Labor Restructuring in China's Industrial Sector: Towards a Functioning Urban Labor Market

Abstract

This paper examines the magnitude, patterns, and determinants of the labor restructuring process in China's industrial sector using a firm-level dataset for the period between 1998 and 2002. The results show that the SOE sector has undergone substantial labor retrenchment. The removal of employment guarantees for state workers has led to substantial employment shifts both within and between sectors. As compared to many countries in Central and Eastern Europe in the early phase of transition, China has experienced a more synchronized pace of job destruction and creation, as well as higher rates of excessive reallocation. Our results also show that the employment adjustment and downsizing process has been driven largely by market forces, i.e., the changes in sales, wages, and technology, and the need to correct labor misallocations created by the managed labor system, such as over-manning and skill-mismatching. We find a notable resemblance in the patterns of enterprises' response to demand shocks between the state and the private sectors. These findings have important implications to the timing and sequencing of public sector reforms.