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Policy issues of China's urban unemployment.


In the past two decades, China initiated many reforms, including agricultural, urban housing, pension, medical care, taxation, financial sector, and state-owned enterprise (SOB) reforms. With these reforms, China's economy experienced a rapid growth in 1978-98, at an average annual real gross domestic product growth rate of 9.8%. This rapid growth created a lot of jobs in China, and the number of employed persons increased from 401.5 million in 1978 to 699.6 million in 1998 (National Bureau of Statistics [NBS], 1999a). These reforms are also transforming China's economy from a socialist planning economy to a socialist market economy.

Like other transitional economies, China faces many challenges. One major challenge is its increasing unemployment in urban areas. In China, open urban unemployment consists of laid-off workers and registered unemployed persons. Starting 1993, to improve SOE efficiency, China has laid off an increasing number of former SOE employees. Although no consistent statistics are available, several studies have shown that there were about 3 million laid-off SOB workers in 1993, and the figure rose to 5.6 million in 1995, 11.5 million in 1997, and 11.7 million in 1999 (Gu, 1999; Lei, 1998; Lu, 1998; People's Daily, March 8, 2000). According to Lei (1998), layoff is the issue of most concern to urban residents, followed by corruption, pollution, crime, and social protection. Yuan and Fan (1998) showed that 16.6% of urban residents in five major Chinese cities ranked layoff as the worst social problem in China. During 1993-98, urban registered unemployment also worsened consistently. The number of registered unemployed workers was 4.2 million in 1993; it increased to 5.7 million in 1998, a 40% increase in just five years (NBS, 1998a, 1999a). No doubt layoff and unemployment problem has become a major concern for not only policy makers but also the public in general. Further worsening layoff and urban unemployment could hinder economic development and cause social instability.

The article is organized as follows. Section II investigates causes and characteristics of urban layoff and unemployment. Section III discusses policy issues involving layoff and unemployment in urban China. Section IV gives conclusions.

Most previous studies have addressed the problem of urban layoff and unemployment by focusing on demand-side factors, such as creating jobs by increasing government spending, attracting foreign direct investment (FDI), promoting exports, expanding labor-intensive industries, and developing the nonstate economy (Lu, 1998; Mo, 1998; Dong and Liu, 2000). Little research has been done on the supply side of the labor market. However, supply-side policies are equally important to China's unemployment problem, because the number of unemployed workers equates excess labor supply, which depends on both labor demand and labor supply. In this article, four major supplyside policies will be discussed, including expanding senior secondary and higher education, providing job-training programs, limiting massive peasant migration to Chinese cities, and lowering labor participation rate.


Actual open urban unemployment in China assumes two forms. One consists of registered unemployed persons. This group of people are registered as permanent urban residents, engaged in nonagricultural activities, aged within the range of working age, capable of working, unemployed but desirous to be employed, and have registered at local employment service agencies to apply for jobs. The number in this group increased from 4.2 million in 1993 to 5.7 million in 1998. Respectively, the registered unemployment rate in urban areas increased from 2.6% in 1993 to 3.1% in 1998 (NBS, 1998a, 1999a). The other form of unemployment consists of laid-off workers. Unlike the definition used in Western countries, laid-off workers in urban China are employees who left enterprises and go home due to downsizing of SOEs or collective-owned enterprises but they still maintain nominal labor relations with their work units. China's laid-off workers do not register themselves as unemployed. Most enterprises pay their laid-off employ ees monthly stipends. Some also provide training and reemployment programs. The number of urban laid-off workers increased dramatically from 3 million in 1993 to 11.7 million in 1999 (People's Daily, March 8, 2000).

Laid-off workers are in reality jobless people, although they maintain their labor relationship with their former work units. To better understand the reality of urban unemployment, a revised unemployment rate is constructed that takes into account both registered unemployed people and laid-off workers. Table 1 shows the results. Specifically, the revised unemployment rate (row 7) is calculated as the ratio of total jobless people to the active labor force, where the total jobless people consist of laid-off workers and registered unemployed persons, the active labor force consists of total jobless people and employed workers. Because the calculation of registered unemployment rate (row 5) does not include the laid-off workers in the active labor force, the revised unemployment rate is not the sum of registered unemployment rate and laid-off rate (row 6) but less than the sum of these two rates. For the period 1993-98, Table 1 shows that the revised unemployment rate is significantly higher than the registere d unemployment rate, more than doubled since 1996. This finding suggests that unemployment in urban China is massive, especially after 1995. It also indicates that employment pressure in urban areas is much greater than what is implied by the official unemployment rate.

Some previous studies have also calculated revised unemployment rates for urban China. For example, Gu (1999) gave similar but slightly higher revised unemployment rates (e.g., 6.0% in 1995 and 9.4% in 1997). Meng and Gong (1999) believed that more than 8% of urban active labor force was without jobs in 1997. But Wang et al. (2000) estimated that the real unemployment rate in 1997 was about 6%. Considering "hidden employment" among laid-off workers, this author is "biased" to the lower revised unemployment rates. In China, once a laid-off worker finds a job or becomes self-employed, he or she is required to report to his or her former employer, who will take the worker off the laid-off list. But in reality, many workers do not do so. This type of employment is called "hidden employment." Mo (2000) estimated that 25% of laid-off workers are actually engaged in paid activities. Yang and Li (2000) stated that about 20% of laid-off workers are hidden employed.

A. Causes of China's Urban Layoff and Unemployment

Several factors have contributed to the increasing layoff and unemployment in urban China. First, China is transforming its economy from a socialist planning economy to a socialist market economy. With this transition, the role of SOEs and collective-owned enterprises is diminishing. As shown in Table 2, the share of SOE employment had consistently decreased in the past two decades, from 78.3% in 1978 to 59.2% in 1998. The share of collective-owned sector employment decreased from its highest share of 26.3% in 1984 to 12.8% in 1998. In absolute numbers, Table 2 shows that SOE employment began to decline in 1996 and employment in collective-owned enterprises started to decline in 1992.

With downsizing of the public sector, laying off workers is inevitable. Previous studies called this type of layoff "transitional unemployment" or "institutional unemployment" (Gu, 1999). This author wants to emphasize two institutional reasons of transitional unemployment. One is the full and permanent employment policy that China implemented after 1949. Before the economic reform, China attempted to maximize urban employment and offered its workers "iron rice bowls." This policy resulted in a huge number of surplus workers and hidden unemployment in SOEs and collective-owned enterprises. In the reform era, enterprises have to lay off redundant workers to improve efficiency, bringing the hidden unemployment into the open (Wong and Yang, 2000). The other institutional reason is China's social security system. Before the reform, SOEs were solely responsible for providing employees retirement pensions, medical care, housing, and social services (Song and Chu, 1997). SOEs were thus much more than just employers. In 1992, SOE expenses on insurance and welfare took up 35% of the total wages. In addition, housing subsidy amounted to 26% of the total wages (Zhao, 2000). Mo (1998) found that 5.4% of SOE workers in 1995 were actually engaged in social services for their employees, including healthcare, daycare, and schools. These burdens greatly increased production cost, which in turn caused many SOEs to be unable to compete with private or foreign-funded enterprises. They began to lose money, and many went bankrupt. With cutting down of production output and more bankruptcies, many SOE workers were laid off.

Second, China has been experiencing structural changes since 1978 and faces structural unemployment. As shown in Table 3, the agricultural sector employed 70.5% of the total workers in 1978. This share decreased to 49.8% in 1998. During the same period, the employment share of the service sector more than doubled, from 12.2% in 1978 to 26.7% in 1998. Table 3 also shows that the agricultural sector actually lost 38.5 million workers from 386.85 million in 1991 to 348.38 million in 1998. Even the manufacturing sector started to lose jobs in the late 1990s. In 1998, it lost 0.6 million workers. According to Mo (2000), in 1998, textile SOEs laid off 0.6 million workers, coal SOEs laid off 0.4 million workers, and machinery SOEs laid off 0.2 million workers. These sectoral shifts caused structural unemployment. Sectoral shifts also imply frictional unemployment in urban China. With economic structural changes, many workers lose their jobs in one sector and find new jobs in others. Job transfer, however, takes time and thus causes frictional unemployment.

Third, like other countries, China experiences cyclical unemployment. For example, due to the Asian financial crisis, China's export growth rate decreased dramatically from 21.0% in 1997 to 0.5% in 1998 (NBS, 1999a). Hence, exports made a much smaller contribution to China's employment growth in 1998. A weakening domestic demand in recent years is also a cyclical phenomenon, which slows down economic growth and creates fewer jobs. Since Deng's south tour in 1992, the real GDP growth rate remained double digits until 1996 (NBS, 1999a).

B. Characteristics of China's Urban Layoff and Unemployment

China's urban layoff and unemployment exhibit several interesting characteristics. First, middle-aged workers are more likely to be laid off and unemployed. Mo (2000) showed that middle-aged workers experienced a higher risk of being laid off. In 1998, 44.6% of all laid-off workers were between 35 and 46 years old. This finding is consistent with a survey conducted in 1997 (Lei, 1998) that showed that middle-aged (40-49 years old) laid-off workers accounted for 44.2% of the total laid-off workers, even though they only accounted for 19.2% of the total urban working population. Middle-aged workers also have a higher risk of being unemployed. The NBS (1998b) showed that city-level registered unemployment rate in 1997 was 4.6% for workers aged 35-39, compared with the 3.1% of the overall urban unemployment rate.

Second, the incidence of layoff and unemployment depends on education. Lu (1998) found that less educated people (junior secondary school or less) accounted for 70.6% of all laid-off workers in 1996. This group has a higher registered unemployment rate too. NBS (2000, p. 159) shows that 61.4% of all urban registered unemployed workers in 1999 had education of junior secondary school or less. Using China Population Statistics Yearbook (NBS, 1998b, pp. 132-43), the author calculated unemployment rate for this group and found that it was 5.37% in cities and 6.69% in towns in 1995. These results give a weighted average unemployment rate of 5.9% for less educated workers, which is considerably higher than 2.9%, the overall urban registered unemployment rate in 1995. The rate is calculated as the ratio of unemployed population to the active labor force by education level.

Third, gender is a factor. Specifically, female workers experience a higher incidence of layoff and unemployment. Mo (2000) found that among 6.1 million SOE laid-off workers in 1998, 44.6% were female workers. But female workers accounted for only 36.5% of all SOE employees in 1998. In another study, Lei (1998) showed that 59.2% of total laid-off workers in 1997 were female workers, though female workers accounted for only 39% of the total urban employees (NBS, 1999a). Female workers also have a higher registered unemployment rate. According to China Population Statistics Yearbook (NBS, 1998b), city registered unemployment rate in 1997 was 5.5% for female workers but only 4.2% for male workers. Town registered unemployment rate in 1997 was 5.6% for female workers but only 4.2% for male workers.

Fourth, most laid-off workers are former SOE employees. According to China Labor Statistical Yearbook, China had 8,769,314 laid-off workers in urban areas at the end of 1998. Among them, 5,947,907 were from SOEs (NBS, 1999b, p. 442), accounting for 67.8% of the total layoff. As shown in Table 2, the SOE share of total urban employment was 59.2% in 1998. These findings indicate that SOE workers have a higher risk of being laid off.

Fifth, the secondary industry, that is, the manufacturing sector, is a major contributor to urban layoff. At the end of 1998, 4,055,984 workers were laid off by this industry, accounting for 46.3% of the total urban layoff (NBS, 1999b, p. 442). However, the employment share of the secondary industry was only 23.5% in 1998 (Table 3). Thus, manufacturing workers are more likely to be laid off.

Sixth, incidence of urban layoff varies across regions. In 1998, the number of laid-off workers for the eastern, central, and western regions was 3.08, 4.16, and 1.49 million, respectively (NBS, 1999b, p. 446). Calculating a ratio of this population to the total urban employment for each corresponding region, the author found that it was 0.042, 0.073, and 0.052, respectively. These results suggest that the incidence of urban layoff is lowest for the east coastal region and becomes considerably higher for inland regions.

Finally, the duration of unemployment for urban registered unemployed workers is relatively long. According to the NBS (1999b, p. 92), 60% of unemployed workers had been remained unemployed longer than six months. The situation is worse for female workers. In 1998, 56.9% of unemployed male workers had unemployment duration longer than six months. This proportion increased to 62.2% for female unemployed workers, implying that it is more difficult for female workers to get reemployed.


In the Chinese literature, many studies have proposed policy recommendations for China's urban layoff and unemployment problem (e.g., Deng et al., 2000; Meng and Gong, 1999). Recommendations can be classified into two general categories: demand-side and supply-side policies. The former centers on job creation, including policies such as increasing government spending, attracting FDI, promoting exports, and developing the private and service sectors. Supply-side policies have received less attention and can include policies on education, job training, migration, and family planning. This section focuses on supply-side policies, although demand-side policies will also be discussed. No attempt is made to list all possible recommendations, however.

A. Supply-Side Policies

Supply-side policies refer to policies that aim to rationalize and reduce labor supply, including policies on education, job training, migration, and population control. Unemployment tells excess labor supply. Therefore, supply-side policies could affect urban unemployment in a similar way as they affect labor supply. This section discusses four major policy proposals that aim to reduce China's urban layoff and unemployment.

First, China should expand senior secondary and higher education to reduce labor supply. As shown in section II, education is a major factor affecting layoff and unemployment. In 1996, 70.6% of all laid-off workers were those who received education less than senior secondary school. Urban registered unemployment rate was also much higher for this group of people, with 5.9% in 1995 compared to the overall 2.9% registered unemployment rate. To mitigate China's layoff and unemployment problem, therefore, China should expand its education sector. In the short run, extending education will postpone a lot of young people's entering into the labor market, thus reducing employment pressure. According to China Education Yearbook (Ministry of Education, 1999), only about half (50.7%) of junior secondary school graduates entered senior secondary schools in 1998. In 1997, 2.2 million students graduated from senior secondary schools (Yang, 1998). Only 45.9% of them continued their postsecondary education. Because of low admission rates to senior secondary schools and universities, most young people enter the labor market early, worsening China's unemployment problem. In 1997, for people aged 16-19, registered unemployment rates were 17.6% and 21.6% for cities and towns, respectively (NBS, 1998b); both are significantly higher than the national averages (4.8% and 5.0%, respectively). If enrollments in colleges and secondary professional schools could increase 20% annually in 1999-2001, Yang and Li (2000) estimated that 1.5 million additional students would enter colleges and 2.3 million additional students would enroll in secondary professional schools. With a 10% annual increase in the enrollment of senior secondary schools, 2.17 million additional students would be in schools in 1999-2001. These would total 5.98 million, up to 3.9% of 1998 urban employment.

No doubt, keeping students in schools longer is an effective way to reduce labor supply in the short run. In the long run, as a human capital investment, education affects not only productivity but also employability. It is well accepted that today's education is tomorrow's productivity. Groot et al. (2000) empirically proves that education and training increase the employability of workers. Using panel data on Chinese provinces, Lin (2000) shows that higher level of education leads to lower unemployment rate. Compared with many other countries, however, China has a much smaller budget for education and smaller proportion of population with postsecondary education. For example, in 1994, China's public expenditures on education was 2.2% of gross national product, compared with 6.6% for Hungary, 3.6% for India, 2.8% for Pakistan, 3.8% for Thailand, 5.3% for Malaysia, 3.7% for South Korea, and 4.7% for Mexico. In 1990, the proportion of national population with postsecondary education was 1.4% for China, wherea s it was 10.1% for Hungary, 2.5% for India, 2.5% for Pakistan, 5.1% for Thailand, 6.8% for Malaysia, 21.1% for South Korea, and 9.2% for Mexico (NBS, 1999a). For future economic development and global competitiveness, China needs to devote a lot more resources to its education sector.

Second, job training should become a major part of the solution to China's urban layoff and unemployment problem. With economic restructuring, on the one hand, many workers have been laid off due to the downsizing of SOEs and collective-owned enterprises; on the other hand, many positions need to be filled and a lot of work needs to be done. Chinese scholars call the first phenomenon "lack of jobs for many people" and the second phenomenon "lack of people for many positions." (1) This double lack situation is caused by two major factors. One is the imperfection of the labor market. Many things that need to be done represent job opportunities. Yet for many reasons (such as lack of information and labor mobility) these job opportunities do not materialize for people who need jobs. The other factor is related to mismatched labor skills. The skills of the overall labor force do not meet the challenging requirements of the industries.

This problem is particularly acute as China restructures its economy further. The greater the change or transition, the more severe the structural unemployment problem is. Though education is the long-turn solution to the labor skill dilemma, temporary job training may enable part of the labor force to switch to new jobs that demand different skills. Both education and job training would shift supply from one low-demand, low-skill category to another higher-demand, higher-skill category, thus improving employability and productivity. Shanghai's experience confirms that job training is an effective way to help laid-off workers gain reemployment. Wang (2000) stated that by the end of 1998, 583,000 laid-workers received job training from various reemployment centers. Among them, 420,000 were reemployed, with a reemployment rate of 72%. During the first nine months of 1999, Shanghai trained 120,000 laid-off workers. Among them, 81,000 people found new jobs, with a reemployment rate of 65.8% (Wei, 1999).

As shown in section II, most laid-off workers are middle-aged and less educated. Without training, many of them would not be able to find new jobs. At present, however, all job-training programs are run by either local governments or SOEs. China should explore more opportunities to gear up such training, such as establishing training programs with universities, private enterprises, foreign-invested ventures, and international organizations. Inevitably, job training will be a major solution to China's urban layoff and unemployment problem.

Third, it may be necessary for China to limit massive migration of peasants to cities in the short run. Since the urban economic reform started in 1984, hiring and firing workers have become more autonomous. Migration also becomes much easier. As a result, many peasants have moved to cities in search of better jobs and better life. Cross-regional floating workers reached 24 million in 1995, 25 million in 1996, and 30 million in 1997 (Meng and Gong, 1999). According to NBS (1999b), 44.24 million rural workers left their homeland in 1998 to seek jobs somewhere else, most in cities. This floating labor force places a great pressure on employment in Chinese cities, worsening urban layoff and unemployment problems. Many SOEs lay off their former employees but in the meantime hire peasant workers. They do so because temporary peasant workers not only demand lower wages but also receive less or no other benefits, such as housing, medical care, and social welfare. Thus job competition is institutionally biased agains t urban workers, causing unfairness and social conflicts (Chen and Lu, 1999; Fang, 1999).

To improve social stability and reduce labor supply in cities, controlling peasant migration should be considered as a rational short-run policy. In the long run, however, the author would argue that China should promote mobility to improve labor efficiency and thus economic development. But before that, China needs to reform its social security and housing systems, so that urban and peasant workers can move from one location to another or from one industry to another, and they can compete for jobs on the same ground. In fact, rural-urban migration is inevitable in China. On the one hand, improvement of agricultural productivity and China's accession to the World Trade Organization (WTO) will demand fewer rural workers, forcing many peasants to seek jobs in cities. On the other hand, cities always need rural labor to work in the construction sector, in hard-labor activities, and so on. Better quality of life in urban areas, such as better housing and education, also promotes rural-urban migration.

Fourth, China needs to lower its labor force participation rate. (2) Labor supply depends on two numbers: the legally defined working-age population and socially determined labor force participation rate. Controlling or lowering one or both of these numbers would reduce labor supply and thus reduce urban unemployment. Although controlling population growth in China is a long-run policy, lowering participation rate could have an immediate effect on labor supply.

According to the International Labour Organization (1998), China has the highest labor force participation rate in the world. The rate reached 79.2% in 1990 (78.7% in 1996; NBS, 1997), but it was 67.1% for United States in 1997, 57.9% for India in 1991, 61.8% for Hong Kong in 1997, 57.4% in Germany in 1997, 51.8% for Hungary in 1996, and 58.5% for Russia in 1996 (International Labour Organization, 1998; U.S. Census Bureau, 1999). Several factors explain the higher participation rate in China. (1) Low government budget on education and low enrollment rates of students in colleges and senior secondary school, as mentioned, make many young people enter the labor market early. (2) Many private and town-village enterprises do not follow the Chinese labor laws and hire workers who are younger than 16 years old, the legal employment age. (3) China's social security system, insurance policies, and low-wage practice all force a person to find a job. Being employed enables a worker to not only receive an income but als o enjoy healthcare, housing, retirement pensions, and other welfare benefits. (4) China has overemphasized the role of employment in a person's social status and value. However, to work or not to work or how much to work should be largely economically determined, based on factors including wage rates and family welfare function. Hence, being a homemaker should be accepted and respected. Overemphasizing the role of employment would cause excess labor supply, leading to a higher unemployment rate. In fact, with many redundant workers and the law of diminishing returns, any further increase in labor supply would make little contribution to China's economic growth (Tian, 1997). Therefore, one solution to China's urban layoff and unemployment is to lower the labor force participation rate. For example, increasing student enrollments in colleges and senior secondary schools would reduce the number of young people entering the labor market. Better enforcement of the labor law would better prevent enterprises from hi ring illegal young workers. Changing the institutional systems and social ideology will rationalize China's labor force participation rate and labor supply in the long run.

B. Demand-Side Policies

Demand-side policies refer to policies that aim to create jobs in an economy. In the short run, given labor participation rate and working-age population, increasing labor demand would decrease the excess of labor supply and reduce the unemployment spell, thus decreasing urban unemployment. In the long run, with growth of population, migration, and change of labor force participation rate, net effects on urban unemployment might be partially canceled by labor supply increase. Nevertheless, creating jobs is a fundamental solution to China's unemployment problem.

Several previous studies have proposed various demand-side policies (Lu, 1998). Some proposed to increase government spending to create jobs directly (Gao, 2000; Yang, 2000). Some recommended that the government lower interest rate to stimulate private investment, hence indirectly increasing jobs (Zeng and Zeng, 2000). Some argued that the labor market in some industries is institutionally biased against urban workers (Chen and Lu, 1999; Fang, 1999). In China, work units are required to provide their formal urban workers benefits that include housing, medical care, pension, and other welfare. However, they offer no or fewer such benefits to temporary rural workers. Because of fewer benefits and lower wages demanded by rural migrants, many enterprises lay off their urban workers and hire informal rural workers. The same principle is also applied to new jobs. These urban--rural dynamics and the problematic demand-side policy have produced many laid-off workers and made urban workers difficult to find new jobs.

This section discusses three major demandside policy recommendations. One recommendation is to promote the service industry. As shown in Table 3, the service sector is the only industry that has experienced consistent increase in employment in the past two decades. Its employment almost quadrupled, from 48.9 million in 1978 to 186.8 million in 1998. Its share of total employment increased from 12.2% in 1978 to 26.7% in 1998. The average annual growth rate of employment was 5.9% for the service sector in 1990-98 and was -1.2% and 2.4% for the agricultural and manufacturing sectors, respectively. (3) Undoubtedly, the service sector plays a more important role in creating jobs and absorbing workers. In fact, in 1998 the service industry was the only industry that had a net increase in employment, while both the agricultural and manufacturing sectors were laying off more workers than hiring new employees. Yet China has a relative underdeveloped service sector compared with many other countries. In the United Stat es, the service sector accounted for 73.3% of total employment in 1998 (Dong and Liu, 2000). Even in Indonesia, this share was 37.9% in 1996 (Yang and Li, 2000), much higher than the share of 26.7% for China in 1998. The service sector thus has a good potential to absorb more labor, especially after China's entry to the WTO.

A second major proposal is to further attract EDI, on the grounds that FDI is an effective way to increase labor demand. Since the late 1970s, FDI in China has risen dramatically under the open-door policy. Annual FDI increased from US$1.7 billion in 1985 to US$45.5 billion in 1998 (Table 4). After 1992, China become the largest recipient of FDI among developing countries and globally, second only to the United States. The increasing direct role of FDI in Chinese economy can be demonstrated by two facts. One is its contribution to China's exports. As shown in Table 4, the share of foreign-invested enterprises' (FIEs) exports in China's total exports increased from 1.1% in 1985 to 20.4% in 1992, and then to 44% in 1998. The other is its contribution to China's urban employment. In 1985, FIEs employed only 0.13 million workers, accounting for a negligible 0.1% share of total urban employment (Table 4). In 1998, FIEs' employment reached 5.9 million, or 3.8% of total urban employment. In addition to its direct co ntributions, FDI also affects China's economy in several indirect ways, including technology spillovers, information diffusion, and management expertise (Liu, 2000). Because of FDI's direct and indirect contributions, China should continue to make efforts to attract foreign investment.

Developing the nonstate economy to fight unemployment is also a popular view among Chinese scholars and policy makers. This view stems from the rapid growth of the private economy that includes share-holding units, joint-owned units, private enterprises, foreign-funded units, and self-employed individuals. As shown in Table 2, share of urban employment for both SOEs and collective-owned sectors have declined since the late 1980s. In absolute numbers, SOB employment decreased from its highest level of 112.6 million in 1995 to 90.6 million in 1998, with a net loss of more than 22 million workers in just four years. The collective-owned sector lost 16.7 million workers during the period of 1991-98. In contrast, the private sector experienced rapid growth, with its urban employment increasing from 0.15 million in 1978 to 42.7 million in 1998 and its share of the total urban employment going up from 0.2% to 28% in the same period. (4) Clearly, the role of the private sector has become much more important in China' s s urban employment.

The contribution of the nonpublic economy to urban employment can be further observed in Table 5, which shows the number of newly hired workers by types of ownership. In 1990, SOEs were still the main employers, hiring more than 60% of new workers. Less than 10% of all new jobs were created by the nonpublic sector. In 1997, however, the pattern was reversed. More than half of all new workers went to the private sector. Less than one-third went to SOEs. The private sector has thus become the major employer of urban new workers. Considering many workers were laid off by the SOEs and collective-owned enterprises, it is safe to conclude that the nonpublic sector is playing the most important role in creating new jobs and absorbing new urban workers. With further economic reform and the booming of China's s private sector, China will have to increasingly reply on the sector to mitigate urban layoff and unemployment problems.

Besides supply-side and demand-side policies, some other policies could also improve China's urban layoff and unemployment. For example, urbanization increases both labor supply and demand. But due to urbanization economies in production and consumption, the unemployment rate could be lower. Better information would also help laid-off and unemployed workers find new jobs. In short, China needs to apply a "100 cuts" strategy to deal with its layoff and unemployment problems. Although each cut may not have a big impact, the overall result could be significant.


China's urban unemployment consists of layoffs and registered unemployed workers. This article investigates the urban unemployment problem in the 1990s. It calculates revised unemployment rates for years in the period 1993-98 and finds that they are much higher than the official registered unemployment rates, suggesting that China had massive layoffs in urban areas. The article also examines causes and characteristics of China's urban unemployment. Statistics show that causes of the high unemployment rate in urban China include transitional changes, structural shifts, and cyclical adjustments. Incidence of layoff and unemployment is higher for middle-aged, less educated, and female workers.

This article discusses several supply-side and demand-side policies in relation to China's urban layoff and unemployment problem. Supply-side policies aim to rationalize and reduce labor supply, which include expanding secondary and higher education, providing job-training programs, limiting massive peasant migration, and lowering labor force participation rate. Demand-side policies aim to create jobs in an economy by promoting the service industry, attracting FDI, and developing the nonstate economy. The article argues that China should implement both supply-side and demand-side policies to deal with its urban layoff and unemployment problem. Each policy may not have a big impact on solving China's unemployment problem. But with all policies working together, the overall result could be significant.

Unemployed and Laid-Off Workers and Revised Unemployment Rates

Year 1993 1994 1995 1996

1: Urban employed persons 175.89 184.13 190.93 198.15
 (million) (a)
2: Registered unemployed persons 4.20 4.76 5.20 5.53
 (million) (a)
3: Laid-off workers (million) (b) 3 4 5.64 8.91
4: Total urban labor force 183.09 192.89 201.77 212.59
 (million) (c)
5: Registered unemployment 2.33 2.52 2.65 2.72
 rate (%) (d)
6: Laid-off rate (%) (e) 1.71 2.17 2.95 4.50
7: Revised unemployment rate (%) (f) 3.93 4.54 5.37 6.79

Year 1997 1998

1: Urban employed persons 202.07 206.78
 (million) (a)
2: Registered unemployed persons 5.70 5.71
 (million) (a)
3: Laid-off workers (million) (b) 11.5 8.92
4: Total urban labor force 219.27 221.41
 (million) (c)
5: Registered unemployment 2.74 2.69
 rate (%) (d)
6: Laid-off rate (%) (e) 5.69 4.31
7: Revised unemployment rate (%) (f) 7.84 6.61

(a)Data are from China Statistical Yearbook (NBS, 1998a, 1999a).

(b)No consistent statistics on laid-off workers are available. Data used
in this row are compiled from the Ministry of Labor and Social
Protection, Lu (1998), and Mo (1999).

(c)Total urban labor force is the sum of rows 1, 2, and 3.

(d)Registered unemployment rate refers to the ratio of the row 2 to the
sum of rows 1 and 2. The registered unemployment rates in urban areas
shown in China Statistical Yearbook (NBS, 1998a, p. 127; 1999a, p. 133)
have inconsistency and thus are not reported directly in the table.

(e)Laid-off rate equals to the ratio of row 3 to row 1.

(f)Revised unemployment rate is the ratio of the sum of row 2 and row 3
to row 4.


Urban Employment by Ownership

 Employment (Million Persons) a
 State-Owned Collective-Owned Private-Owned
Year Units Units Units

1978 74.51 20.48 0.15
1980 80.19 24.25 0.81
1983 87.71 27.44 2.31
1984 86.37 32.16 3.76
1985 89.9 33.24 4.94
1986 93.33 34.21 5.39
1987 96.54 34.88 6.4
1988 99.84 35.27 7.53
1989 101.08 35.02 7.77
1990 103.46 35.49 8.33
1991 106.64 36.28 9.74
1992 108.89 36.21 11.15
1993 109.2 33.93 16.34
1994 112.14 32.85 23.07
1995 112.61 31.47 29.29
1996 112.44 30.16 32.81
1997 110.44 28.83 37.61
1998 90.58 19.63 42.71

 Share of Employment (%)
 State-Owned Collective-Owned Private-Owned
Year Units Units Units

1978 78.3 21.5 0.2
1980 76.2 23 0.8
1983 74.7 23.4 2
1984 70.6 26.3 3.1
1985 70.2 26 3.9
1986 70.2 25.7 4.1
1987 70 25.3 4.6
1988 70 24.7 5.3
1989 70.3 24.3 5.4
1990 70.2 24.1 5.7
1991 69.9 23.8 6.4
1992 69.7 23.2 7.1
1993 68.5 21.3 10.2
1994 66.7 19.5 13.7
1995 65 18.2 16.9
1996 64.1 17.2 18.7
1997 62.4 16.3 21.3
1998 59.2 12.8 28

Sources: China Statistical Yearbook (NBS, 1994, 1998a, 1999a) and
author's calculation.

(a)Data on employment include both long-term and short-term contract


Employment by Type of Industry

 Employment (Million Persons) *

 Agricultural Manufacturing Service
Year Industry Industry Industry

1978 283.18 69.45 48.9
1980 291.22 77.07 55.32
1985 311.3 103.84 83.59
1986 312.54 112.16 88.11
1987 316.63 117.26 93.95
1988 322.49 121.52 99.36
1989 332.25 119.76 101.29
1990 384.28 136.54 118.28
1991 386.85 138.67 122.47
1992 383.49 142.26 129.79
1993 374.34 148.68 140.71
1994 364.89 152.54 154.56
1995 354.68 156.28 168.51
1996 347.69 161.8 179.01
1997 347.3 164.95 183.75
1998 348.38 164.4 186.79

 Share of Employment (%)

 Agricultural Manufacturing Service
Year Industry Industry Industry

1978 70.53 17.3 12.18
1980 68.75 18.19 13.06
1985 62.42 20.82 16.76
1986 60.95 21.87 17.18
1987 59.99 22.22 17.8
1988 59.35 22.36 18.29
1989 60.05 21.64 18.31
1990 60.13 21.36 18.51
1991 59.7 21.4 18.9
1992 58.5 21.7 19.8
1993 56.4 22.4 21.2
1994 54.3 22.7 23
1995 52.2 23 24.8
1996 50.5 23.5 26
1997 49.9 23.7 26.4
1998 49.8 23.5 26.7

Source: China Statistical Yearbook (NBS, 1999a).

(a)Data on employment include both long-term and short-term contract


Foreign Investment and Its Contributions to Exports and Employment

 Share of Total
 Foreign Direct Exports by
 Investment Foreign-Invested
Year (US$billion) Ventures (%)

1985 1.661 1.08
1986 1.874 1.88
1987 2.314 3.06
1988 3.194 5.17
1989 3.392 9.35
1990 3.487 12.58
1991 4.366 16.77
1992 11.007 20.43
1993 27.515 27.51
1994 33.767 28.69
1995 37.521 31.51
1996 41.726 40.72
1997 45.257 40.98
1998 45.463 44.06

 Employment in Foreign-Funded

 Persons Share of Urban
 Employed Employment
Year (Million) (%)

1985 0.06 0.05
1986 0.13 0.1
1987 0.21 0.15
1988 0.31 0.22
1989 0.47 0.33
1990 0.66 0.45
1991 1.65 1.08
1992 2.21 1.41
1993 2.88 1.81
1994 4.06 2.42
1995 5.13 2.96
1996 5.4 3.08
1997 5.81 3.28
1998 5.87 3.84

Sources: China Statistical Yearbook (NBS, 1998a, 1999a, 1999c), Zhang
and Song (2000).


Newly Hired Urban Workers by Ownership in the 1990s

 State-owned Units Collective-owned Units
Year Persons (1000) Share (%) Persons (1000) Share (%)

1990 4750 60.5 2350 29.94
1991 3630 47.46 2720 35.56
1992 3670 49.85 2180 29.64
1993 3100 43.97 2020 28.65
1994 2940 41.12 1810 25.31
1995 2600 36.11 1700 23.61
1996 2430 34.47 1550 21.99
1997 2260 31.83 1280 18.03

 Private-Owned Units
Year Persons (1000) Share (%)

1990 750 9.55
1991 1300 16.99
1992 1510 20.49
1993 1930 27.38
1994 2400 33.56
1995 2900 40.28
1996 3070 43.55
1997 3560 50.14

Source: Wang et al. (2000) and author's calculation.

(1.) The lack of jobs for many people is obvious because the economic efficiency reduces labor requirement but more people enter into the labor market. The lack of people for many positions can be observed in both high-skill and low-skill sectors. As Yang (2000) pointed out, many multinational companies in China complain that they have difficulties finding people with the appropriate skills and knowledge to fill positions. Many things that do not require special skills are not being attended to. For example, it is difficult to find trained and organized porters at many railway stations and airports. Many badly littered streets have no cleaners.

(2.) In China, labor force refers to all persons who are 16 years old or above, able to work, and potentially or actually engaged in economic activities. Labor force participation rate is defined as the ratio of economically active population to the labor force. The economically active population refers to all persons who are actually engaged in economic activities or unemployed but actively seeking for jobs.

(3.) It needs to be cautious that a centrally planned economy might understate the employment of the so-called tertiary sector before the reforms and thus overstate the growth of this sector with reforms. It is basically a statistical problem in China. For example, a big SQE like Anshan Steel is considered a "secondary industry" enterprise, but Anshan Steel was a mini--welfare state by itself. Apart from steel production, it had many services, such as clinics, schools, and canteens. When Anshan Steel underwent reform, many services were transferred to the tertiary sector.

(4.) Due to the restriction of ownership transformation, the growth of the nonpublic economy mainly comes from newly established economic activities, not from spin-offs of activities that were formerly parts of the SOE and collective sector. This growth reflects the structural change of the Chinese economy and causes a shift away from the state-dominated economy. Many workers in the private sector were former SOE and collective employees. This fact, however, does not necessarily imply that the contribution of the private sector to urban employment is subject to an upward bias. It suggests that the public sector is in disadvantage in labor market competition and the whole sector is downsizing.


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FDI: Foreign Direct Investment

FIE: Foreign-Invested Enterprise

NBS: National Bureau of Statistics

SOE: State-Owned Enterprise

WTO: World Trade Organization


* The article was presented at a seminar held at the East Asian Institute, the National University of Singapore, July 28, 2000. The author thanks John Wong, Liu Shaojia, Gu Qingyang, and other participants at the seminar for their constructive inputs. The author also thanks the two anonymous referees for their comments and Aw Beng Teck for editorial help.

Song: Professor, Department of Economics/030, University of Nevada, Reno, NV 89557. Phone 1-775-7846860, Fax 1-775-784-4728, E-mail song@unr.nevada. edu
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Author:Song, Shunfeng
Publication:Contemporary Economic Policy
Geographic Code:9CHIN
Date:Apr 1, 2003
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