Ebook Economic liberalization and the public-private earnings gap in urban China
The urban labor market in China has been affected by tremendous changes at the turn of the century. The state sector reform was speeded up after the Chinese Communist Party’s 15th Congress held in September 1997 by encouraging both the corporatization of large SOEs and the restructuring of small SOEs. Moreover, the same Congress recognized private enterprises as an important component of the economy and stressed the rule of law. The direct consequences of these changes on the urban labor market have been the unprecedented growth in unemployment and the reallocation of labor from the public to the private sector.
Whereas employment in the public sector rose continuously up to 1995, it started decreasing in 1995, with a huge acceleration in 1998, the pivotal year in State-owned units reforms (-18% for this only year). Since then, the number of workers in both state-owned units and urban collective enterprises has kept decreasing, from 144.6 million in 1995 to 83.3 million in 2002, representing a decrease of 42 percent. In terms of employment share, the public sector share dropped from 83% to 55% over the period. In contrast to the downsizing of the public sector, the private sector share in urban employment increased from 17% in 1995 to 44% in 2002.
The growing importance of the private sector came from the development of private or individual enterprises and foreign-invested enterprises, as well as from the emergence of new ownership forms from the mid-90s, including limited liability corporations and share-holding corporations. Employment in foreign-invested enterprises grew by nearly 1.5 million (from 5.1 million in 1995 to 7.6 million in 2002) and employment in private and individual enterprises more than doubled (from 20.4 million in 1995 to 42.7 million in 2002) (NBS, 2003a). Moreover, the number of those employed in new ownership forms increased from 3.2 million in 1995 to 16.2 million in 2002. These figures indicate that there has been a significant shift in the employment structure at the turn of the century and that China experienced a somewhat similar situation to Eastern European countries in the process of moving the labor force from the public to the private sector.
Earnings differentials between private and public sectors in European transition economies have recently been documented by a literature highlighting the mechanisms through which labor reallocation has been taking place in these countries (Adamchick and Bedi 2000; Falaris 2004). For Poland, Adamchick and Bedi (2000) find a wage premium in favor of the private sector in 1996, the premium being especially high for university-educated workers. The authors interpret this result as implying further difficulties for SOEs to retain skilled workers, as well as giving incentives for moonlighting in the public sector and thus compromising the overall efficiency of the sector.
In the case of China, the sharp decrease in employment in the public sector is a recent phenomenon. At the beginning of the transition to a market economy, reforms in the labor market did not provide strong incentives for workers in the state-owned sector to move out, thus resulting in labor immobility until the mid 90s (Zhao 2002; Chen et al. 2005). Evidence show that one of the main reasons for this immobility lies in the higher-than-market-cleanning-level earnings premium provided to workers in State-owned units.
The main questions addressed in this paper are the following: How has this situation evolved with the acceleration of reforms at the turn of the century? Is the state-owned sector still much protected? What has been the evolution of wage-setting behaviors in the private sector?
The paper is organized as follows. Section 2 provides information on the Chinese labor market at the turn of the century and describes the data and variables. Section 3 presents the methodology used to account for public-private earnings differentials. Section 4 discusses estimations results for earnings functions in the different categories of enterprises and section 5 presents decomposition results of the evolution of earnings gaps between enterprises of different ownership. Section 6 concludes and stresses key policy implications.
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