Chinese Economic Reform and Labor Market Efficiency

Transcription

1 Chnese Economc Reform and Labor Market Effcency John A. Bshop* Department of Economcs East Carolna Unversty Greenvlle, NC Emal: Phone: Fax: Andrew Grodner Department of Economcs East Carolna Unversty Greenvlle, NC Emal: Hayong Lu Department of Economcs East Carolna Unversty Greenvlle, NC Emal: Februrary 9, 2006 *Correspondng author 1

2 Chnese Economc Reform and Labor Market Effcency Abstract. The envronment n whch Chnese workers convert ther human captal nto earnngs changed dramatcally as a result of market-orented economc reform. Smultaneously wth labor market reforms were educatonal reforms that ncreased compulsory schoolng to 10 years. We hypothesze that the change from a centrally-planned economy to a more market orented economy substantally ncreased labor market effcency. We decompose earnngs and fnd that approxmately 60 percent of the total change n earnngs s the result of greater labor market effcences, 20 percent of earnngs growth can be attrbuted to hgher levels of human captal, and 20 percent of earnngs growth can be attrbuted to exogenous change. Key Words: Economc transton, earnngs determnants, stochastc fronter regresson JEL Codes: P3, J3, C4

3 I. Introducton The Chnese economy experenced very rapd growth between 1988 and nomnal wages trpled and average annual real wage growth was just under fve percent. It s well-known that the market-orented reform has been an mportant factor n the unprecedented economc growth. Less well-known are the educatonal reform polces that were undertaken about the same tme, of whch rasng the compulsory educaton to ten years s most noteworthy. Destroyed by the Cultural Revoluton, Chna has also wtnessed a remarkable expanson of hgher educaton nsttutons from 598 n 1978 to 1,984 n 1998 (Mnstry of Educaton, 2000). Enrollment numbers n postsecondary nsttutons rose from 0.86 mllon n 1978 to 2.8 mllon n Fulltme students enrolled n undergraduate programs also grew at an annual rate of 7.7 percent durng ths perod. Chna also became more outward lookng durng ths tme perod, wth exports as a fracton of GDP growng from 14 percent n 1988 to 20 percent n 1997 (World Development Report, 1999). We hypothesze that the change from a centrally-planned economy to a more market orented labor market substantally ncreased labor market effcency. In ths paper we ask the queston: how much of the rapd rse n earnngs between 1988 and 1995 can be attrbuted to an ncrease n the labor market effcency and how much can be attrbuted to the ncrease n the average level of human captal (educaton)? We employ a stochastc fronter method to obtan a latent effcency measure. Whle stochastc fronter analyss (Agner, Lovell, and Schmdt, 1977) has not been appled to transton economes, t has been employed by labor economsts to study ncomplete worker nformaton (Hofler and Polachek, 1985, among others), dscrmnaton (Robnson and Wunnava, 1989), and mmgrant s relatve earnngs performance (Daneshvary et al, 1992; Lang, 2005). Lovell (1995) provdes a useful polcy orented revew of effcency analyss. 1

4 Our study complements the exstng lterature focusng on the effects of economc reform n Chna. Some recent examples nclude the effects of economc reforms on: skll dfferentals and market segmentaton (Flesher and Wang, 2004); returns to schoolng (Zhang et al, 2005); gender dscrmnaton (Lu et. al, 2000), manufacturng productvty (Wu, 2001); ownershp reform and productvty (Xu, 2000), among other topcs. However, we are the frst to consder how economc reforms allow workers to more fully capture the potental returns to ther human captal. II. Stochastc Fronter Models Pror to the economc reform the wage rate was determned by a rgd formula that s prmarly based on senorty and, n turn, wage dfferences by schoolng, occupaton, and level of sklls were very small n Chna. Snce the economc and educatonal reforms the returns to schoolng have remaned below ts contrbuton to productvty when compared to other transton economes. Ths phenomenon s ntrgung, consderng that the proporton of 4-year college graduates n Chna among the adult populaton was less than 1% n 1997 (Natonal Bureau of Statstcs of Chna, 1998) and the sklled labor s relatvely scarce n Chna. The labor-market monopsony theory provdes a useful framework to our research. 1 Monopsony n Chna may rse from the mmoblty of urban workers, especally those who are employed by state-owned enterprses (SOE) and locked by employer-provded benefts, such as housng, medcal, food, and others (Parker, 1999; Dong and Putterman, 2000). On the demand sde, the compensaton system used by the SOE s and collectves s unable to reflect the varatons of margnal product for workers wth dfferent human captal (Flesher and Wang, 2001). Ths neffcency of labor demand stems from the fact that these frms do not have ncentves to maxmze profts pror to the economc reform. Gven the pre-reform offcal wage grd, 1 Meng (2000) provdes an excellent survey of recent labor market reforms n urban Chna. 2

5 restrctons on wage and employment polces of collectves, and persstng lmts on geographc moblty, t s plausble that wage compresson by skll or schoolng level has dmnshed to some extent. Although sngle ndustres domnated labor markets pror to the reform, the levels of ther monopsony power vary n dfferent regons due to the dspartes of these ndustres concentraton n the local labor market. Durng transton a lmted number of frms are lkely to contnue ther domnance n the local labor market due to dfferent levels of competton caused by frms of nonstate ownershps. In addton, the ncentve structures wthn SOE s were dramatcally changed after the ntroducton of a reward system that related workers as well as managers wages to the proft performance of frms. Ths reform prompted SOE s management to abandon ther poltcally motvated practces and pursue proft-orented objectves. Many studes have reported that these new ncentves are very effectve n reducng techncal neffcency and ncreasng productvty (Hay et al., 1994; Hussan and Zhang, 1994; Morrs, 1995). Due to the neffcency orgnatng from both labor demand and supply, especally durng the pre-reform perod, we expect to see a szable gap between realzed earnngs and earnngs fronters, whch s lkely to dmnsh over tme. Usng a standard labor market effcency model: L D jk D D D D D = θ1 + θ 2 X jk + θ3 w jk u jk, u jk 0, (1) and L S j S S S S S = θ1 + θ 2 X j + θ3 w j u j, u j 0, (2) L jk D S where s quantty of labor demanded for employer k n local labor market j and s ndvdual s labor supply choce. The determnstc parts of equatons (1) and (2) are local labor demand and supply fronters. The term reflects the neffcency for employer j to dentfy the potental pool of qualfed workers n locale j, whch s partly due to the fact that state frms are not proft maxmzers; S u j D u jk captures the nablty of ndvdual to dentfy the full range of 3 L j

6 potental employers, or to realze the full potental of worker's human captal, as well as the mmoblty caused by the local employers' monopsony. 2 Suppose that there are K employers and N potental workers n locale j, wth the local labor market clearng condton appled, j K j N j k = 1 D L jk = L We can derve the followng reduced-form wage equaton: = 1 j S j. (3) ln( w ) = α + βx + γr + v u, (4) where ln( w ) s log earnngs, X s a vector of human captal measures, R s an ndcator for 2 geographcal regons, v ~ N (0, σ ) s normal error, and 0 s earnng neffcency due to the v D S jont effects of u and u. Whleγ s may capture the dfferences of lvng standards, they also reflect the real earnng dfferences and dspartes of the degree of monopsony prevalence n dfferent geographcal areas. The predcted wage effcency s then gven by u E[exp( u ) ln( w ) ( α + βx + γr )]. (5) Emprcal model We assume that a worker s human captal endowment s measured solely by one s educaton and experence (c.f., Polachek and Xang, 2005). Other factors such as gender, occupaton, ndustry, famly status, or Communst Party membershp status affect earnngs ndrectly by nfluencng how effcently one s able to convert ther human captal nto earnngs. Ths assumpton, along wth our theoretcal model, suggests that we model (log) earnngs as a functon of experence, experence squared, years of schoolng and a vector of regonal ndcators. 2 Polachek and Robst (1998) address the assumpton that effcency can be measured as a resdual. Usng ndependent nformaton they fnd that stochastc fronter estmates provde a reasonable measure of a worker s ncomplete wage nformaton p.231). 4

7 It s necessary to assume a structure for the effcency porton of the combned error term. We follow the lterature and mpose an exponental form on the error term as the most robust alternatve. 3 To dentfy the effcent fronter we use the 1995 data because t represents the outcome of a partally functonng labor market, as opposed to 1988 where wages were set by a formula based prmarly on senorty. We then predct the potental earnngs for both years from the 1995 fronter model. Ths allows us to predct the ncrease n overall labor market effcency over tme as well as effcency gans for partcular subgroups (males, Party members, etc). An Oaxaca type decomposton s used to analyze the contrbutons of varous determnants to the ncrease n earnngs. To hghlght the mpact of effcency we report the decomposton results wth and wthout the effcency term. III. Data and Fndngs Our data source s the Chnese Household Income Projects (urban samples), 1988 and We select workers between 18 years and 59 years wth postve earnngs and labor market experence. We exclude workers whose prmary occupaton s lsted as owner and those workers whose real earnngs are less than one yuan per day. Our samples nclude 16,807 observatons for 1988 and 10,747 observatons for The samples contan data from 10 provnces n 1988 and 11 provnces n Table 1 presents descrptve statstcs. Earnngs have rsen rapdly from 1848 yuan n 1988 to 2788 yuan n 1995 (n 1988 yuan). Schoolng ncreases from 10.3 years to 11.3 years between 1988 and As both age and educaton are ncreasng over tme we fnd a slght ncrease n 3 We also used half-normal and truncated normal forms but our emprcal fndng regardng the contrbuton of schoolng sn t altered. 4 Our data ncludes very few foregn sector workers, whch mght be used to compare effcency across sectors. Addtonally, 80 percent of the sample s marred workers. 5

8 experence. We have nearly equal proporton of males and females n our samples and about onequarter of workers are Party members. Regresson Results Table 2 reports our regresson results. Standard OLS earnngs equaton results are smlar to those cted n the lterature above. We observe a sharp ncrease n the educaton coeffcent (0.041 vs ) and a slght decrease n the experence coeffcent. Column 3 n Table 2 presents the fronter regresson results. We note that the rato of the standard errors for the random and neffcency-nduced dsturbances s close to 1 (lambda = 0.78), suggestng that the two error terms nearly equally contrbute to the total varance n earnngs. Comparng the OLS results of column 2 to the fronter results we see that both the schoolng and experence coeffcents are smaller n the fronter model whch dfferentates between actual and potental returns to human captal. The last row of Table 2 presents the predcted effcences. As expected workers capture a larger share of ther potental earnngs n 1995, wth overall labor market effcency ncreasng from to Table 3 shows margnal effects of Party membershp, gender, famly status, enterprse type, and occupaton on labor market effcency. Begnnng wth Party membershp we fnd that the margnal effcency gan declnes from 2.1 percentage ponts n 1988 to 1.35 percentage ponts n 1995, suggestng the wanng nfluence of Party membershp on earnngs. The effcency advantage of beng male (relatve to the omtted group, females wthout a chld less than three) changed very lttle over tme, n each case addng about 1.7 percentage ponts to effcency. However, males wth small chldren enjoyed a larger ncrease n effcency over tme, changng from no mpact n 1988 to a 2.7 percentage pont effcency gan n Ths suggests that fathers of small chldren benefted most from labor market reforms. The margnal effcency effect for females wth chldren was negatve n 1988 and not statstcally sgnfcant n 6

9 1995, mplyng that the effcency penalty for beng female and havng a chld dsappeared over tme. 5 Workers n SOE (state owned enterprses) enjoyed larger ncreases n effcency relatve to the omtted group, urban collectves, and other employment. On the other hand, publc (provncal-level) enterprses experenced only a modest gan relatve to urban collectves. We focus on two occupatons: professonal, techncal, and management (PROF) and Offce workers (omtted group, manual workers). In 1988, offce and professonal workers were less able to convert ther human captal nto wages than manual workers. However, by 1995 we fnd that offce and professonal workers were more effcent than manual workers. Ths suggests that the reforms weakened the relatve advantage of manual workers. Decomposton Results Usng a decomposton method proposed by Oaxaca (1973) we hold the regresson coeffcents constant and allow the levels of the ndependent varables to vary. Table 4 presents the decomposton results based on the pooled data set. By poolng the data we can dentfy a year effect as well as effcency and human captal effects. The frst regresson ncludes the effcency term and the second excludes effcency. The decomposton results clearly show that most, but not all, of the earnngs gans can be contrbuted to an ncrease n labor market effcency. In fact, we fnd that whle 61.4 percent of the change n earnngs can be attrbuted to an ncrease n effcency nearly one-ffth (18.4 percent) s due to an ncrease n the average level of schoolng. The fnal ffth can be explaned by exogenous changes captured by the year dummy (18.9 percent). If we exclude the effcency term we fnd that the 5 Lu et. al (2000), among others, provde evdence that economc reforms have reduced labor market dscrmnaton n Chna. 7

10 schoolng effect generally remans the same (15.6 percent) whle the year ndcator now contrbutes more than 80 percent of the change n earnngs. 6 IV. Concluson The well-known change from a centrally-planned economy to a more market orented labor market substantally mproved Chnese labor market effcency. Less well-known are the educatonal reforms that were undertaken about the same tme. In ths paper we address the queston, how much of the rapd rse n earnngs (between 1988 and 1995) can be attrbuted to an ncrease n the labor market effcency and how much can be attrbuted to the ncrease n average level of human captal (educaton)? We model the Chna s labor market usng standard labor market monopsony theory where the monopsony arses from the lack of job moblty. Ths lack of moblty leads to neffcency whch we expect to declne over tme as labor market reforms begn to take hold. We measure the magntude and change n labor market neffcency usng a stochastc fronter model. Ths approach allows us to measure the extent to whch hgher earnngs n Chna can be attrbuted to a more effcent job market. Our fndngs suggest that most, but not all, of the earnngs gans can be contrbuted to an ncrease n labor market effcency. We attrbute three-ffths of the change n earnngs to an ncrease n effcency, one-ffth to an ncrease n the average level of schoolng, and the fnal ffth to exogenous shocks to the overall economy. 6 We also decomposed usng ndvdual years and no year effect. In ths case the effcency term captures most of the year effect and the schoolng effect remans essentally unchanged. 8

11 References: Agner, D., Lovell, C. and Schmdt, P. (1977). Formulaton and estmaton of stochastc fronter producton models, Journal of Econometrcs, 6, pp Daneshvary, N., Herzog, Jr., H.W., Hofler, R.A., and Schlottman, A.M. (1992). Job search and mmgrant assmlaton: An earnngs fronter approach, Revew of Economcs and Statstcs, 74, Dong, X. and Putterman, L. (2000). Pre-reform ndustry and state monopsony n Chna, Journal of Comparatve Economcs, 28(1), Flesher, B. and Wang, X. (2004). Skll dfferentals, return to schoolng, and market segmentaton n a transton economy; the case of manland Chna, Journal of Development Economcs, 33, Hay, D.M., Derek, M., Lu, G.S. and Yao, S. (1994). Economc Reform and State-owned Enterprses n Chna Oxford, Clarendon Press. Hofler, R.A. and Polachek, S.A. (1985) A new approach for measurng wage gnorance n the labor market, Journal of Economcs and Busness, 37, Hussan and Zhang (1994) Impact of reform on wage and employment determnaton n Chnese state enterprses, , Workng Paper, London School of Economcs. Lang, Günter. (2005). The dfference between wages and wage potentals: Earnngs dsadvantages of mmgrants n Germany, Journal of Economc Inequalty, 3, Lu, P.W., Meng, X. and Zhang, J. (2000). Sectoral wage dfferentals and dscrmnaton n the transtonal Chnese economy, Journal of Populaton Economcs, 13, Lovell, C.A. K. (1995) Econometrc effcency analyss: A polcy-orented revew, European Journal of Operatonal Research, 80, Meng, X. (2000). Labour Market Reform n Chna, Cambrdge: Cambrdge Unversty Press. 9

12 Mnstry of Educaton (2000). Educatonal statstcs yearbook of Chna Bejng, Chna: People s Educaton Press. Morrs (1995). The reform of state-owned enterprses n Chna: The art of the possble, Oxford Revew of Economc Polcy, 11(4), Oaxaca, R. (1973). Male-female wage dfferentals n urban labor markets, Internatonal Economc Revew, 14(3), pp Parker (1999). Are wage ncreases n Chnese state ndustry effcent? Productvty n Nanjng s Machne-Buldng Industry, Contemporary Economc Polcy 17, Polachek, S.A. and Robst, J. (1998). Employee labor market nformaton: Comparng drect measures of workers knowledge to stochastc fronter estmates, Labour Economcs, 5, Polachek, S. and Xang, J (2005). The effects of ncomplete employee wage nformaton: a cross country analyss, Luxembourg Income Study workng paper no.415. Robnson, M. D. and Wunnava, P. V. (1989). Measurng drect dscrmnaton n labor markets usng a fronter approach: evdence from CPS female earnngs data, Southern Economc Journal, 56(2), Natonal Bureau of Statstcs of Chna, (1998). Chna Statstcal Yearbook 1998, Chna Statstcs Press. World Bank, (1999). World Development Report, Washngton, DC Wu, H.X. (2001). Chna s comparatve labor productvty performance n manufacturng, , Chna Economc Revew, 12, Xu, C. (2000). Control, ncentves and competton: The mpact of reform on Chnese stateowned enterprses, Economcs of Transton, 18,

13 Zhang, J, Zhao, Y., Park, A. and Song, X. (2005). Economc returns to schoolng n urban Chna, 1988 to 2001, Journal of Comparatve Economcs, 33, Table 1. Descrptve Statstcs mean std. mean std. Experence (years) Schoolng (years) Male (%) Party membershp (%) Chld < Male wth chld < 3 (%) Female wth chld < 3 (%) Age SOE (%) (works n) publc sector (%) (works n) collectve (%) (works n) other employment (%) Professonal employment Offce employment Earnngs, 1988 Yuan Sample Sze (N)

14 Table 2. Human captal regresson results. (dependent varable: log earnngs) OLS Fronter Experence (.0009)*** (.0017)*** (.0016)*** Experence² (.00002)*** (.00004)*** (.00004)*** Schoolng (.0010)*** (.0018)*** (.0018)*** Provnce ndcators yes yes yes R²/LL N Lambda (0.10) Mean Predcted Effcency (.0008) (.0010) -- Notes: Standard errors n parenthess; *** ndcate that the estmated coeffcents are statstcally sgnfcant at the 1% level. Mean predcted effcency s computed usng parameters of the fronter model (thrd column) estmated on 1995 data. 12

15 Table 3. Determnants of effcency. (dependent varable: predcted effcency) Party membershp (.0022)*** (.0025)*** Male (.0018)*** (.0021)*** Male wth chld (.0037) (.0082)*** Female wth chld (.0038)*** (.0084) SOE (.0021)*** (.0032)*** Publc (.0023)*** (.0029)*** Professonal (.0022)*** (.0029)*** Offce (.0021)*** (.0028)*** Constant (.0020)*** (.0027)*** Provnce ndcators no no R² N Notes: standard errors n parenthess; *** ndcate that the estmated coeffcents are statstcally sgnfcant at the 1% level. 13

16 Table 4. Decomposton of the ncrease n log earnngs between 1988 and (dependent varable: log earnngs) Contrbuton Contrbuton Experence % % (.0003)*** (.0008)*** Experence² % % (.0000)*** (.00002)*** Schoolng % % (.0003)*** (.0009)*** Effcency % (predcted) (.0072)*** Year 1995 dummy % % (.0017)*** (.0049)*** Provnce ndcators yes -- yes -- R² N Notes: standard errors n parenthess; *** ndcate that the estmated coeffcents are statstcally sgnfcant at the 1% level. 14