EMPLOYMENT AND INEQUALITY OUTCOMES IN CHINA Cai Fang, Du Yang and Wang Meiyan Institute of Population and Labour Economics, Chinese Academy of Social Sciences TABLE OF CONTENTS INTRODUCTION ........................................................................................................................................... 4 1. INEQUALITY TRENDS IN CHINA ......................................................................................................... 5 2. LABOUR MARKET OUTCOMES, POVERTY AND INEQUALITY TRENDS: WHAT LINKS? ....... 9 2.1. The importance of incomes from labour ............................................................................................... 9 2.2. Poverty and inequality: measurement issues ...................................................................................... 11 2.3. The determinants of inequality ........................................................................................................... 17 3. THE ROLE OF LABOUR MARKET INSTITUTIONS, REGULATIONS AND POLICIES ................ 21 3.1. Strictness of the Employment Contract Law ...................................................................................... 22 3.2. Other new institutions on China’s labour markets .............................................................................. 24 3.3. Links between labour market institutions and inequality ................................................................... 30 4. THE ROLE OF SOCIAL ASSISTANCE PROGRAMMES AND THE PENSION SYSTEM ............... 34 4.1 The dibao programme .......................................................................................................................... 34 4.2 The pension system .............................................................................................................................. 37 5. THE IMPACTS OF OTHER POLICIES ON INEQUALITY DEVELOPMENTS ................................. 41 5.1 Improvements in education .................................................................................................................. 41 5.2 Health care system reform in rural China ............................................................................................ 43 6. CONCLUSION ......................................................................................................................................... 44 ANNEX ......................................................................................................................................................... 45 REFERENCES .............................................................................................................................................. 46 Tables Table 2.1. Total employment and its structure, 1990-2008 ....................................................................... 10 Table 2.2. Inequality indices by groups of population ............................................................................... 14 Table 2.3. Overall inequalities: biased and unbiased ................................................................................. 14 Table 2.4. Decompositions of overall inequalities ..................................................................................... 15 Table 2.5. Rural poverty in China, 1990-2008 .......................................................................................... 16 Table 2.6. Urban poverty and dibao coverage ........................................................................................... 17 Table 2.7. Regression on household per capita income ............................................................................. 18 Table 2.8. Decomposition based on per capita income regressions ........................................................... 19 Table 3.1. Minimum wage adjustment in Chinese cities, 1996-2008 ........................................................ 26 Table 3.2. Coverage of minimum wage: migrants versus local workers ................................................... 26 Table 3.3. Descriptive statistics of variables at city level in 2005 ............................................................. 32 Table 3.4. The role of labour market institutions on wage inequality at city level in 2005 ....................... 32 Table 4.1. Poverty rates by individual level before and after the Dibao transfer....................................... 36 Table 4.2. Targeting outcomes of the urban Dibao programme ................................................................ 36 2 Table 4.3. Poverty rates by age group at individual level in 2004 ............................................................. 38 Table 5.1. Expenditures in education in selected economies in 2005 ........................................................ 41 Table A. Studies on inequality in China .................................................................................................... 45 Figures Figure 1.1. Gini and Theil indexes of provincial per capita GDP in China, 1978-2008 .............................. 8 Figure 2.1. Share of labour income in household incomes, 1990-2008 ....................................................... 9 Figure 2.2. Annual wage growth rates for migrant workers, 2002-2008 ................................................... 11 Figure 2.3. The mean of earnings by deciles for local and migrant workers ............................................. 13 Figure 3.1. Contributors and coverage rate of Unemployment Insurance, 1994-2008 .............................. 30 Figure 3.2. Wage inequality and minimum wage across cities in 2005 ..................................................... 33 Figure 4.1. Number of urban and rural dibao beneficiaries ....................................................................... 35 Figure 4.2. Coverage of the rural pension system, 1994-2007 .................................................................. 39 Figure 5.1. Number of college recruitment, 1990-2008............................................................................. 42 3 INTRODUCTION It is widely discussed that growing income inequality has taken place in China since the reform and opening up. Unfortunately, few empirical evidences based on national representative surveys and reliable statistical methodologies describe the trend of the past three decades. Although it is impossible to give a clear picture of income inequality in China on a single paper, this report tries to describe the related measurement issues, as well as the labour market and social policies affecting inequality. In addition to the institutional changes complicating China’s income inequality, the statistical dilemma in China that every researcher has to face makes it difficult to clarify what the real fact on inequality is. Ravallion and Chen (1999) showed that economic reform went faster than statistical system reform making China’s statistical data extremely complicated and requiring further investigation. This is still the case today. When the National Bureau of Statistics (NBS) conducts the household surveys in rural and urban areas, only two types of households are concerned and sampled: the urban residence households and the rural residence households, but the rural-to-urban migrant households are still to a large extent omitted. Indeed, migrant households are excluded from the selected samples of urban households that are required to keep accounting for daily income and expenditure for the NBS survey programme. The simplest reason for doing so is that migrant households usually do not have stable housing in destination cities and therefore they are not considered in the survey samples. Because the omitted migrants have expanded in size, this group of income earners have a significant impact on the total magnitude and distribution of Chinese residents’ income. When examining income levels and distribution in China, three different groups of population have to be compared, namely: urban native population, rural usual population, and rural-to-urban migrant population. In other words, estimates based on current sampling framework could bias the actual situation of income inequality. To some extent, exclusion of long-term migrant workers and their accompanied family members leads to underreported migrants’ income and exaggeration of overall income inequality. Although there exist various factors determining income distribution, labour market policy is definitely the essential one. As explained in this chapter, since China is rich of human resources, appropriate labour market policies are of great importance. Therefore, this report focuses on labour market policies and their impacts on income inequality trends. In particular, given the significant policy changes that have taken place in the Chinese labour market, the report reviews the implications of those policy changes in detail. In addition to labour market policies, other social policies not only affect the income inequality trend directly, but have links with labour market behaviours too. However, the impacts of social policies on inequality have not been fully evaluated yet as many of them have taken place in recent years (Ravallion and Chen, 2007; World Bank, 2009). This chapter is organized as follows. Chapter 1 reviews income inequality trends in China. Chapter 2 analyzes the main trends of income inequality and poverty in China and examines their links with labour market changes. Chapter 3 explores the role of labour market institutions, regulations and policies that have changed