Reform of China's Labor Market

Introduction

The China’s labor market has been evolving into a more sophisticated labor force from the previous mass of huge unskilled labor. The transformation in this labor market over past few decades has been focused on a market-driven system which has also been experiencing massive economic reforms in the country. The labor market reform is best understood after reviewing the changing nature of urban and rural economies whose segregation was enhanced by the household registration system (hukou)  enforcement where those people who are born in rural areas engage in agriculture (non-agricultural houku ) and those who born in cities were referred to as non-agricultural hukou. In the cities, life-time employment was assigned by the state which also determined the wages while in the rural areas, commune-based production system determined employment and wages.  With economic reforms beginning in 1970’s, the need for reforms on the labor market started arising as more skilled than non-skilled workforce was being sought. This paper aims at discussing the emergence and continuity of labor market reforms in China and how these reforms have been playing out presently as the nature of market changes to align itself with the standards in the global arena.

In the communist era, all the people who had attained the workforce age were expected to be employed so as to contribute to the common good, and this saw almost everyone who was able being employed. The introduction of economic reforms led to increased labor mobility and changes in incentive systems. The labor mobility enabled many workers choose to work in the urban areas which also increased the likelihood of unemployment, and the effects of this mobility is indicated by the employment –to population ratios (Meng, 2012). The labor market has been on the move ever since with the recent migration to the urban areas being mostly voluntary unlike in the 1950s when migration was largely forced. The migration to the urban centers was mostly driven by the income differential as the people considered that it was likely to gain employment or higher wages in the urban areas than in the rural areas. Hence, in spite of the high urban employment, which stood at 83 to 75 percent for men and women respectively in 1988, the rural people especially continued to seek better employment opportunities in the urban areas (Meng & Kidd, 1997). Initially at the time of urban unemployment, over 100 million rural workers migrated to cities for employment but the unemployment remained fairly low. Currently the, the unemployment in the urban sectors can be attributed to the mismatch between the available jobs and the skills. The younger generation has had to bear the biggest weight of being unemployed although the percentage has been reducing as many of them attain high school and university education. Unemployment has been experienced by the older workers, where for men the employment decline happens in their 50s while for women, it occurs at their 40s (Meng, 2012). Many of those adults who lost jobs were victims of economic restructuring, where they left the labor market after being discouraged.   

The China’s economic system reforms have made it possible for development of labor market. The Ministry of Labor made a proposition in 1994 that the labor system reforms would be promoted so that to slowly establish a labor system that suits the market economy demands (Seeborg, Jin, & Zhu, 2000). This has led to the emergence of a labor market which is market oriented over the past few decades. Due to these reforms more laborers are being distributed through the market system so that this system has been having a great influence on how labor is being allocated and adjusted.  For instance, the selection of workers, rural enterprises wages distribution, private businesses and joint ventures are majorly adjusted by the market system (Seeborg, Jin, & Zhu, 2000). Moreover, there is increased expansion in autonomy among the state owned institutions and enterprises so that they are recruiting new employees and distributing their wages.  Many workers are also being offered the opportunity to work in the places of choice and this has led to more and more of them are choosing to be employed in ownership units through the market system (Meng, 2012). As noted earlier, there is an increased mobility of workers especially over the past 30 years and this has been enabled by various factors.  There is a dual track policy which has been adopted, where market is combined with guidance and planning in labor and employment. Another factor is that market system is determining and regulating how the college graduates are distributed, where these graduates are required to look for jobs themselves in the market so that the government is not assigning these jobs as before. There are also issues of demoralized army personnel being able to join the labor market and the introduction of a system of labor contracting (Meng, 2012).  These changes indicates a shift away from the lifetime tenures system whose work incentives could be distorted. 

After the promulgation and implementation of Labor Contract Law, about all the workers enter into an agreement or contract with their employers. This implies that employers and employees have the chance to sign or dissolve their contract freely and this leads to increased human resources mobility in China. Presently, organizations have the freedom to recruit new management from the labor market and the managers have the freedom to move across regions or sectors.  Hence, a major reform that has been experienced in China’s labor market has been allowing the market system to determine the distribution of labor based on needs of employers and the skills of the workers which serve the need of the economy. If the market was to remain constrained, there would be breaking of the direct connection between labor productivity and human capital. If firms are unable to recruit or dismiss workers at will, it would be difficult to deal with shirking. In addition, if workers are unable to make choice on which jobs to take, they may end up on jobs that do not align with their abilities and interests and this may lead to mismatch between the worker and work functions. This may encourage a shirk behavior in workers.  Hence, without mobility of labor in China, only potential labor productivity may be measured by human capital. The introduction of labor mobility in China has majorly enhanced the productivity of labor force which in turn has led to better performance of both the state – owned enterprises and   private or foreign organizations.

Along with the reform on labor mobility has been the formation of market rates of wages offered to workers. The Chinese authorities gradually got rid of the businesses’ wage allocation policy based on issued command. This has seen various enterprises begin using the wage rates prevailing in the market – enterprise autonomous allocation – with a combination of macro-economic control by the government.  The pricing system, supply and demand and competition in the market are regulating the wage rates in accordance to the kind of work and occupation both in government ventures and private organizations. The state owned organizations and institutions, however, offer wage rates that are affected market rates and government decisions (LIN Yuan & Shaobo, 2014). Employees in the government owned enterprises have the freedom to move to foreign firms which offers higher salaries.  In addition, the enterprises owned by the state are gradually adopting to the wage rates prevailing in the market, so that their senior employees are earning higher salaries .Since some enterprises have accepted the operations of foreign and private firms systems’, they have allowed wages to be determined by the market. Various labor departments publish wage rates in the market so as to assist the state- owned firms to adopt the market-oriented system (LIN Yuan & Shaobo, 2014). These departments have to search in the market to get and provide reference to the firms owned by the government and this enables the adoption of market rate wage system.  The reforms in the wage rates were necessary to fit a competitive world market where people are paid wages that equals their marginal product value. According to the human capital theory, people will naturally invest in personal development through training and education so as to improve on their marginal productivity and hence, their lifetime wages and income (Meng & Kidd, 1997).  This indicates a direct link between variables in human capital and wages.  The adoption of market based wage rates ensures that China’s workforce put to use their total stock of human capital and this discourages people from shunning hard work and determination.  

Over the past few decades there have also been establishment of labor markets intermediate organizations and service outlets. Intermediate organizations form a major part labor market and an important aspect in smoothening operation of the labor market.  Over the last 3 decades labor market intermediate organizations like employment guidance, occupation introduction and arbitration of labor has emerged quickly. For example, there have been about 31,322 organizations offering employment guidance in China by 1996, which have provided such services to almost 90 million people.  A Public Employment Service Organization, which centers for talent exchange and employment agencies represent, has been the most essential part of employment service system in China (LIN Yuan & Shaobo, 2014). These kinds of organizations have expanded their functions from just introduction of jobs to offering career instruction, social insurance, employment training and even personnel services. Another important reform that is in progress is the development of organizations offering arbitration for labor disputes.   The development of these organizations is very important in a free labor market since they help to link the skilled or semi-skilled workforce with available employment opportunities that best suits those (LIN Yuan & Shaobo, 2014). The various organizations are also able to benefit from such developments since they can manage to hire workers who have skills for existing functionality and more so those who can drive productivity and growth.

Another reform in labor market has been the establishment of social insurance system, which has expended its coverage to include collective enterprises, not owned by the state and hence, includes all workers and different ownership systems. The source of funds for such system has shifted from being the sole responsibility of the government or concerned firms to combine contributions by individuals, enterprises and the state (LIN Yuan & Shaobo, 2014).  The pool of insurance has also been increased to the province level which enables a wide pool of social risk sharing. In addition, pension schemes have evolved from government basic pension to one that is provided by firms and employees depository pension insurance (LIN Yuan & Shaobo, 2014).  This enables employees in firms having varying economic profit to enjoy various treatments from social insurance if the employee can attain basic living standard.

 Labor market reforms have also been experience in the rural markets, which had experienced problems of pervasive labor incentive because of work being organized in communes and extreme cases of labor misallocation between urban and rural areas. The various reforms introduced in rural areas include replacing the production teams with households as the fundamental production units, officially increasing prices for agricultural produce and rural products’ markets liberalization. This was done through the Household Responsibility System (Fleisher & Yang, 2003). In fact, the introduction of these reforms offered the right conditions for rural industries booms and played a major role in emergence of rural labor markets. The shift to house-hold based system of farming from communes led to introduction of a link between work effort and compensation and hence, serving a solution to communes, incentive challenges. When the state introduced in the procurement for agricultural produces, there was injection of huge amount of funds into the rural areas, which created demand capital investment funds and industrial products(Fleisher & Yang, 2003).

These reforms introduced in rural labor market enhanced the sale of other products not related to funds and inputs for industries in the rural areas.  The workers are the ones who benefited the most from these reforms since the efforts they put in the production of firm produce could be repaid with higher incomes.  Various government deregulations in the labor market in mid 80s served as the catalysts for quick growth for rural enterprises. The expansion of rural markets meant that households had alternative opportunities for employment and they could seek employment opportunities that offered higher wages across the non-formal sector. The rapid increase of non-farming activities lead to a high growth in income of rural folks as the labor movements in these areas were not restricted to only local jobs.  In recent years, rural- to- rural workforce mobility has seen workers being employed places away from home villages and this represent a component of rural labor forces that is rapidly growing.

Conclusion

The reforms experienced in China’s labor market involves the mobility of labor, rates of wage , emergence of intermediate labor organizations and the pension systems. These reforms have been facilitated by opening of the labor market to the control of market forces, which determines the distribution of workforce and the determination of wage rates.  These reforms have influenced both the rural and urban labor markets, a fact that is seen in increased rural-to-rural and urban-to-rural labor movements. These reforms have provided the workforces an opportunity to choose where to work and the organization to choose the best skills that meets their needs.

Reference

Seeborg[*], M. C., Jin, Z., & Zhu, Y. (2000). The new rural-urban labor mobility in China: Causes and implications. Journal of Socio-Economics, 29(1), 39.

Meng, X. (2012). Labor Market Outcomes and Reforms in China. Journal Of Economic Perspectives, 26(4), 75-102. doi:10.1257/jep.26.4.75

Meng ,X., Kidd,M.,(1997). Labor Market Reform and the Changing Structure of Wage Determination in China’s State Sector during the 1980s. JOURNAL OF COMPARATIVE ECONOMICS 25, 403–421

 

 LIN Yuan, L., Shaobo, W., (2014). Reform and Challenges in China’s Labor Market.

 StudiesinSociologyofScienceVol.5,3,2014.128-132.Retrievedfrom: http://www.cscanada.net/index.php/sss/article/view/5181/pdf_64

 

Fleisher ,B., Yang,D.,(  2003).China’s Labor Market Stanford University. Retrieved from: https://pdfs.semanticscholar.org/f69b/738c4938978333a4983e7866517f21e133d3.pdf