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ECONOMIC TRANSITION
AND LABOR MARKET
REFORM IN CHINA

Xinxin Ma
Economic Transition and Labor Market
Reform in China
 Xinxin Ma

Economic Transition
and Labor Market
Reform in China
Xinxin Ma
Hitotsubashi University
Tokyo, Japan

ISBN 978-981-13-1986-0    ISBN 978-981-13-1987-7 (eBook)

https://doi.org/10.1007/978-981-13-1987-7

Library of Congress Control Number: 2018953333

© The Editor(s) (if applicable) and The Author(s) 2018

This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights of
translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on
microfilms or in any other physical way, and transmission or information storage and retrieval,
electronic adaptation, computer software, or by similar or dissimilar methodology now
known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this
publication does not imply, even in the absence of a specific statement, that such names are
exempt from the relevant protective laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and information
in this book are believed to be true and accurate at the date of publication. Neither the pub-
lisher nor the authors or the editors give a warranty, express or implied, with respect to the
material contained herein or for any errors or omissions that may have been made. The
publisher remains neutral with regard to jurisdictional claims in published maps and institu-
tional affiliations.

Cover Design by Emma J. Hardy

This Palgrave Macmillan imprint is published by the registered company Springer Nature
Singapore Pte Ltd.
The registered company address is: 152 Beach Road, #21-­01/04 Gateway East, Singapore
189721, Singapore
To my family and friends
 Preface

China has experienced rapid economic development and huge economic

growth since 1978. The main reason for this is that the Chinese govern-
ment promoted transition of the economic system from a planned econ-
omy to a market-oriented economy. The Chinese government enforced
gradualism reform in which the government retains and controls the pub-
lic sector (e.g. state-owned enterprises), and simultaneously promotes the
private sector (e.g. privately owned enterprises, foreign-owned enterprises,
and the self-employed sector). No other country with a transition econ-
omy, including Russia and the Central and Eastern European states, fol-
lowed this path. This uniquely gradual reform led to the mixed ownership
system in China and to new segmentation problems in the Chinese labor
market. For example, the labor market is segmented into both public and
private sectors; into the monopoly industry sector and competitive indus-
try sector; into migrant and local urban resident groups; and into the
formal sector and informal sector.
This is a significant area of academic debate. There is a set of unique
issues in these labor market segmentations that only occurred in China:
they generate valuable research questions to help us understand an imper-
fect competitive market and transition economics. The government could
usefully address the segmentation problems in the Chinese labor market
that may contribute to severe income inequality and harm social fairness
and welfare in China. Thus Part I of this book focuses on these special
issues related to the segmentation of the Chinese labor market during the
economic transition period from 1978. The overarching purpose of this

vii
viii PREFACE

book is to investigate the causes and consequences of Chinese labor mar-

ket segmentations.
As well as the transition from a planned economy to a market economy,
the government implemented a set of new policies to address problems
related to segmentation of the labor market and to enforce system reforms,
for example, the minimum wage system implemented from 1993, the
public pension system reformed from the 1990s, and the higher education
expansion policy promoted from 1999. Did these policy changes influence
labor market outcomes? Part II of this book analyzes the influence of these
policies on household and individual behaviors. The results provide reli-
able evidence to evaluate these policies and generate some suggestions for
reform. This policy evaluation not only contributes to academic debate
but also provides evidence on which to base new governmental policy.
This research was supported by the Japan Society for the Promotion of
Science (JSPS) with its grant-in-aid for scientific research (grant numbers:
25243006 and 16K03611) from 2012 to 2018, and the Joint Usage and
Research Center, Institute of Economic Research, Hitotsubashi University
from 2015 to 2018. I am grateful to Professor Li Shi (Beijing Normal
University) for providing the CHIPs data, and giving so many valuable
suggestions and comments since 2004. I acknowledge Professor Atsushi
Seike (Keio University), Professor Yoshio Higuchi (Keio University),
Professor Ryoshin Minami (Hitotsubashi University), and Professor
Katsuji Nakagane (The University of Tokyo) for their teaching and coach-
ing that opened the world of labor economics, development economics,
and transition economics and led me to become an Economics researcher.
I would like to thank Professor Jun Zhang (Fudan University), Professor
Go Yano (Kyoto University), Professor Kazufumi Yugami (Kobai
University), Professor Kai Kajitani (Kobai University), and Professor
Quheng Deng (Chinese Academy of Social Sciences) and the conference
participants for their many helpful comments in 2015 First World
Congress of Comparative Economics (WCCE) at Roma Tre University;
the 2015 International Conference titled “Economic Transition and
Income Inequality in China” at Kyoto University; the Annual Conference
of the Japanese Association for Chinese Economy and Management
Studies, Tokyo; the 2015 6th Biennial International Conference on
Transition and Economic Development (TED) at Fudan University; the
27th CEA (UK) and 8th CEA (Europe) Annual Conference held at the
University of Duisburg-Essen; and the 2016 14th European Association
of Comparative Economic Studies (EACES) Conference at the University
 PREFACE ix

of Regensburg, Germany. I would like to express my gratitude to my col-

leagues and friends, Professor Ichiro Iwazaki and Professor Kazuhiro
Kumo, for their helpful suggestions and encouragement for my research,
and colleagues at the Institute of Economic Research (IER), Hitotsubashi
University, for giving me such an excellent research environment and sup-
port. I greatly appreciate the staff at Palgrave Macmillan for their interest
in my research work. Particularly, I acknowledge Dreyer Jacob, Nirmal
Kumar Gnana Prakasam, and Jasper Asir for their encouragement and
editing work.
Finally, I am deeply grateful to my family for their warm and strong
support of my life and work.

Tokyo, Japan Xinxin Ma

May 30, 2018
 Contents

1 Introduction  1
1.1 Background: Economic Transition and Change in Labor
Policies and Labor Market Structures in China  1
1.2 The Main Arguments of the Book  8
1.3 Significance of the Book 14
References 15

Part I Labor Market Reform in China: Consequence and Cause  17

2 Economic Transition and Change of Wage Structure 19

2.1 Introduction 19
2.2 Institutional Background: Changes in China’s Wage
Policy and Wage System 20
2.3 The Channels and Empirical Studies on the Influence of
Education on Wage 23
2.3.1 The Channels of the Influence of Education on
Wage 23
2.3.2 Previous Empirical Studies on the Return to
Education in China 24
2.4 Methodology and Data for Estimation of Return to
Education 25
2.4.1 Models 25
2.4.2 Data 26

xi
xii Contents

2.5 Estimated Results of Wage Structure 30

2.5.1 Results of Wage Function at Mean Wage Level 30
2.5.2 Results of Return to Education by Wage
Percentiles 41
2.6 Conclusions 42
Appendix 43
References 45

3 Determinants of Wage Gap Between Public Sector and

Private Sector 49
3.1 Introduction 49
3.2 Methodology and Data 51
3.2.1 Models 51
3.2.2 Data 53
3.3 Econometric Analysis Results 56
3.3.1 How Large Are the Wage Gaps Between the
Public Sector and Private Sector? 56
3.3.2 Are There Wage Structure Differences Between
the Public and Private Sectors? 58
3.3.3 What Determines the Wage Gaps Between the
Public Sector and Private Sector? 63
3.4 Conclusions 66
References 68

4 Monopoly Industrial Sector and Its Influence on the

Wage Gaps Between Migrants and Local Urban Residents 71
4.1 Introduction 71
4.2 Hukou System Reform and Policy Change for
Monopolistic Industries in China 72
4.2.1 Hukou System Deregulation in China 73
4.2.2 Monopolistic Industries in China 74
4.3 The Channels of the Influence of Industrial Factors on the
Wage Gap: Inter-industry Differentials and Intra-
industry Differentials 75
4.3.1 The Channels of the Influence of Industry Sector
on the Wage Gap Between Migrants and Local
Urban Residents 75
4.3.2 Summary of Empirical Studies on the Wage Gap
Between Migrants and Local Urban Residents 78
 Contents  xiii

4.4 Methodology and Data 80

4.4.1 Model 80
4.4.2 Data 82
4.5 Econometric Analysis Results 84
4.5.1 Do Wage Gaps Between Various Industrial
Sectors Exist? 84
4.5.2 How Do Industrial Sectors Affect the Wage Gap
Between Migrants and Local Urban Residents? 90
4.6 Conclusions 99
References102

5 Labor Market Segmentation by Public-­Private Sector and

Its Influence on Gender Wage Gap109
5.1 Introduction109
5.2 Changes in Gender Equality Policy and the Gender Wage
Gap in Urban China During the Economic Transition
Period110
5.3 The Channel of the Influence of Ownership Sector on
Gender Wage Gap and Empirical Study on the Issue112
5.3.1 General Economic Theories to Explain the
Influence of Ownership Sector on Gender Wage
Gap in Urban China112
5.3.2 How Do the Ownership Sectors Affect the Gender
Wage Gap in Urban China?114
5.3.3 Empirical Studies on the Gender Wage Gap in
Urban China115
5.4 Methodology and Data116
5.4.1 Model116
5.4.2 Data119
5.5 Econometric Analysis Results122
5.5.1 How Do the Ownership Sectors Affect Wage Levels?122
5.5.2 How Does the Segmentations by Ownership Type
Affect Gender Wage Gap?124
5.6 Conclusions131
References133

6 The Determinants of Labor Supply of Informal Sector:

Two Hypotheses on Self-Employment139
6.1 Introduction139
xiv Contents

6.2 Economic Transition and Changes of Self-­employment in

China141
6.3 Theories and Empirical Studies on the Labor Supply of
Self-employment143
6.4 Methodology and Data145
6.4.1 Models145
6.4.2 Data148
6.5 Econometric Analysis Results154
6.5.1 What Determines the Choice to Enter the
Self-­employed Sector?154
6.5.2 Hypothesis Testing: Business Start-ups or
Disguised Unemployment?160
6.5.3 Robustness Checks of Hypotheses Testing164
6.6 Conclusions171
References174

Part II Policy Reform and Its Impact on Labor Market

Performance 179

7 Impact of Minimum Wage on Wage Distribution and

Wage Gap Between Rural and Urban Registration Groups181
7.1 Introduction181
7.2 Hypotheses and Empirical Studies on the Effects of
Minimum Wage on Wage Distribution183
7.3 Methodology and Data186
7.3.1 Model186
7.3.2 Data187
7.4 Econometric Analysis Results189
7.4.1 Estimated Results of Minimum Wage Effects on
Wage Distribution Using OLS and QR Models189
7.4.2 Estimated Results of Minimum Wage Effects on
Wage Distribution Using the DID Method196
7.4.3 Estimated Results of Minimum Wage Effects on
Wage Gap Between Rural and Urban
Registration Groups Using the DID Method201
7.5 Conclusions203
References207
 Contents  xv

8 Impact of China’s Higher Education Expansion Policy on

Youth Employment211
8.1 Introduction211
8.2 Higher Education Expansion Policy in China During the
Economic Transition Period212
8.3 The Channel of the Impact of Higher Education
Expansion Policy on College Graduate Employment and
Empirical Studies214
8.3.1 The Channel of the Impact of Higher Education
Expansion Policy on College Graduate
Employment214
8.3.2 Empirical Studies on the Issue215
8.3.3 Features of This Study216
8.4 Methodology and Data216
8.4.1 Model216
8.4.2 Data217
8.5 Descriptive Statistics Results219
8.6 Econometric Analysis Results221
8.6.1 Impact of Higher Education Expansion Policy
on College Graduate Employment221
8.6.2 Results of Impact of Higher Education
Expansion Policy on College Graduate
Employment Status226
8.6.3 Robustness Checks228
8.7 Conclusions235
References237

9 Impact of the New Rural Pension Scheme on Labor

Supply241
9.1 Introduction241
9.2 The Rural Public Pension Scheme in China During the
Economic Transition Period243
9.2.1 The Rural Public Pension Scheme in China
Before 2009243
9.2.2 The NRPS244
9.3 Literature Review245
9.3.1 The Channels for the Impact of Public Pensions
on Labor Force Participation245
xvi Contents

9.3.2 Empirical Studies on the Impact of Public

Pension on Labor Force Participation246
9.3.3 Contributions of This Study248
9.4 Methodology and Data249
9.4.1 Model249
9.4.2 Data250
9.5 Descriptive Statistics Results250
9.6 Econometric Analysis Results254
9.6.1 The Impact of NRPS on Labor Force Participation254
9.6.2 Results of Impact of NRPS on Employment
Status257
9.6.3 Results of Impact of NRPS on Labor Force
Participation by Various Groups259
9.6.4 Robustness Checks261
9.7 Conclusions265
References269

10 Impact of Social Insurance Contributions on Wages273

10.1 Introduction273
10.2 The Social Security System and Social Insurance
Premium for Enterprises in China275
10.3 Empirical Studies on the Issue276
10.3.1 The Channels for the Impact of Social Insurance
Contributions on Wage276
10.3.2 Empirical Studies on the Impact of Social
Insurance Contributions on Wage278
10.3.3 Two Hypotheses Setting279
10.4 Methodology and Data281
10.4.1 Model281
10.4.2 Data283
10.5 Econometric Analysis Results286
10.5.1 Results of Impact of Social Insurance
Contribution on Wage286
10.5.2 Results of Impact of Social Insurance
Contributions on Wage by Ownership Types289
10.6 Conclusions295
References297

Index299
 List of Figures

Fig. 1.1 Proportions of public sector and private sector from 1949 to
1956 in China. Source: Data based on National Bureau of
Statistics (1959), page 32 3
Fig. 1.2 Changes of worker numbers by ownership sectors from 1978
to 2016 in China. Note: Data based on National Bureau of
Statistics China Statistical Yearbook 2017. Source: author 4
Fig. 1.3 Changes of average wages by ownership sectors from 1995 to
2016 in urban China. Note: (1) Data based on National
Bureau of Statistics China Statistical Yearbook 2017. (2) The
values are average annual wages. They are nominal wages. (3)
Public includes government organizations and SOEs; Others
are composed of FOEs, POEs, and other ownership-type
enterprises. Source: author 5
Fig. 1.4 Changes of labor numbers by industry sector from 1952 to
2016 in China. Note: Data from National Bureau of Statistics
China Statistical Yearbook 2017 Table 4–3. Source: author 6
Fig. 1.5 Changes of numbers of migrant workers from 2000 to
2016 in China. Note: (1) Data from National Bureau of
Statistics 2016 Migrants Monitoring Report. http://www.stats.
gov.cn/tjsj/zxfb/201704/t20170428_1489334.html
(accessed on April 16, 2018). (2) Migrants (B) is the total
number of migrant workers. (3) Share of migrant
workers = migrant workers/total workers including migrant
workers and workers in rural regions. Source: author 7
Fig. 3.1 Wage gaps between public and private sectors. Note: (1) Public
sector includes SOEs, government organizations, and units
related to government organizations. (2) The other enterprise

xvii
xviii List of Figures

includes privately owned enterprises (POEs) and foreign-owned

enterprises (FOEs). Source: Based on data from Tables 4–12
in National Bureau of Statistics Chinese Statistical Yearbook 201150
Fig. 3.2 Kernel density distribution in public and private sector wages
for 1995 and 2007. Source: Calculated based on CHIPs 1995
and CHIPs 2007 56
Fig. 3.3 Wage gaps between public and private sectors by wage percentiles
for 1995 and 2007. Note: Differential = logarithm of wage rate in
public sector-­logarithm of wage rate in private sector. Source:
Calculated based on CHIPs 1995 and CHIPs 2007 56
Fig. 3.4 Estimated wage gaps between public and private sectors by
wage distribution for 1995 and 2007. Note: (1) Estimate 1:
education, tenure, tenure square, age, age square, occupation,
and industry dummy are used as variables. (2) Estimate 2:
added sex, race, employment status, and province dummy as
variables to estimate 1. Source: Calculated based on CHIPs
1995 and CHIPs 2007 57
Fig. 3.5 Machado–Mata decomposition results of wage gaps between
public and private sectors for 1995 and 2007. Source:
Calculated based on CHIPs 1995 and CHIPs 2007 65
Fig. 8.1 Numbers of college students and graduates from 1990 to
2014. Source: Based on data from National Bureau of Statistics
China Statistical Yearbook 2016214
Fig. 8.2 Labor force participation rate of college graduates (1997–
2011). Source: Calculated based on CHNS from 1997 to 2011 220
Fig. 8.3 Labor force participation rate of senior high school graduates
(1997–2011). Source: Calculated based on CHNS from 1997
to 2011 220
Fig. 8.4 Labor force participation rate gaps between higher education
group and senior high school group (1997–2011). Source:
Calculated based on CHNS from 1997 to 2011 221
Fig. 10.1 The impact of social insurance contributions on wage based
on the partial equilibrium model. Source: By author based on
Kotlikoff and Summer (1987), Gruber (1997), Bojas (2004),
and Adhikari et al. (2009) 277
Fig. 10.2 Summary of the results of the impact of social insurance
contributions on wage. Note: (1) Estimated coefficients of
social insurance contributions are expressed in the figure.
Logarithms of wage in the prior survey year, K/L, export,
profit, firm size, industry sector, survey year dummy variables
are controlled in these analyses. (2) GMM: generalized
method of moments; FE: fixed-effects model. Source:
Calculated based on CLMME database from 2004 to 2007 295
 List of Tables

Table 1.1 Economic transition and changes of labor policies in China 2

Table 2.1 Descriptive statistics by four periods 28
Table 2.2 Results of wage function (OLS) 31
Table 2.3 Results of wage function (OLS, Heckman two-step, and IV) 33
Table 2.4 Results of wage function by three periods (Heckman
two-step model) 36
Table 2.5 Results of wage function by every survey year (OLS,
Heckman two-­step, IV) 37
Table 2.6 Results of wage function by wage distribution and four
periods39
Table 2.7 Results of wage function by wage distribution and by every
survey year 40
Table 2.8 Summary of previous studies on the IRR in China 43
Table 3.1 Descriptive statistics for 1995 and 2007 55
Table 3.2 Results of wage gaps between public and private sectors for
1995 and 2007 57
Table 3.3 Estimated results of wage function by public and private
sectors for 1995 and 2007 59
Table 3.4 Results of wage function by sectors and wage percentiles for
1995 and 2007 61
Table 3.5 Blinder–Oaxaca decomposition results 64
Table 4.1 Descriptive statistics for 2002 and 2013 85
Table 4.2 Results of wage function (total samples) for 2002 and 2013 88
Table 4.3 Results of wage function by industry categories for 2002 and
201391
Table 4.4 Industry distributions by the actual values and the imputed
values for 2002 and 2013 95

xix
xx List of Tables

Table 4.5 Decomposition results based on Brown et al. model 96

Table 5.1 Statistics description for 2002 and 2013 120
Table 5.2 Results of wage function for 2002 and 2013 123
Table 5.3 Estimated gender wage gap by ownership sectors for 2002
and 2013 124
Table 5.4A Results of wage function by ownership types (2002) 125
Table 5.4B Results of wage function by ownership types (2013) 127
Table 5.5 Proportions of ownership types: actual values and imputed
values129
Table 5.6 Decomposition results based on the Brown et al. model 130
Table 6.1 Descriptive statistics by local urban residents and migrants
for 2007 and 2013 150
Table 6.2 Determinants of entry to the self-employed sector by local
urban residents and migrants for 2007 and 2013 155
Table 6.3 Wage function by local urban residents and migrants for
2007 and 2013 161
Table 6.4 Results of hypothesis testing by local urban residents and
migrants for 2007 and 2013 164
Table 6.5 Hypotheses test by the wage premiums based on the wage of
the employee in the POEs 165
Table 6.6 Hypotheses test by age groups 166
Table 6.7 Hypotheses test by regional groups 167
Table 7.1 DID items and policy years setting 189
Table 7.2 Descriptive statistics by total, rural, and urban groups 190
Table 7.3 Results of effects of minimum wage policy on average wage
by the OLS 191
Table 7.4 Results of effects of minimum wage policy on average wage
by the Heckman two-step model 193
Table 7.5 Results of effects of minimum wage policy on wage
distribution by the QR model 195
Table 7.6A Results of the effects of the minimum wage policy on wage
distribution by the DID method (1991–1997) 197
Table 7.6B Results of the effects of the minimum wage policy on wage
distribution by the DID method (1997–2006) 198
Table 7.6C Results of the effects of the minimum wage policy on wage
distribution by the DID method (2006–2011) 199
Table 7.7 Results of the effects of the minimum wage policy on wage
gap between the rural and urban groups by the DID method 202
Table 8.1 Test results for treatment group setting 219
Table 8.2 Result for college graduate group based on DID model 222
Table 8.3 Results of impact of higher education expansion policy on
college graduate employment 223
 List of Tables  xxi

Table 8.4 Results of period effect of the impact of higher education

expansion policy on college graduate employment 224
Table 8.5 Results of impact of higher education expansion policy on
college graduate work status 227
Table 8.6 Results of impact of higher education expansion policy on
employment by regions 229
Table 8.7 Results of impact of higher education expansion policy on
employment by urban and rural groups 231
Table 8.8 Test results using various treatment groups 233
Table 8.9 Results of the Placebo test 235
Table 9.1 Treatment group and control group setting in the study 251
Table 9.2 Descriptive statistics 252
Table 9.3 Labor force participation rate (LFPR) in rural China 254
Table 9.4 Results of the impact of NRPS on labor force participation 255
Table 9.5 Results of impact of NRPS on employment status 258
Table 9.6 Results of impact of NRPS on labor force participation by
regions260
Table 9.7 Results of impact of NRPS on labor force participation by
gender261
Table 9.8 Results using various treatment groups 262
Table 9.9 Results using various samples 265
Table 9.10 Placebo test results 266
Table 10.1 Social security systems and insurance premium by enterprise
and individual worker in China (2015) 275
Table 10.2 Descriptive statistics 284
Table 10.3 Results of the impact of social insurance contributions on
wage287
Table 10.4 Results of the impact of social insurance contributions on
wage for SOEs and COEs 290
Table 10.5 Results of the impact of social insurance contributions on
wage for POEs and FOEs 292
Table 10.6 Results of the impact of social insurance contributions on
wage for HTOEs 294
 CHAPTER 1

Introduction

1.1   Background: Economic Transition and Change

in Labor Policies and Labor Market Structures
in China

The level of economic development, production resources, ownership,

and economic policies and systems has been transformed since 1949 when
the People’s Republic of China was established. Economic historians usu-
ally divide the Chinese economy into the planned economy period
(1949–1977) and the economic transition period (post 1978) (see
Table 1.1).
In the planned economy period, the economic development level was
poor, capital was scarce, and there was a lot of surplus labor. “Socialist
remodeling” (Sherhui Zhuyi Gaizao) was introduced to enforce central
government control and management for the national economy. All own-
ership types were transferred into the public sector. By 1956 this included
government organizations, state-owned enterprises (SOEs), and collec-
tively owned enterprises (COEs). Figure 1.1 shows the proportions of vari-
ous ownership types in China from 1949 to 1956. The share of privately
owned enterprises (POEs) and foreign-owned enterprises (FOEs) decreased
dramatically from 55.8% in 1949 to 0.0% in 1956, whereas the share of
public sector (government organizations, SOEs, COEs, and j­oint-­owned
enterprises1) increased from 44.2% in 1949 to 100.0% in 1956. From 1956
to 1977 the government managed production, capital, and wage/employ-
ment of labor in the public sector. In addition, to promote the “Heavy

© The Author(s) 2018 1

X. Ma, Economic Transition and Labor Market Reform in China,
https://doi.org/10.1007/978-981-13-1987-7_1
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