Contrasting paradigms: segmentation and competitiveness in the formation of the chinese labour market

Abstract

An urban labour market is in the process of being formed in China. The objective of this paper is to analyse the stage that it has reached. A 1999 household survey is used to investigate whether the labour market has three tiers comprised of recently retrenched and re-employed urban workers, non-retrenched urban workers, and rural–urban migrants. It tests whether wage levels and structures differ across these categories of worker. Panel data are used to model the evolution of the wage structure and, specifically, the impact of retrenchment and re-employment. The results indicate that non-retrenched urban workers enjoy a wage premium, although migrants receive similar returns to education. Re-employed workers receive no return to education and appear to have lost out on the wage rises enjoyed by the non-retrenched. There is evidence to suggest that the urban labour market is segmented into these categories, which differ in their openness to market competition. The urban labour market has a long way to go before it is fully competitive.

Keywords:

• Chinese labour market
• retrenchment
• unemployment
• re-employment
• wages
• migration
• JEL classifications: J31
• J42
• O15
• P23

Acknowledgements

The authors are grateful to the Department for International Development, United Kingdom, for their funding of the project (Escor grant R7526) and the Ford Foundation for their support of data collection.

Notes

 This year was chosen because it marked the appointment of a new Prime Minister and the beginning of significant moves to reform the SOE sector. Of the 1364 workers in the survey who had ever been laid-off, 96% had been laid-off in or after 1992. Twenty-five were laid-off in 1992, compared with nine in the year before and 55 in 1993. The ten-year SOE reform programme began officially in 1994, when 127 workers in our sample were laid-off. 1998 saw the largest number of redundancies in our sample, with 305 workers losing their jobs.

 These explanations do not reflect a lack of labour market competition. Hence, even if we find differences in the remuneration of the re-employed and the non-retrenched, we cannot necessarily conclude that this is evidence of weak competition. However, the scale of retrenchment in urban China in the 1990s still means that it is of interest to explore its impact, even if we cannot draw inferences from our results about competitiveness or segmentation.

 We were not able to test for the selectivity of rural migrants, since we lack matching data on rural residents who did not migrate. There is also a wider issue of there possibly being unobserved differences between people with urban and rural hukou, but since residence registration is largely an accident of birth, this issue is not amenable to the standard econometric techniques for correcting for sample selectivity.

 If the positive correlation does not arise by chance, it could arise because workers who, through good information or contacts, had attractive jobs lined up were allowed to opt for redundancy, or because the (continuing) threat of retrenchment raises personal effort and hence wages.

 The lower return to education in the historic wage function may partly reflect a rise in returns to education over time. In addition, retrenched workers tended to be more concentrated in occupations where education is less rewarded. For example, over half of them were industrial workers compared with only a third of the non-retrenched. Including interaction terms between education and occupational dummies in the historic wage function for the non-retrenched revealed that industrial workers had significantly lower returns to their education than professional and technical workers.

 We calculate the percentage effect of a dummy variable with coefficient β to be exp(β)-1.

 Self-reported data on health are probably subject to systematic biases compared with objective clinical assessment. However, some reviews have found them to be as good a predictor of mortality as more objective measures (Idler, 1991; Idler & Kasl, 1991).

 The results of this exercise are not reported because of space limitations. The authors are willing to provide the table on request.

 Here we are essentially engaged in an exercise in decomposition following Oaxaca (1973). As is well known, there is a potential index number problem with such exercises. In this case, mean characteristics – including occupation and sector – explain less of the wage gap between the non-retrenched and the re-employed if we evaluate using the wage structure of the re-employed.

 With the recall data on wages, we take only observations where the worker was employed for the whole year. Years when workers were sacked or re-employed are dropped from the panel. This is for data reasons: the survey does not provide recall data on months worked and thus we cannot infer a reliable monthly wage rate. We thus have an unbalanced panel, where not all workers in the sample are included for all five years.

 The fixed effects estimator eliminates bias from time-invariant unobserved factors that have a proportional effect on wages. Bias from factors that influence wages in other ways – for example, additively – will not be fully eliminated.

 We do not correct for the selectivity of these two groups of worker because this can be viewed as giving rise to differences in the time-invariant unobserved characteristics of the individual, α _i , which are eliminated by the fixed effects estimation.

 Where workers are unemployed for a whole year, they have no wage and are thus not included in the panel analysis for that year (hence our panel for the retrenched workers is unbalanced).

 Where a worker works in both their pre-retrenchment job and their re-employed job in the same year, we use the re-employed wage rate for that year.

 There has been a change over time in the recruitment policy of the Communist Party, with recent attempts to welcome businessmen and other non-conventional recruits into its ranks. However, this cannot explain the panel data results because we treat Communist Party membership as a time invariant variable (we observe it only for 1999 and assume it is unchanged since 1995). In such a case, the entrepreneurial characteristics of recent recruits can be regarded as a fixed effect and thus controlled for in the panel estimates.