China
Needs Labor Flexibility
By Dan Ewing
Reprinted from March 14, 2002 edition of the Far Eastern Economic Review
As its economy opens to the world's toughest competitors, China knows that hard blows from its membership in the World Trade Organization are coming and that inefficient domestic industries will be steamrollered. Industries that are particularly exposed, such as agriculture and car making, threaten to add tens of millions more to the ranks of the unemployed. The only way for its labor market to properly absorb them is for Beijing to reform its outdated hukou household-registration system.
To help their domestic economies adjust to macro shocks, governments can use various policy tools. China's hands, however, essentially are tied. While its fixed-exchange rate offers predictability to foreign investors, it can strangle exporters when neighbors devalue. Expansionary fiscal policy can spur demand, but Beijing opened the budgetary floodgates years ago and cannot sustain that spending indefinitely. Although China recently cut interest rates for the first time in years, the effects likely will be muted. Struggling under non-performing loans, banks are hesitant to find new borrowers and uncertain consumers may refrain from major purchases. That leaves China with just the labor market.
Labor markets are the lifeblood of economies. By leaving dying industries and entering growing ones, workers help the economy adjust. But to be efficient, labor markets need three characteristics: the ability for workers to relocate; the opportunity for workers to acquire new job skills; and a free flow of information. By such measures, China's labor market is extremely rigid. Local dialects and cultural barriers impede those seeking employment in other regions, and education in China has yet to become a market commodity. That means the ambitious but laid-off Lioaning steelworker will find it virtually impossible to learn Web-design skills, for example.
But the most restrictive aspect of the Chinese labor market is the hukou, the system that binds rural residents to their birthplace and prevents them from finding jobs elsewhere. Mao Zedong instituted the hukou in 1958, which had the ironic and tragic effect of making the rural population a permanent underclass. This system became hereditary, forcing those born in rural areas to remain there and erecting a wall between rural peasants and relatively prosperous urbanites.
Under Deng Xiaoping, its rigidity eased somewhat, and more recently, China took another step in the right direction by revising the hukou to permit movement from rural areas to small cities. Deng dismantled Mao's communes. Newly freed reserves of redundant labor created township and village enterprises, but also flowed into cities. The transportation and lodging sectors expanded, and free markets emerged to sell food, permitting travel without official meal coupons. Lastly, China's urban construction boom created a need for a massive inflow of low-skill laborers. Today, 120 million migrant workers roam the cities in search of jobs. Lacking official residency status for urban areas, they work under dismal conditions and often are exploited. Yet despite some positive changes and the willingness of so many millions to illegally leave their villages, China remains one of the least urbanized countries. Three quarters of Chinese live in rural areas, far above the world average of one half.
China's competitive advantage is its vast supply of cheap labor, and that has attracted billions of dollars in foreign investment. Yet to fully capture the gains from its labor surplus, China must efficiently match labor with capital. A fluid labor market would boost productivity and wages. It would also expedite recovery from economic shocks, making China's WTO hardships shorter-lived. A final bonus would be that it could help lower China's natural rate of unemployment-a coveted but elusive policy goal.
Despite these advantages, Beijing is reluctant to infuse flexibility into the labor market for political reasons. At root, the hukou is the world's largest experiment in social control. A free labor market means minimal interference in people's lives-they must have reliable information and the freedom to make rational choices. But Beijing is worried that through this it will lose control and a flood of rural residents will sweep into cities, causing a tidal wave of unrest. Yet without reform, how is a displaced car-industry worker in Heilongjiang supposed to land a new textile job in Guangzhou?
China's leaders must now commit to scrapping the anachronistic hukou altogether. If not, the rising unemployed will direct their energies from job-seeking to political change.
The writer is
assistant director of Chinese Studies at the The Nixon Center in
Washington
