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Employment Trends in ShanghaiA case of China’s institutional and economic restructuring

Throughout the process of economic transition in China, employment has been, and is still, a very complex social and economic question. Nowhere is this more so than in the city of Shanghai, one of China's most economically developed cities: here, the economic question is of additional interest in that it can be used as a model for China as a whole. Job shortages are less serious in Shanghai than elsewhere, because the rate of economic growth is one of the highest in China and because there has been massive investment from abroad. However, the municipal government can be seen as an archetype of administrative intervention in the labour market; and, precisely because of the city's economic advance, the present employment situation could well represent a tendency for the whole of China, even a textbook example for studying the question on a national scale.

The labour market in China has historically been sharply different in town and country. In the countryside, after the start of the reforms, and because the peasants held onto their land use rights, there was insufficient work, some kind of “hidden” unemployment. As the land guarantees their security, the lack of work has led to lower levels of income in rural than in urban areas. By comparison, unemployed urban workers can only depend on state benefits. The effect of this is that economists and local governments in China tend to be more sensitive to the question of urban unemployment. The employment situation in Shanghai emerges more clearly, in that the rural economy is comparatively more developed and the transfer of surplus rural labour to the industrialised sector is fundamentally complete. For the purposes of the present article, discussion of this subject will concentrate on employment and unemployment in the urban districts of Shanghai((1).

Employment and unemployment during the transition period: a complex situation

Shanghai's unemployment figures since 1985 show three trends. Firstly, a rising rate of unemployment over the past 15 years. Before 1992, the number of registered unemployed in Shanghai was insignificant: below 100,000, that is to say, less than 2%. From 1993 onwards, this grew rapidly: by the end of 1994, this figure was 148,500; and, by the end of 1999, 187,000((2). Secondly, there have been no dramatic surges in the rate, with the single exception of 1996. Thirdly, according to official figures, the unemployment rate in Shanghai is not high in absolute terms. By 1999 it was only 3.1% (see Figure 1). These three factors are significant when we consider the transition of the Chinese economy. They are largely explained by the reform of the employment system beginning in the 1980s, a period characterised by a particularly low rate of urban unemployment. At that time, almost the only people out of work in the towns were graduates. For all other employees, jobs were guaranteed for life: which meant no fear of losing them. After the reform of the employment system, it became clear that major unemployment did exist and had been hidden within the state industry sector, and unemployment figures rose((3). Thus, transition brought with it unemployment and, curiously, this was unconnected with whatever macro-economic variations were taking effect in the economy((4).

Figure 1 Evolution of the unemployment rate in Shanghai (1985-2001)

Those familiar with the Chinese economy will be aware that the real unemployment rate is not as low as the figures would suggest. It is not enough to look at the official figures, because these only include people who are registered as unemployed, that is to say those entitled to sign up as unemployed and to claim the benefits and services authorised by the government—and, in Shanghai, that means only those with city residence permits. So, while unemployment can be defined as “unused labour resources”, in China it takes at least two forms: recognised unemployment—those registered as unemployed—and hidden unemployment—those who are not registered. Among the latter there are again two kinds: laid-off employees from the public sector, known as xiagang, and the “hidden unemployed”, people who are counted as retaining their job but are in fact jobless. The xiagang represent a specifically Chinese phenomenon that made its appearance in the 1990s. This group is made up of company employees who, in losing their jobs (xiagang), have lost the working connection with their company but still receive the social security attached to their area of work, the danwei((5). Shanghai was the first city to create (in 1996) a “re-employment centre”, and only those registered with the centre could enjoy the status of xiagang. These were confined within a strictly limited area of the enterprise. The figures in Table 1 show that, since 1991, the reform of the employment system has to a certain extent deepened, but that government re-employment measures have been partly successful in redeploying the xiagang. At the end of the years 1996 and 1997, the cumulative total of xiagang had reached 200,000. But during more recent years, the cumulative total of Shanghai's xiagang was 147,000 people, a slightly lower figure than the official number of registered unemployed at the end of the same year. According to our own estimates, the number of Shanghai's unemployed—registered unemployed and the xiagang—is close to 7%. When it comes to the hidden unemployed, those with jobs in state enterprises, it is difficult to arrive at a figure; but it is estimated that the amount of surplus labour would be greater in healthy state enterprises or collectives than in those in difficulty or making a loss; this is because, for some years now, workers with nothing to do have been transferred out of loss-making state enterprises and deployed elsewhere. Thus, the question of hidden unemployment has not yet been thoroughly analysed.

Table 1 Situation of the employees and the laid-off workers in the public sector (1991-1999)

Unit: individual. * The reference plan bases its evaluation on the agregate number of xiagang at the end of the previous year and the number of xiagang of the year. Source: Bureau of Labour and Social Security of Shanghai.

Once the number of xiagang is included in the unemployment category, the problem in Shanghai could appear more serious. But one must wonder why the unemployment in the city seems not to amount to a social problem. In fact, for a city that has a growth rate of over 10%, it is quite plausible to imagine that many new jobs are created every year. Throughout the period of economic transition, the phenomenon of “hidden unemployment” has masked the fact that, among those registered as unemployed and the xiagang, there were a large number of people who nonetheless had a paying job. In reality, the job put them in the employed category. But the registered unemployed and these xiagang with their government allowances are all included in the unemployment statistics. The reasons for the phenomenon of “hidden employment” are very complex, the main one being economic. As long as the possibility of hiding exists, the people filling these hidden posts have no need—and often it is not in their interests—to bring the reality of their jobs to public attention. Thus, they can receive unemployment benefit (or the allowances available to the xiagang) and the health insurance that goes with it (or, for the xiagang, the health insurance associated with their area of work). From another point of view, the paid work that these “hidden employees” find for themselves is never stable; and often the workers have no proper employment contract with the danwei that employ them((6). Be that as it may, the existence of this “hidden employment” leads to seriously overestimated figures for unemployment; small-scale statistical surveys suggest that 50% to 65% of those registered as unemployed and the xiagang are involved in “hidden employment”((7).

It is often said that statistics for urban unemployment do not take account of the migrant population and, in particular, of immigrants from the countryside (mingong). Yet, it is obvious that the problem of unemployment arises also among the labour force outside the cities. Thus, present statistics do not perfectly reflect the unemployment situation. But if the figures did include the labour force from outside the cities, would unemployment be higher? At present, it is difficult to say whether unemployment in the cities is less significant than outside. According to a sample survey, the relevant services of the Shanghai municipality listed more than 1.3 million people from outside as working in the services, trade and industry sectors. Of these, enterprises employ 300,000 migrant workers, building sites 500,000, service activities or the collective economy about 400,000, and sectors attached to agricultural production, forestry and livestock farming, about 100,000. In addition, from 150,000 to 160,000 immigrants are reckoned to be working in those social services entities that are not included in the municipal departments((8). The foregoing figures refer to the proportion of the labour force from outside that is already in employment; there are no available figures for those within the same labour force who are out of work. Yet, the rapid growth of Shanghai's economy leaves a significant margin for the creation of jobs for those coming in from outside. Moreover, the work done by “migrants” and that done by the locals is complementary. In these circumstances, one may think that the problem of unemployment among workers from outside is not very serious. Thus, the employment—“hidden”—of some of the unemployed and of the migrants helps to reduce the unemployment rate in Shanghai.

Employment trends in relation to supply and demand on the labour front

By comparison with other cities in China, employment in Shanghai is not yet a serious social problem. We shall try to estimate the prospects for employment by first considering how supply and demand in the field of work has developed over recent years.

For those bound by the household registration system (hukou), the labour market in China still remains segmented. Thus, in Shanghai, the labour market is limited to the supply of labour originating in the city itself. The first factor influencing this market is the slow growth of the city's population. Since the family planning policy was applied, the natural rate of growth of the Shanghai population has been extremely low. It dropped below zero in 1993, and this tendency persisted thereafter((9). At the same time, the migratory balance (the difference between the growth rates of the immigrant and emigrant populations) remained stable. The level for the rate has been maintained since 1993 at 5%. For Shanghai's population, that has been reflected in a very low growth rate (see Figure 2).

Figure 2 Natural growth rate and migratory balance (1978-1999)

Growth in the supply of labour is also influenced by the level of activity. Since the reforms, China's overall level of economic activity has tended to fall, mainly because of the transition. The traditional planned system of employment takes no account of differences in income, because those who are in a position to work must have a job and receive in exchange a corresponding salary in social benefits. In this system, the activity rate has adopted distinctive features in China, just as in other countries with planned economies. After the reforms, the differences between people's incomes grew, and the system whereby social benefits were constantly linked to the employer had to be reformed. That allowed a small number of people who did not wish to be re-employed to retire from the labour market. Moreover, in the traditional system, employment in the towns and districts of China was unevenly concentrated in the secondary sector, particularly in heavy industry, whereas development of the tertiary sector and of light industry has been inadequate. After the structure of the economy was reformed and realigned, some newly created economic sectors were unable completely to absorb the surplus labour from traditional sectors; and certain rapidly growing sectors in particular, finance and trade among them, did not play much of a role in absorbing it. In fact, surplus workers from the traditional sectors were unable to find new jobs and, voluntarily or otherwise, had to withdraw from the labour market. The development of education, university education in particular, was another significant factor in lower activity levels because young people receiving real higher education are not counted among the active population((10). In Shanghai, the downward tendency in the labour force participation rate since the start of the reforms is not as marked as in the rest of China((11). Indeed, the development of university education there since the 1990s is very rapid, and the proportion of young people in higher education is among the highest in China. The number of students in Shanghai has increased by around 10,000 a year on average, and this tendency has inevitably helped to bring down the rate of economic activity among young people.

While the supply of labour was not growing strongly, the rapid growth of the Shanghai economy helped to create numerous jobs and, in fact, to ease the pressure on employment. In practical terms, the growth of demand for labour can be explained under three headings.

Firstly, a growing number of new jobs were created by non-state and non-collective entities. In 1999, the “other economic entities” provided work for more than half the new urban employees (see Table 2). The number of employees from collectives and state enterprises who were listed as unemployed went up every year. The total number of employees put out of work overtook that of jobless people finding employment. In the other economic entities, the number of jobless people finding work went up more quickly than the number of employees put out of work (even though this figure was also rising by the year). In 1999, it is estimated that only one fifth of those out of work found a job in the collectives and state enterprises (see Table 3). In the 1990s, the number of people employed in collectives and state enterprises fell, whereas the number in other entities rose sharply: at present, this number is greater than that for the collective economic entities (see Figure 3).

Table 2 Evolution of re-employed persons

Unit: individual. Source: Bureau of Labour and Social Security of Shanghai.

Table 3 Mobility of employees and unemployed people (1995-1999)

Source: Bureau of Labour and Social Security of Shanghai.

Figure 3 Distribution of employees, by type of enterprises (1991-1999)

Secondly, in recent years in Shanghai, the number of individual workers has hardly risen because “informal employment”, as it is called, has become a useful solution for the city's unemployed workers and xiagang. From 1996 onwards, the introduction of this practice, informal employment has enabled individuals or groups of xiagang to do publicly useful work in urban projects for the improvement of the environment, social welfare services and neighbourhood associations. Such publicly useful enterprises have created temporary or limited jobs in the form of unqualified family work or craft workshops. This form of work did not offer, even temporarily, the means of forming a stable employment relationship. In Shanghai it has mainly been taken up by groups; and, by the end of 1999, the number of such groups was put at 7,048, employing 71,072 people.

Thirdly, the Shanghai municipality has become a significant force for the creation of jobs. By maintaining, since the 1990s, quite rapid growth throughout all areas of construction, infrastructure and the rehabilitation of urban areas, the Shanghai municipality has certainly enabled a parallel growth in jobs to take place. Moreover, the government has provided help for people having difficulty finding work. The Shanghai municipality has recently taken a close interest in the formation of groups for work on public projects. It has also brought about a transformation in benefits, replacing passive handouts with active help for people seeking jobs. A monthly employment grant of between 200 and 400 yuan has been agreed for workers devoting themselves to projects that benefit the community. The city of Shanghai has set up a support network on three levels—the city, the district/county and the neighbourhood—for unemployed people in serious difficulty, finishing at the end of 1999. This formation of 167 work groups for projects benefiting the community((12) helped 10,836 people out of 36,000 to find work again((14).

We have been studying employment in Shanghai in the context of labour supply and demand. From an overall point of view, Shanghai's employment situation is quite favourable, but such optimism must be moderated.

The prospects for employment and unemployment according to its structure

When economic growth is fast, the structure of employment undergoes radical change. In recent years, the proportion of employment in the private sector has grown (see Figure 3), but employment in the state and collective sector still amounts to more than half the jobs. The growth of employment in the private sector is nevertheless likely to continue over the years ahead, because Shanghai has witnessed an acceleration in the realignment of its economic sectors during the past twenty years. Development dependent on a pre-reform economic structure that was excessively weighted in favour of industry and especially heavy industry, has been corrected (see Table 4).

Table 4 Evolution of the GDP structure and distribution of jobs, by type of activity (1980-1999)

Source: Bureau of Labour and Social Security of Shanghai.

The rapid realignment of the employment structure is leading to the creation of a reserve of structural unemployment. In order to reduce it, two conditions must be met. Firstly, the labour market has to be highly efficient and must perfectly develop its functions of information and the adjustment of prices. Then, the quality of the labour must constantly be able to adapt to the demand from expanding economic sectors. For the time being, the intrinsic quality of labour does not satisfy the demands for readjustment on the part of various sectors of the economy. That is the most important factor that negatively influences the setting up of a “market” for employment in Shanghai. From the point of view of the professional distribution of jobs, the proportions of managers, technicians and engineers increase regularly, while those of workers, apprentices and service staff diminish (see Table 5)((15). Indeed, the relative importance of various sectors to economic growth is altering in favour of the tertiary sector, which is very demanding when it comes to the quality of labour. This point is an important factor in structural unemployment.

Table 5 Distribution of employees in state-owned and collective enterprises in the industry and the construction sector

Source: Bureau of Labour and Social Security of Shanghai.

The question of the quality of labour comes up also in the structure of unemployment. It is characterised by three elements:

1. The average age of unemployed people is rising, with the proportion of those over 35 going up steadily. 7.9% of unemployed people were over 35 in 1991, 25.9% by the end of 1999 and 27.3% by the end of June 2000 (see Table 6).

Table 6 Evolution of the number of unemployed persons, by age (1991-1999)

Source: Bureau of Labour and Social Security of Shanghai.

2. The level of qualifications offered by unemployed people is falling: most have not reached the level of specialised technical establishments—46.2% of unemployed people, by the end of 1999, had reached junior school level, 46.1% that of secondary school or specialised establishment, 7.7% had attained a level above technical schools and scarcely 10% had reached the level of specialised technician or above (see Table 7).

Table 7 Evolution of the number of unemployed persons, by level of instruction (1995-1999)

Source: Bureau of Labour and Social Security of Shanghai.

3. Periods of unemployment are quite long, with an increase in medium-term and long-term unemployment. The average period of unemployment in 1989 was ten months. By 1999 this had gone up to 16 months. Many people remain unemployed for more than two years((16). The elements described above show the three sides of the same problem. Experience and corresponding levels of qualification are fairly low within age groups more easily affected by unemployment; while jobless people with minor qualifications remain unemployed for longer.

The municipality has implemented measures appropriate to help the older unemployed to find work. In 2001, “measure 4050” targeted women over 40 and men over 50 with the aim of resolving this problem. Moreover, the city improved its training facilities for unemployed people and the xiagang. At the end of 1997, a comprehensive training network had been put in place linking by computer all the training organs in the employment market. The Centre for Vocational Training, which is attached to the Bureau for Labour and Social Security, has begun since 1997 to offer free training for more than 100,000 unemployed people selected by means of a competence appraisal. The government took the initiative, in 1998, of offering training in setting up businesses, using the re-employment grant as a loan or as security for launching the business. In addition, it gave specific help to those setting up new businesses that would employ people who were jobless.

The unification of the labour market: Its impact on employment and unemployment

To take a closer look at various aspects of employment in Shanghai, we must analyse the disparities in the employment market in a cross section of China's cities. During the processes of restructuring and transition of the economic system, the labour market in China has remained split between town and country((17), a separation that is favourable to the control of unemployment in Shanghai itself. But with the reform of the employment system, the labour market has become progressively more unified. And this reform has inevitably affected the creation of employment and unemployment.

The gap between urban and rural labour markets

In 1996, under pressure to employ its urban labour force, the city of Shanghai increased the range of restrictions and blocks to labour coming in from outside the city. The government set up a system of control at different levels—the city, the district and the neighbourhood—by adjusting the structure and overall control of labour from outside. Not only did it restrict the access of outside labour to certain sectors and jobs, it also imposed a charge on work units to cover management and service expenses for every such worker employed. As a consequence, the costs associated with migrant labour went up and the demand for migrant labour went down.

It would be wrong to over-emphasise the negative influence of migrant labour upon employment in Shanghai: the influx of workers from outside the city has made a noticeably positive contribution to economic growth. The incomers accept work that Shanghai people do not want to do: they will do “anything that is dirty, tiring or dangerous”. What is more, consumers can benefit from the fairly low pay required by the migrant labour force; and the enterprises that employ outside labour can increase their profits, which means they can attract more investment and thus further enhance their capacity to create jobs. Thirdly, workers from outside are themselves consumers. The growing volume of demand for consumer goods brings with it a more significant demand for labour. This effect is very noticeable when the economy is in recession. Factors favouring a separation between the labour force in the cities and that from the countryside are likely to exert a negative influence on the growth of employment and the development of the economy((18). In fact, the restrictions on the employment of migrant labour hold back the growth of the job market((19).

Rifts within the labour market

Shanghai is one of those cities where the employment system is differentiated according to the type of enterprise. In the private sector, the mechanism for recruiting labour and fixing wage levels is quite simple since, fundamentally, the market dictates the volume of employment and pay levels((20). In the state enterprises, it is the government that controls both these things((21). This control is exercised in three ways:

1. It is applied to pay as a whole. If what is paid out by enterprises exceeds the total sum allocated for pay in that year by the Labour Bureau, then the total revenue from income tax and tax on the companies must balance the extra money spent on pay; and, when the pay plan for the half-year is drawn up, the adjusted total must be deducted from the average person's basic wage.

2. The control is applied also to fixing and paying out pay rises. Shanghai Labour and social Security Bureau must decide the annual pay award, calculating the margin for increase in the average person's pay according to the margin for increase in the annual tax revenue coming in from the enterprise.

3. Lastly, if the development level of the average pay per person in collectives, state enterprises and holding companies exceeds in one year the average for the preceding year by more than 200%, the surplus amount is diverted into the aid fund for people in difficulty.

Despite the reforms, enterprises in the state sector are not entirely free to take their own decisions in matters of employment. The government still imposes very strict control over the total reservoir of labour already accumulated within the state enterprises. The system will not yet allow manpower cuts for purely economic reasons. In recent years, although the state enterprises have been able to shed some of their surplus staff by passing them on to the employment centres, the departure of staff from the enterprises has not immediately affected the overall numbers of surplus staff. Depending on the spending capacity of the state finances, while taking account of the pressure exerted by the consolidated figure for the xiagang in the previous year and of the redeployed surplus labour, each year, Shanghai's Labour Bureau can draw up a list of targets in reference to the number of xiagang over the year. Then, depending on the efficiency of each sector, the state allocates afresh to each sector its share of the overall number of xiagang employees. Profitable enterprises that have surplus labour cannot obtain from the government a target figure for xiagang. To redeploy surplus manpower, the only possibility for these profitable enterprises is to find jobs for the xiagang within the enterprise itself.

The rift within the labour market has had negative effects on the efficiency of state enterprises. So long as the control of wages remains with the government, workforce incomes and the firm's growth will both be held down. As the wages in state enterprises become lower than in non-state firms (especially in enterprises built on foreign investment) they generate an imbalance. What is more, the number of employees in the state enterprises over which the government exercises control is still objectively the most important labour force. The staff in state enterprises, faced with falling pay levels and insufficient work, lack the motivation to take their duties seriously((22). And the distortion of wages in state enterprises gives further encouragement to highly qualified workers to choose non-state enterprises; this further impedes development in the state sector((23).

It must be emphasised that the rifts in the labour market permit only a short-term control of unemployment in towns and cities. The municipality of Shanghai has already witnessed the negative effects of these rifts upon employment and growth. At the time of the 10th Five-year Plan, Shanghai had recommended that a mechanism known as “the kernel and the four offshoots” should be introduced to the labour market. The kernel represents the employment mobilised by the market. The four offshoots designate the practical effects of state action in the market economy: promotion of employment, social security, control and supervision, and management services.

In the process of unifying the labour market, recent trends in Shanghai's employment deserve special attention. Firstly, by unifying the labour market, efficiency and economic growth are enhanced, which in turn have an active influence on job creation. Thus, from the point of view of overall quantity, unifying the job market helps employment in Shanghai. Secondly, the reform of the employment system should be extended still further in the state entities. Hidden unemployment in some state enterprises should be “disclosed”. In the short term, the unemployment rate is likely to rise but, in the long term, the competitiveness of Shanghai will improve while playing an active part in the growth of employment. Thirdly, the unification of the labour market has the certain effect of increasing competition in the market for jobs. In particular, low-cost labour from outside threatens the structure of labour employment in Shanghai. The wish to create jobs for Shanghai's original workforce should be boldly extended to a full acceptance of competition in the marketplace, which will lead to a balance between Shanghai labour and outside labour. The intrinsic quality of employment in sectors where outside labour is not competitive must improve; otherwise, the principle of competition in the market can only leave this insufficiently qualified labour force out of work.

By studying the development in Shanghai of changes in employment, unemployment and the labour market during the economic reforms, we have been able to distil a few general rules on employment in China. Firstly, to understand the question of unemployment, one must become familiar with all aspects of the reforms within the employment system, the work situation and the statistical methods used to measure the level of unemployment. Today, if we consult the official figures on unemployment, we will find that levels in Shanghai and China are not high. But, if we take into account the situation of the xiagang and the hidden unemployment of staff still employed, then the problem of unemployment seems quite serious. Yet, if we then consider that a significant number of the unemployed and the xiagang are, in fact, employed (a situation we have called “hidden” employment), then the worrying figures for the jobless and the xiagang must be re-examined. Obviously, sustained economic growth in a given area will lead to the rapid creation of employment. Shanghai has been able to maintain rapid economic growth over a long period, and the problem of unemployment seems to have been contained there.

If we look at the labour market in Shanghai by analysing changes in supply and demand, the question of unemployment is not alarming. But, if we consider the transition and the structure of the system, it is harder to be optimistic. The share in the economic structure of various sectors of activity is in contradiction to the quality of the labour force. The less qualified workers will be more likely to lose their jobs. Moreover, if the labour market can gradually be unified, the surplus labour in state enterprises and collectives will be progressively redeployed, which will bring about stronger competition between outside labour and Shanghai labour. Labour that cannot adapt to the process of reforming the system is bound to be eliminated as a result of competition within the market. Although the prospects for employment are not yet determined, we can be sure that the reform of the employment system by the market can only increase the efficient allocation of labour resources and benefit economic growth. The problem is to know how the fruits of economic growth will be divided up. The future for poorly qualified urban workers, stripped of the government's protection as they are now, is none too rosy. It is, nevertheless, the government's responsibility to help them, though a fair number of people think it is also up to the workers themselves to make more of an effort. When it comes to the transition towards a market economy, recent developments in Shanghai's employment market are a useful pointer to the road China as a whole may be taking.

Translated from the French original by Philip Liddell
(Originally translated from Chinese in Perspectives chinoises)