Chinese Labor Market in the Late 1990s (This article will appear in The Journal of Contemporary China) Fei-Ling Wang, Ph.D. The Sam Nunn School of International Affairs Georgia Institute of Technology Atlanta, GA 30332-0610, USA 404-894-1904 404-894-1900 (fax) [email protected] Abstract: A national labor market has emerged, as one of the most funda- mental institutional changes, in the PRC. Foreign direct investment has played a direct role. The Chinese national labor market, albeit noticeable distortions, has provided a stable and abundant supply of cheap unskilled or low-skilled labor and subsidized skilled la- bor and professionals, and enhanced labor mobility and autonomy in general. The national labor market has been strongly blessed by Beijing as it feels it can effectively rely on the hukou (household registration) system to stabilize the massive underemployment at a time of comprehensive dislocations caused by the advancing market economy. The sociopolitical impact of the national labor market, however, is mounting as urban unemployment rises, the floating la- borers grow and become increasingly restless, and the PRC govern- ment has become more apparently pro-employers at the expenses of the labor. The Author: Fei-Ling Wang is assistant professor at the Sam Nunn School of International Affairs, Georgia Institute of Technology. Graduated from the University of Pennsylvania (1992) and taught at the United States Military Academy, West Point (1992-93), he is the author of From Family to the Market: Labor Allocation in Contemporary China (1997) and Institutions and Institutional Changes: Premodernity and Modernization of China (1998) and co-editor of In the Dragon’s Eyes: China Views the World and Sino-American Relations (1998). He has published several articles and book chapters in English and Chinese on international politics, development, Chinese political economy and foreign policy. Chinese Labor Market in the Late 1990s (This article will appear in The Journal of Contemporary China) Fei-Ling Wang * The Sam Nunn School of International Affairs Georgia Institute of Technology Labor market is usually the last and perhaps the most regu- lated component of a market economy. As a market-oriented economic reform deepened, a labor market emerged in the People’s Republic of China (PRC) by the end of 1980s. Like in other countries, the Chi- nese labor market has been heavily distorted and regulated by po- litical and social forces, as compared to the goods, services, and capital markets. Unlike in most market economies, the labor market in the PRC has thusfar demonstrated some very peculiar “Chinese characteristics” that seem to offer interesting clues to under- standing of the prospect of the Chinese political and economic de- velopments. In late 1990s, the labor market in the PRC appears to have two parts. First, primarily practiced by collective enterprises and township-village enterprises (TVEs), there is a host of small com- munity—township, district, village, city, or even large danwei (unit)—based local labor markets that have high community-based barriers and discriminations against outside job seekers. The com- munity-based local labor markets have evidenced the powerful dis- tortions of the Chinese labor market caused by strong political and social institutions and rationales in the PRC (Fei-Ling Wang 1997, chapter 3). The other and more genuine part of the Chinese labor market has been a rapidly growing national labor market that fea- tures a gigantic army of floating laborers, a pro-employer sociopolitical environment and the related policies, a coexistence of massive yet stabilized underemployment, and a state subsidy mainly in the form of moonlighting by the state employees. The na- tional labor market has been essential to the operation of foreign invested enterprises and native private enterprises, both have been the main force driving the economic boom in the PRC. Sociopolitically, it tends to have greater propensity and potential to facilitate some fundamental changes, compared to the dispersed small community-based local labor markets. This paper analyzes the national labor market of the PRC. As one of the most fundamental institutional changes in the PRC in the past two decades, the emergence and operation of a national labor market have closely associated with the entry and operation of for- eign direct investment (FDI). The Chinese national labor market, albeit noticeable distortions and still poor institutionalization, has greatly raised the productivity of the Chinese labor force to enable and sustain the rapid growth of a market economy. It pro- vides a stable and abundant supply of cheap unskilled or low- skilled labor and subsidized skilled labor and professionals. Both labor mobility and autonomy have been greatly enhanced on the na- tional labor market. Ironically perhaps, this national labor market has been strongly blessed by the CCP (Chinese Communist Party) re- gime, as Beijing still feel it can effectively rely on tools such as the ethically questionable hukou (household registration) system to stabilize the massive underemployment thus its sociopolitical system at a time of comprehensive dislocations caused by the ad- vancing market economy. The sociopolitical impact of the national labor market, however, is mounting as urban unemployment rises, the floating laborers grow and become increasingly restless, and the CCP regime has become more apparently pro-employers at the expenses of the labor. The Emergence of a National Labor Market in the PRC Market-oriented labor allocation was systematically eliminated and a national labor market disappeared in the PRC by mid-1950s. The Chinese reform especially the new policies that allowed and encouraged the growth of private employment and “self-employment” led to the emergence of a national labor market. The rapid agricul- tural decollectivization (1978-80) released huge numbers of surplus rural labor, which gradually and steadily flooded the cities as the hired workers or floating laborers to form the supply pool for the national labor market. Reform measures aimed at increasing the ef- ficiency of the state-owned enterprises, started in 1984, enabled certain relaxation of personnel flow control, competition among the danweis and workers, contract employment, and legalization of the status of unemployment initially under the cover of “waiting-for- job.” More important, however, the emergence of a national labor market in the PRC seemed to have directly related to the entry and operation of FDI. To use foreign investment and thus import foreign technology were a main component of Deng’s reform strategy. An ambivalent CCP first attempted at a politically motivated control policy of SEZs (special economic zones) to contain the “alien” FDI. Yet FDI snow- balled in the PRC. In 1978, China only had twenty foreign-invested enterprises including some join-ventures with then “socialist” countries such as Poland. By 1994, China became the second largest recipient (second only to the United States) of FDI in the world. More than 221,777 FDI enterprises were registered and 129,900 were in operation in 1995. The contracted FDI exceeded $303.3 billion with $95.6 billion already invested. FDI enterprises have developed in literally every corner of the PRC. Hong Kong and Macao ranked a distant number one among the 150 foreign countries that invested in China, followed by Taiwan, the U.S., Japan, and Singapore. The largest wholly-owned FDI enterprise by 1995 was Motorola (China) with $200 million assets (RMRB-O 3/24/1995, 5). Most of the FDI enterprises were labor-intensive and small- scale businesses. On average, an FDI enterprise had only $950,000 investment from foreign investors in 1993. Only 4 percent of the more than 13,000 FDI enterprises in operation in 1990 had “advanced technology” and only 18 percent had products for export. The main purposes of these foreign investors were to explore a huge and cheap labor force. A survey of 1,066 foreign investors in China concluded that 91.89 percent of them were drawn there by the Chi- nese labor resource (50.56 percent of them believed that was their number-one motivation) (RMRB-O 3/28/1994, 1). It was reported that Chinese workers in FDI enterprises were paid only 10 to 40 percent of the wages of similar workers in Hong Kong, even with the same productivity (Mao 1990, 27). Almost all foreign investors insisted on having independent authority and terms in labor recruitment and management based on market conditions. In spite of finding such requests “foreign” and “nonsocialist,” the PRC nonetheless decided to grant them, thus creating market-oriented labor practices in China. The strong political endorsement and support from the PRC state have helped FDI in its interactions with the bureaucrats con- cerning the development of a national labor market. Step by step, FDI enterprises were granted the rights to hire, pay, promote, and dismiss as they see economically fit. They also won the crucial right to hire anybody from anywhere with little regard to the em- ployees’ legal residency. One year after Beijing passed a law recognizing FDI enter- prises in July 1979, the PRC adopted its first measure granting legal status to the FDI employment: the “Regulation on the Labor and Wages Management in Sino-Foreign Joint Ventures.” According to that regulation, local labor bureaus must “approve” any labor con- tracts between an FDI employer and its employees. The wage level of FDI enterprises was set at 120 to 150 percent of similar state- owned danweis in the same locality (article 8). FDI employers, though granted “autonomous rights” in recruiting and managing la- bor, were only allowed to hire from local hukou holders who were either “approved” by the labor bureaus or were unemployed. Largely due to persistent demands from foreign investors and local leaders in the unfortunate non-coastal regions, Beijing quickly made numer- ous retreats.