Development Drivers and Limitations
Global Development Network series
Edited by Natalia Dinello and Shaoguang Wang
Chapter 8: Labor Market Informalization and Implications for Sustainable Growth
Du Yang, Cai Fang and Wang Meiyan
Du Yang, Cai Fang and Wang Meiyan In the late 1990s China’s labor market entered a steep decline characterized by increasing unemployment and reduced labor-force participation. The severe unemployment crisis has three causes. First, state-owned enterprises (SOEs) lost their comparative advantage, leaving them unable to fully utilize their production capacity, and they began operating at a loss. Second, the radical reform of the SOE guaranteed-employment system, known as the ‘iron rice bowl’, further exacerbated unemployment. Third, massive numbers of rural laborers have migrated to cities to seek urban jobs, creating competition for urban labor markets. As a result, several million workers have been laid off from SOEs, who either remain unemployed or exit the labor force altogether. At the same time, researchers have expressed doubts about official statistics on employment and unemployment, uncertainties which create misunderstandings about the real status of labor-market developments and give the impression that unemployment in China is not manageable. Meanwhile, this uncertainty prevents policymakers from identifying priorities for coping with the situation. To properly understand China’s labor market, observers must bear in mind that the Chinese economy is rapidly growing and drastically changing. With the fastest growth rate in the world, China will inevitably witness an increase in total employment, although the accompanying industrial-structural change and institutional transition have two effects on current workers. First, industrial-structural adjustments required by World Trade Organization (WTO) membership commitments will spur the economy to follow its comparative advantage – labor-intensive industries – and therefore should create more jobs. Meanwhile, the same...
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