, 55, 60–61, 119, 147 skilled-labor 55 skills mismatch 34 training 7–8, 35, 40, 149 skills-intensive and knowledge-intensive sectors 51, 61

index slowdown in the economy 141 small and labor-intensive firms 40 small cities 7, 12–14, 108–109, 114, 117–118 small towns 7, 12–14, 108 social assistance 48–49, 95, 105 social harmony 154 social income, distribution of 172 social insurance contributions 98 for the unemployed 130 Law 97 participation rates 16–18 schemes 98, 105, 110, 115–116, 119 social organizations 91 social pool/ing  and individual accounts 91–92, 95, 106 with individual accounts 91, 101 social protection policies 172 policy measures 95 schemes or policies 101 system 49, 101–102 social security coverage 38 equal access to 149 policies 000 system/s 92, 103, 105, 109 social welfare 96 socioeconomic development 40–41, 102–103, 110, 152 structure 46 sole proprietor/ships 119 South Asian 71 South Korea 71, 77, 135 Southeast Asian financial crisis 125, 130 Spain 148 specialization 50–51, 60–61, 73–74 specialized 35, 39–40, 74, 112–113 Spring Festival 136, 149 stable employment 119 standards 51, 69, 83, 103, 110, 113–114, 117–118, 131, 154, 171, 173, 191 State Council 48, 91, 97, 99, 102, 104, 108–109, 132

207 state organs 91, 104, 164 State-owned Enterprise/s, reform of 41, 149 stimulus measures 125 policies 148 program 62 strikes 191 structural adjustment 60, 62 changes 145 transformation 85, 107 unemployment 35, 132, 134, 138–140, 142, 148 upgrading 75 sub-provincial cities 6 subsidy/ies 93–96, 100, 102, 104, 120 substitution, elasticity of 55–56, 61 suggestions 90, 101–102, 104, 107, 155, 191 Summer Davos forum 127 supply and demand factors 142 relationship in the labor market 191 supply factors of production 145 supply structure of human capital 75 surplus agricultural labor 31, 59, 72 surplus labor hidden unemployment 135 resources 59 transfer 149 surplus rural labor 50 surveyed unemployment 127–132, 137, 139–141 sustainability 90, 100–101, 104–105 sustainable 26, 38, 49, 62, 101, 103 system innovation 30 Taiwan owned enterprises 167–168, 171, 192 talent pool 110, 116 targets of the reform 47 technical school/s 93 technological advances 30 improvements 77, 147 progress 31 temporary residence permit 120

208 theory of institutional change 26 Third Plenary Session of the 18th CPC Central Committee 101, 108 third-tier 115 total factor productivity (TFP) 24 total fertility rate (TFR) 27 training 7–8, 27, 33–37, 39–41, 112, 120, 128, 149–150, 157, 169, 173, 192 transfer 23, 50, 52, 59, 64–65, 72, 107, 109–110, 121, 135, 149, 167, 191 transferred labor 72 transfers of agricultural labor to non-agricultural sectors 74 transformation 48, 55, 70, 74, 77, 85–86, 89–90, 97, 107, 133 tripartism 173 tripartite system 154, 192 two children for all 28, 40–41, 89 two children for only-child parents 28, 37, 40–41, 89, 149 underemployment 132–134 unemployed urban residents 90, 93 unemployment assistance 128 benefits 130 insurance 130 rate 24, 125–134, 137–141, 148, 152 situation 127 training 128 unions 154, 169, 172–173, 191–192 United States (US) 39, 46, 78, 127, 129 universalization 70, 77, 80, 83 unpaid wages 17, 162, 167 upper-middle income 69, 89 urban and rural labor markets 58, 108 medical insurance schemes 101 participants in the basic old-age insurance schemes 105 population/s 47, 49, 78, 86, 102, 104, 191 residents 38, 47–48, 97, 99, 102, 104–105 social insurance programs 101 systems 49, 117

index urban employees 90–92, 96–99, 101, 103–106, 110, 139, 172 employment 59–61, 92, 108, 137–138 household/s registration 38, 51, 92, 98, 111, 116, 149 labor force 137 market 48, 58, 60, 63, 76, 127, 137, 139–140, 172, 182 population 48, 90, 92–93, 99, 109 registered population 59, 64, 66, 86, 110 unemployment 126, 128, 130–131, 138–139 resident/s households 55 social security 92 unemployment 139–141 workers 63, 139, 159, 161–165, 175–178, 180–190 urbanization costs of 152 gap 64 of migrant workers 108, 149, 151 process 59, 120 urbanize migrant workers 31, 38, 41, 151 utilized 46 vocational education 83–86, 117 vocational middle schools 93 Wacziarg, Romain 73 wage/s convergence 147 increases 38 waged employment 75, 171 wages and welfare benefits 155, 190 wages of migrant workers 134, 185 wages or welfare benefits 167 Wang Meiyan 89, 136, 154 Wang Xiaolu 53 welfare benefits 47–48, 155, 160, 167, 172, 175, 190 investments 118 Wen Jiabao 125, 127

209

index western region/s 5–6, 10, 16–17, 19, 94, 96, 100, 118, 167–168, 191 work duration of 15 injury insurance 16–18 units 12–13, 15–17, 91 workers’ individual characteristics 178, 180, 187 working hours 51, 55, 57, 62–65, 162, 167 working-age population 23–24, 28, 40, 78–79, 134, 137, 144, 147, 171 workplace insurance 90, 137 workplace social insurance system 92 World Bank 69, 89, 102, 104, 143 Wuhan 160, 174–175, 177, 183–185 Wuxi 175

Xi’an 57, 160, 174–175, 178, 180, 183 Xie Danyang 54 Yangtze River Delta region 134 years spent in education 33, 35–36, 74–75, 77–79, 148 Yichang 175 youth population 92 Zhang Jun 53–54 Zhang Yuan 53 Zhou Xiaoguang 154 Zhu Rongji 125 Zhuhai 175