Shock and Recovery in China’s Labour Market :Flexibility in the Face of a Global Financial Crisis

CEA Conference on Global Economic Recovery: the Role of China and Other Emerging Economies, University of Oxford, July 12-13, 2010

Albert Park, University of Oxford, CEPR, and IZAFang Cai and Yang Du, Chinese Academy of Social SciencesJohn Giles, World Bank and IZA

Presentation Goals

Document and interpret what happened to workers in China since the crisis Official data Firm surveys (PBC-CASS enterprise survey 2009) Household surveys (China Urban Labor Survey

2010) Discuss key employment challenges moving

forward Labor market shortage? Enforcement of labor regulations Labor market informality

China’s Labor Market Before the Crisis

Rising real wages for migrants since 2005 (reaching double digit increases)

Steady increases in rural-urban migration (145 million individual migrants in 2009)

Rapid informalization of the urban labor market (by 2005, >50% of urban workers were employed informally)

China implemented a landmark Labor Contract Law starting on January 1, 2008

Growth slowdown started in early 2008, before the crisis

National employment by registration status, 1978-2008

1978

1985

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

PublicNon-publicSelf-employedUnregistered

Reasons for rising informality By keeping workers off the books, employers

can avoid payroll taxes for social insurance programs (equal to 27% (18%) of wages for local (migrant) workers).

Young workers may prefer cash wages to social insurance coverage, esp. when benefits are not portable

Rise of the private sector (harder to monitor and regulate)

Massive inflow of migrants (less concern about protections for migrants)

China’s Labor Contract LawEffective: January 1, 2008 Labor Contracts

After 2 fixed-term contracts, or 10 years of employment, contract must be open-ended

Limits on probationary period (1-3 months depending on contract length)

Regulations on temporary work agencies (labor service companies

Severance conditions 30-day written notice Severance pay: one month’s pay for each year of

service (half month’s pay if less than 6 months), double severance pay for unfair dismissal

Global Economic Crisis and China’s External Trade

Monthly Changes of Total Value of Import and Export (billion USD)

0

20

40

60

80

100

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160

2006

.1

2006

.3

2006

.5

2006

.7

2006

.9

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.11

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.1

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.3

2007

.5

2007

.7

2007

.9

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.11

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.1

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.3

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.5

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.7

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.9

2008

.11

2009

.1

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.3

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.5

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.7

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.9

2009

.11

export import

China Quarterly Growth Rates

Quarterly on Quarterly Grow th by Sector (%)

0

2

4

6

8

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14

16

18

2004

.1

2004

.2

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.3

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.1

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.1

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.4

2008

.1

2008

.2

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.3

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.4

2009

.1

2009

.2

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.3

2009

.4

GDP Primary Secondary Tertiary

Growth was slowing prior to the crisis and rebounded quickly

China’s response to crisis Massive economic stimulus package Support to enterprises:

suspend tax payments social insurance contributions delayed and/or reduced credit expansion wage subsidies

Expansion of labor training programs Expansion of safety net programs (esp. rural

minimum living standards subsidies) Expanded social insurance coverage (including

portable pension and unemployment insurance for migrants)

China’s $560 billion stimulus package

recoveryconstruction

25%rural

infrastructure9%

keyinfrastructure

38%emission

reduction andenvironmental

protection5%

socialdevelopment

4%

innovationsand economicrestructuring

9%

housing10%

How did the crisis impact employment?

Job vacancy rates fell but bounced back quickly

Up to 20 million migrant workers lost jobs temporarily (MOA, NBS surveys)

2/3 of those losing jobs reemployed by summer 2009 (Rozelle et al., 2009)

Migrant employment in cities increased by 2.9% from 2008 to 2009 (to 145 million) (NBS)

By 2010, very low urban unemployment rates but lower labor force participation (CULS)

Job vacancies declined during crisis but bounced back quickly

Quarterly Ratio of Vacancy to Job Seeker

0.60

0.70

0.80

0.90

1.00

2001

.1

2001

.3

2002

.1

2002

.3

2003

.1

2003

.3

2004

.1

2004

.3

2005

.1

2005

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.1

2006

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2007

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2007

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2009

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2009

.3

China National Firm Survey, November 2009

Surveyed firms in 8 provinces: 4 coastal provinces (Shandong, Jiangsu, Zhejiang, and Guangdong), one northeast province (Jilin), one central province (Hubei), one northwest province (Shaanxi), and one southwest province (Sichuan).

Representative sample of >2000 manufacturing firms in 25 municipalities

Sampling frame: all firms who ever had credit relationship with any financial institution

Key collaborator: People’s Bank of China Research Department

Changes in employment, China firm survey 2009(% change from 6 months earlier)

Jun-08 Dec-08 Jun-09All firms 3.03 -0.53 2.87Non-exporters 3.27 0.68 3.20Exporters 2.76 -1.92 2.48By ownership: State/collective -6.05 -0.83 1.78 Private 2.61 0.99 5.40 Joint/Ltd/Other 3.70 0.65 1.70 Foreign 3.84 -4.55 4.30By size (#employees) Smallest quartile 2.11 0.48 3.41 Second quartile 3.00 0.28 3.20 Third quartile 3.00 0.16 4.16 Largest quartile 3.05 -0.72 2.63

Crisis hit exporters, foreign-invested firms, and larger firms the hardest.

Changes in employment of migrants versus local residents, China firm survey 2009(% change from 6 months earlier)

All workers affected by the crisis, but migrants more adversely affectedthan local workers, especially in exporting firms.

Jun-08 Dec-08 Jun-09All firms Migrants 4.76 -0.88 5.29

Local 3.23 -0.07 2.09Non-exporters Migrants 5.44 1.23 5.71

Local 3.51 0.06 3.35Exporters Migrants 4.22 -2.74 5.01

Local 2.80 -0.27 -0.01

What best describes your current employment situation? (China firm survey 2009)

Surplus Appropriate DeficitAll firms 5.05 59.86 35.09By ownership:

State/collective 35.15 53.26 11.59Private 4.55 57.33 38.12

Joint/Ltd/Other 2.55 69.90 27.55Foreign 1.65 45.36 52.99

Still very high labor demand, despite regulations and recent negative shocks.State/collective sector still plagued by surplus labor.

China Urban Labor Survey, February 2010

In each of 6 cities, survey 700 local resident households and 600 migrant households

In 5 completed cities, surveyed 13,000 adults, including 9000 local residents 5000 migrants

3-stage PPS sampling of urban sub-districts, neighborhoods, and households

Detailed enumeration of all dwellings in each neighborhood

Surveys directed by CASS, working closely with city Statistical Bureaus

Working hours and earnings before and after the crisis, (CULS, 2010)

Weekly Working Hours

Monthly Earnings (yuan)

Hourly Earnings (yuan/hour)

Local workers Sep, 2008 43.50 2104 11.96 Mar, 2009 43.69 2319 13.12 Feb, 2010 44.88 2454 13.53

Migrant workers Sep, 2008 55.13 2290 10.81 Mar, 2009 55.69 2466 11.61 Feb, 2010 56.98 2591 11.94

Real Wages of Migrants Continued to Increase through the Crisis

1221

1140

953889

821

756

703

666644

600

800

1000

1200

1400

1600

2001 2002 2003 2004 2005 2006 2007 2008 2009

NBS RCRE PBC

NBS=National Bureau of StatisticsRCRE=Research Center for Rural Economy (Ministry of Agriculture)PBC=People’s Bank of China

Where did the jobs come from?Migrant employment by sector, 2008 and 2009

2008 2009Manufacturing 42.0 39.1Construction 16.3 17.3Hotels and catering

7.6 7.8

Wholesale and retail trade

7.0 7.8

Transport 5.6 5.9Other 21.5 22.1

Units: %. Source: Sheng Laiyun of NBS (2009)

Reasons for Rising Wage Pressure

The end of surplus labor? Appeal of the New Socialist

Countryside Rising costs of living

Looking forward: labor demand and supply

Q: Could rising wages be good for China?

How strictly have labor regulations been enforced? (China firm survey 2009)

Very strict Strict Not strictBy period:

2007 21.57 71.12 7.31Jan-Jun 2008 22.46 72.61 4.93Jul-Dec 2008 23.47 72.33 4.19Jan-Jun 2009 24.61 71.34 4.04

By size:Smallest 18.32 73.21 8.47

2nd quartile 25.02 70.38 4.603rd quartile 22.01 73.66 4.33

Largest 26.40 70.27 3.33

Firms report strict enforcement, with no weakening during the crisis.Smaller firms report less strict enforcement than larger firms.

Determinants of enforcement laxity

RobustCoef. Std. Err. P>|z|

Sector consumer products 0.014 0.065 0.828Sector raw materials -0.023 0.062 0.709Sector capital and equipment -0.156 0.067 0.019Sector other -0.272 0.084 0.001Ownership private 0.108 0.089 0.225Ownership joint 0.059 0.086 0.491Ownership foreign 0.230 0.096 0.016Jiangsu -0.254 0.049 0.000Guangdong -0.078 0.052 0.133Shandong -0.054 0.056 0.330Jilin -0.164 0.085 0.054Hubei 0.096 0.103 0.350Shaanxi -0.050 0.074 0.505Sichuan -0.538 0.077 0.000Exporter -0.104 0.041 0.011Size-quartile 3 -0.313 0.051 0.000Size-quartile 2 -0.352 0.051 0.000Size-quartile 1 -0.460 0.054 0.000Jan-June 2008 -0.063 0.048 0.190June-Dec 2008 -0.077 0.048 0.109Jan-June 2009 -0.160 0.048 0.001

Dependent variable (ordered probit): 0=very strict, 1=strict, 2=not strict

Reference categories: food and beverage state sector Zhejiang Size quartile 4 (smallest size) 2007

Findings: enforcement stricter for: - capital producers - state sector - Sichuan, Jiangsu, Jilin (no strong pattern) - exporters - large firms - most recent period

Has new Labor Law influenced your firms hiring and firing decisions? (China firm survey 2009)

% yesAll firms 34.44By ownership:

State/collective 28.07Private 31.63

Joint/Ltd/Other 35.40Foreign 38.32

By export status: Non-exporter 34.89

Exporter 33.51

One third of firms report that new LaborLaw has influenced employment decisions.Influence greatest for foreign firms, but not much different for exporters and non-exporters.

However, preliminary regression analysis finds no relationship between degree of enforcement and actual changes in employment .

Informality by residence status(CULS, 2001, 2005, and 2010)

Notable reduction in informality of migrant employment

Informality rates over time(CULS, 2001, 2005, 2010)

2001 2005 2010 Local Migrants Local Migrants Local Migrants All 13.4 85.7 30.7 85.2 25.8 53.3 Wage employees 22.1 54.7 24.7 40.1 By gender:

Male 13.7 85.7 27.5 82.7 24.3 52.0 Female 13.1 85.8 35.0 88.4 27.8 54.9

By age: 16~29 11.6 80.9 26.5 81.7 21.2 47.3 30~39 15.8 89.2 34.1 85.2 21.5 53.3 40~49 14.2 94.3 33.8 91.9 31.3 60.9 50~59 9.22 92.1 24.2 85.5 27.1 64.2

60+ 20.6 93.9 37.6 84.9 63.2 75.6 By education:

0~6 41.4 92.7 68.0 86.8 50.6 78.1 7~9 19.4 87.8 42.5 89.3 44.7 61.4

10~12 12.1 78.4 30.4 83.3 27.9 50.0 13+ 5.0 61.0 18.0 43.5 11.9 23.4

Labor contract status (CULS, 2010)

Local residents Migrants Male Female Total Male Female Total 1. Fixed-term labor contract 56.22 61.29 58.35 50.46 52.17 51.26 2. Open-ended labor contract 20.48 14.98 18.17 4.96 2.88 3.98 3. Other contract (for specific work, labor service company)

1.49 1.53 1.50 3.59 2.21 2.94

4. No labor contract 21.81 22.20 21.97 41.00 42.74 41.82

Informal employment incidence, working hours, and earnings(China Urban Labor Survey, 2010)

Incidence (%)

Weekly Working

Hours

Monthly Earnings (yuan)

Hourly Earnings

(yuan/hour)

Local workers 100 44.88 2454 13.53 Formal Employment 71.59 42.36 2769 15.66 Informal Employment 28.41 51.26 1659 8.14

Family workers 1.24 49.52 1186 7.02 Self-employment 7.00 60.83 2124 8.99

Employee in informal sector 5.48 48. 54 1486 7.67 Employed informally in formal sector 13.99 46.96 1452 7.77

Employer in informal sector 0.71 65.42 3340 12.51 Migrant workers 100 56.98 2591 11.94 Formal Employment 42.18 49.66 3229 16.36 Informal Employment 57.82 62.32 2127 8.72

Family workers 4.57 65.89 1840 7.21 Self-employment 26.07 68.78 2277 8.57

Employee in informal sector 10.80 56.99 1855 8.95 Employed informally in formal sector 14.25 52.22 1912 8.95

Employer in informal sector 2.12 70.57 3724 14.96

Awareness of labor law provisions(CULS, 2010)

Local residents Migrants

1.Do you think that when you are hired your employer should set a labor contract with you? (yes) 96.28 89.66

2.Do you think employers must pay you double wages for each month you worked beyond the allotted time for completing a labor contract? (yes)

82.20 79.47

3.If a worker violates the rules set by an employer can the employer terminate the worker’s labor contract? (yes) 68.83 72.90

4.If you meet the required conditions and suggest an open-ended contract, must your employer comply? (yes) 68.65 62.77

5.Within how long do you think the labor contract should be signed after being hired? (one month) 40.14 41.32

6.For a one-year labor contract, what is the maximum probationary period? (2 months) 24.54 23.72

Workers are aware of right to a labor contract, but vary in their familiarity with Specific provisions. Migrants and local residents have similar levels of awareness.

Social insurance coverage rates(CULS, 2005 and 2010)

Progress increasing coverage of migrants, and expanding health insurance coverage,(especially to nonworking individuals)

2005 2010 Local

residents Migrants Local

residents Migrants

Pension 65.5 6.1 73.0 19.4 working 74.5 6.0 77.0 20.0

Unemployed 49.1 5.6 37.7 4.11 Out of LM 67.2 9.2 78.7 20.2

Unemployment Ins. 18.9 1.9 26.2 5.75 working 31.8 2.1 47.2 6.58

Unemployed 15.4 0 8.25 0 Out of LM 4.5 0.28 7.80 1.18

Health Insurance 54.4 4.2 74.7 47.4 working 62.7 4.0 76.8 46.9

Unemployed 28.6 0 43.0 37.0 Out of LM 56.3 8.1 77.9 33.8

Reflections on recent events: Foxconn and Honda in China

Conclusions

Crisis had very short-term impacts on employment

Labor Law is being implemented Viewed as costly by enterprises Trend of increasing informality reversed

…but no strong evidence of adverse impacts on employment Rising employment and wages Increasing prevalence of labor contracts and social

insurance coverage Suggests that robust labor demand is enabling

regulatory reform

Challenges

Labor Law may become increasingly constraining over time

Tradeoffs between labor regulation and expansion of formal employment could emerge in future economic slowdowns

Increasing labor scarcity will require continued investments to raise labor productivity and enhanced mobility to exploit dynamic comparative advantage