Download Why There Is Rapid Economic Growth Accompanied By High

POLITECNICO DI MILANO
Scuola di Ingegneria dei Gestionale
POLO TERRITORIALE DI COMO
Master of Science in
Management, Economics and Industrial Engineering
Why There Is Rapid Economic
Growth Accompanied By High
Unemployment in China
Supervisor:
Thesis by:
Prof. Tajoli Lucia
Liu Jingya
(736339)
Kong Jie
(721462)
Academic Year 2010/2011
Acknowledgement
At the beginning of this paper, we would like to express our gratitude to our professor,
for her involvement in our research work and for her support during the drafting of
this thesis.
We would like to thank Professor Lucia Tajoli, for her contributing to our education
and growth in the research and professional field. Her constant guidance and
encouragement during the entire periods that helps us keep positive and go through
the difficulties encountered.
For her continue availability and readiness at all stages during our mater
program. Her lecture gives us a comprehensive background in international
economics which contributes a lot during our thesis research.
Meanwhile, she contributes a lot in the final revise and assessment for our
thesis. Thanks to her.
1
Ringraziamenti
All'inizio di questo lavoro, vorremmo esprimere la nostra gratitudine al nostro
professore, per il suo coinvolgimento nel nostro lavoro di ricerca e per il suo supporto
durante la stesura di questa tesi.
Vorremmo ringraziare il professor Lucia Tajoli, per il suo contributo alla nostra
educazione e crescita nel settore della ricerca e professionali. La sua guida costante e
incoraggiamento durante i periodi intero che ci aiuta a mantenere positivo e passare
attraverso le difficoltà incontrate.
Per la sua continua disponibilità e prontezza in tutte le fasi durante il nostro
programma mater. Sua conferenza ci offre il contesto più ampio in economia
internazionale, che contribuisce molto nel corso della nostra ricerca per la tesi. Nel
frattempo, si contribuisce molto nel finale rivedere e valutazione per il nostro
thesis.Grazie a lei.
2
Abstract
In China, there is a phenomenon of the high economic growth coexisting with high
unemployment, which deviates from the Okun’s Law.
The thesis tries to do the empirical and normative exploration in the coexistence.
The empirical analysis focus on describe, explain and predict, and the other analysis
are concern with law and recommendations. In this paper, using empirical analysis,
we demonstrate and expound how the three factors: China's economic growth,
transformation and over-utilization of labor force, working together to bring about
the coexistence, and thus give a complete explanation on Okun's paradox in China.
In China the relationship between unemployment and economic growth will be
different from the mature market economy because China is country not open up a
long time and in the process of accelerating industrialization, increasing the organic
composition of capital, with economic characteristics of dual-sector structure,
economic transformation, and over-utilization of labor forces.
Key words: coexistence, high economic growth, high unemployment, economic
transformation, over-utilization, Okun’s Law
3
Sommario
In Cina, c'è un fenomeno di forte crescita economica che coesiste con alto tasso di
disoccupazione, che si discosta dalla legge del Okun.
La tesi cerca di fare l'esplorazione empirico e normativo nella coesistenza. Il focus
dell'analisi empirica descrivere, spiegare e prevedere, e le altre analisi sono
preoccupazioni con la legge e le raccomandazioni. In questo lavoro, utilizzando
l'analisi empirica, noi dimostrare e spiegare come le tre fattori: la crescita economica
della Cina, la trasformazione e la sovra-utilizzo della forza lavoro, lavorando insieme
per realizzare la coesistenza, e quindi dare una spiegazione completa sul paradosso
Okun in Cina.
In Cina il rapporto tra disoccupazione e la crescita economica sarà diverso
dall'economia di mercato maturo perché la Cina non è un paese aperto da tempo e
nel processo di accelerare l'industrializzazione, l'aumento della composizione
organica del capitale, con le caratteristiche economiche del settore a doppia
struttura , la trasformazione economica, e sovra-utilizzo delle forze lavoro.
Parole chiave: convivenza, crescita economica, alta disoccupazione, trasformazione
economica, sovra-utilizzo, la legge di Okun
4
Contents
Acknowledgement..................................................................................................... 1
Ringraziamenti .......................................................................................................... 2
Abstract ..................................................................................................................... 3
Sommario .................................................................................................................. 4
List of Figures .......................................................................................................... 8
List of Tables .......................................................................................................... 10
1
Introduction .................................................................................................... 11
1.1
The topic ................................................................................................ 11
1.2
The meaning of research ........................................................................ 14
1.3
Define the Basic concept ........................................................................ 16
1.3.1 Economic growth .......................................................................... 16
1.3.2 Unemployment ............................................................................ 16
1.3.3 Unemployment rate, urban unemployment rate .......................... 17
1.4
2
Outline of thesis ..................................................................................... 18
Theoretical overview................................................................................... 21
2.1
The review of relevant western economic theories ................................. 21
2.1.1 Western Theories of Unemployment ............................................ 21
2.1.2 Research on the relationship between the economic growth and
unemployment ........................................................................................ 25
3
2.2
Marxist theory of unemployment ........................................................... 29
2.3
Research on the situations in China ........................................................ 31
2.4
Chapter summary ................................................................................... 33
Analysis on the relationship between China economic growth and
unemployment...................................................................................................... 34
3.1
The economic growth and unemployment in China ................................ 34
5
3.1.1 China's economic growth.............................................................. 34
3.1.2 Reason of China’s economic growth ............................................. 41
3.1.3 Unemployment in China ............................................................... 42
3.2
Relationship between economic growth and unemployment in China .... 50
3.2.1 The deviation of China economy from Okun’s Law ........................ 50
3.2.2 Reasons for the coexistence of China's high economic growth and
high unemployment ................................................................................. 55
4
China’s economic growth pattern and its employment effect .... 57
4.1
Economic growth pattern and employment ............................................ 58
4.1.1 Definition of "Economic growth pattern" ...................................... 58
4.1.2 Economic growth pattern and employment .................................. 59
4.2
The capital-driven economic growth pattern in China ............................. 60
4.2.1 Capital elements and China's economic growth ............................ 61
4.2.2 Effect of Investment on China's economic growth ........................ 65
4.2.3 Analysis of effects of capital on economic growth ......................... 68
4.3
Weakened employment absorption capacity of economic growth .......... 69
4.3.1 The concept of employment elasticity .......................................... 69
4.3.2 Absorption capacity of the employment and employment elasticity
by three strata of industry ........................................................................ 71
4.3.3 Overall employment elasticity of China’s economic growth .......... 75
5
Effect of economic transformation on unemployment .................... 77
5.1
Disguised unemployment led by the planned economic system ............. 77
5.1.1 Employment suppression under the strategy of prioritizing
development of heavy industry ................................................................ 78
5.1.2 Disguised unemployment in urban areas cause by the Planned
Economy system ...................................................................................... 79
5.1.3 Massive
disguised
unemployment
led
by
the
“Urbanized
suppression” in rural areas ....................................................................... 81
6
5.2
Employment expansion in the early reform period ................................. 82
5.2.1 Employment expansion in rural areas ........................................... 82
5.2.2 Employment expansion in urban areas ......................................... 84
5.3
Rising unemployment led by market transformation .............................. 85
5.3.1 Dominance of the disguised unemployment in urban areas ......... 85
5.3.2 The pressure of transition of rural surplus labor to cities on urban
employment ............................................................................................ 87
5.4
6
Dominance of the disguised unemployment and economic growth ........ 88
Over-utilization of labor force and unemployment .......................... 91
6.1
Definition and classification .................................................................... 91
6.1.1 Definition ..................................................................................... 91
6.1.2 Classification ................................................................................ 92
6.2
The causes of the over-utilization of labor forces and its negative effects 93
6.2.1 The causes of the over-utilization of labor forces .......................... 93
6.2.2 Trends and negative effects of over-utilization of labor forces ...... 94
6.3
Unemployment resulted from over-utilization of labor forces................. 96
6.3.1 The crowding effect on employment ............................................ 96
6.3.2 Capital surplus resulted from over-utilization of labor forces under
low wages ................................................................................................ 99
7
8
Suggestion for reducing the unemployment .................................... 101
7.1
The negative impact of unemployment ................................................ 101
7.2
Suggestion of reducing the unemployment .......................................... 102
Conclusion and future work ......................................................................... 106
8.1
Conclusion ............................................................................................ 106
8.2
Future work .......................................................................................... 108
Reference .............................................................................................................. 110
7
List of Figures
Figure 1-1 GDP, Annual average rate of growth (in percentage)........................ 12
Figure 1-2 Number of Registered Unemployed Persons in Urban Areas (in
million) .................................................................................................... 13
Figure 1-3 Registered Unemployment Rate in Urban Areas (%) ........................ 13
Figure 1-4 Partition of the total population ...................................................... 17
Figure 3-1 China in 1978-2008 (in US$ Million) ................................................ 35
Figure 3-2 China GDP Growth rate in 1978-2008 .............................................. 38
Figure 3-3 Composition of GDP in 1978-2008................................................... 40
Figure 3-4 Growth Rate of Each industry in 1978-2008 .................................... 41
Figure 3-5 Chinese unemployment rate and GDP growth rate in 1978-2008 .... 53
Figure 3-6 Scatter Diagram showing unemployment rate and GDP growth rate in
1978-2008................................................................................................ 54
Figure 3-7 Relationship between changes of unemployment rate and GDP
growth rate in 1978-2008 ......................................................................... 55
Figure 4-1 The Scatter plot of relationship between capital stock and GDP ...... 64
Figure 4-4 The calculated elasticity of employment of the Three Strata of
Industry ................................................................................................... 73
Figure 5-1 Number of laid-off workers in State-owned Units ............................ 86
Figure 6-1 ........................................................................................................ 98
8
Figure 6-2 Crowding-out effect of over-utilization of labor force ...................... 99
Figure 6-3 Low wage and Capital surplus ....................................................... 100
9
List of Tables
Table 1-1 GDP: China, USA and Italy (in US$ billion) ......................................... 12
Table 3-1 China Economic growth in 1978-2008 ............................................... 35
Table 3-2 GDP Annual Growth (%): BRIC, Italy, Japan, USA and Western Europe
(Currency: US$) ........................................................................................ 37
Table 3-3 Contribution of the Three Strata of Industry to GDP Growth ............. 38
Table 3-4 The urban unemployment rate estimated by the Chinese Academy of
Social Sciences ......................................................................................... 44
Table 3-5 Other two groups of data about the urban unemployment rate ....... 46
Table 3-6 China Urban unemployment in 1978-2008 ....................................... 49
Table 3-7 Changes of Chinese GDP and unemployment rate in 1978-2008 ....... 51
Table 4-1 Chinese capital stock and GDP (at constant price in 2000) ................ 62
Table 4-2 The investment in fixed assets and GDP ............................................ 65
Table 4-3 Factors contribute to economic growth rate ..................................... 69
Table 4-4 .......................................................................................................... 71
Table 4-5 The employment elasticity of China economic growth ...................... 75
Table 5-1 Rural employment of township and village enterprises ..................... 83
10
1 Introduction
1.1 The topic
Why China economic grows with a high speed but unemployment rate is still high?
Base on the theory of economic, a country’s economic grown result from the
technical improved, the capital’s accumulated and labors increased during a long
time. Once the economic grown the increase labor involved. Absorption of
employment, thereby reducing the unemployment rate, so that there is a negative
correlation between economic grows rate and unemployment rate. This correlation
has accepted by mainstream economic theory and empirical analysis.
American economist Okun raise a positive result of this aspect
[1],
he obtained this
theory according to the U.S.’s the historical data: the unemployment rate for every 1
percentage point below the natural unemployment rate, the economic growth will
be higher than potential output 3 percentage points, this is the famous Okun's Law,
this Law and the Phillips curve, they are cornerstones constitute the neo-classical
economics, the of the aggregate supply curve. 1
Since the reform and opening up, China's economy maintained highly growth rate,
average annual growth is steadily more than 9% during recent years (Table1-1,
Figure1-1). At the same time, the employment situation is increasingly grim; the
registered urban unemployment increased year by year (Figure1-2) and high
unemployment. The registered urban unemployment rate from 2.6% in 1993,
gradually rose to 4.2% in 2004 (Figure l-3), while the actual unemployment rate is
1
In economics, the Phillips curve is an historical inverse relationship between the rate of unemployment and the
rate of inflation in an economy. State simply, the lower the unemployment in an economy, the higher the rate of
inflation. In economics, Okun's law is an empirically observed relationship relating unemployment to losses in a
country's production. A combination of these two is the relationship between inflation and country’s production,
which is Aggregate supply curve.
11
higher. Obviously this is a perverse economic phenomenon, that the Chinese
economy may not fit Okun's law.
Table 1-1 GDP: China, USA and Italy (in US$ billion)
GDP
China
USA
Italy
2000
1,192.84
9,898.80
1,097.34
2001
1,316.56
10,233.90
1,117.35
2002
1,454.04
10,590.20
1,218.98
2003
1,647.92
11,089.20
1,507.11
2004
1,936.50
11,812.30
1,727.83
2005
2,302.72
12,579.70
1,777.69
2006
2,779.87
13,336.20
1,863.38
2007
3,458.33
14,010.80
2,116.20
2008
4,416.10
14,369.40
2,296.63
2009
4,984.43
14,119.29
2,112.78
Source: United Nations Statistics Division-National Accounts Main Aggregates Database
China
USA
Italy
15.00%
Growth rate
10.00%
5.00%
0.00%
2000
-5.00%
2001
2002
2003
2004
2005
2006
2007
2008
2009
Year
Figure 1-1 GDP, Annual average rate of growth (in percentage)
Source: United Nations Statistics Division-National Accounts Main Aggregates Database
12
10
9
8
7
6
5
4
3
2
1
0
Figure 1-2 Number of Registered Unemployed Persons in Urban Areas (in million)
6.0
Registered
Unemployment
5.0
4.0
3.0
2.0
1.0
0.0
Figure 1-3 Registered Unemployment Rate in Urban Areas (%)
Source: China Labor Statistical Yearbook
13
1.2 The meaning of research
Unemployment has become economic and social issues are gradually concerned by
the world, to explore the reason of unemployment, this is always an important task
of economics. Marxist economics and Western neo-classical economics, economic
theory, Keynesian economics, have attempted to explain the unemployment’s reason,
the results of theoretical is a non-ignorable guiding role for the unemployment
problem of present China. It is important significance in practical also. However,
China has its own unique circumstances and different from Western countries and
other developing countries’ process and path of development, therefore, whether
Western economics, or Marxist economics’ unemployment theory have some
limitations on practice in China.
Domestic’s researches are more concentrated on Chinese economic growth’s
the
motivation, the source and the patterns, quality, growth path, comparison of growth,
convergence, capital formation, industrialization, the contribution rate of each
factors in general, not directly regarding the relationship between economic growth
and the unemployment.
The research of employment and unemployment just focused on analysis of the
present employment situation and labor surplus in urban of China, unemployment
and employment statistics, the policy of control unemployment and comparison of
the definition of unemployment between China and other countries. Rather than
discussing the issues related to economic growth.
Although there are many study on the relationship between China's economic
growth and employment, but we still did not obtain a consistent conclusion, if
research shows that China's economic growth leads to employment growth, while
some studies have opposite conclusions.
14
How to solve the problems of jobs, and reduce unemployment rate, has been a
major problem of the developing countries. In the transition of China economic
system, urban unemployment and lost jobs have become prominent issues: current
population movement have expansion trend both on the scope and range.
And this consequent is to be a trigger of a series of economic and social problems, so
that it caused extensive attention. Therefore, solving the unemployment problem is
the most serious challenges of China.
Building a "basically well-off" society requires not only substantial growth on
economic output, but also requires full employment, as well as the society and labor
market develops completely. Based on analysis of the phenomenon that high Chinese
economic growth and high unemployment existing together come out suggested
policy in order to reduce unemployment.
As a part of Asian developing country, China has its own special nature on
development of economic and social. The relationship between unemployment and
economic growth is different from the mature market economy. As high growth and
high unemployment are coexist, Chinese economy deviate from Okun's law, so we
must consider applicability Okun’s law in China, the assumptions of Okun's law meet
the conditions of China or not, and to know this violation is real or nominal, and to
find out it is related to the accuracy of the measure of the unemployment or not and
so these types of issues. We cannot fully explain by use a single theory, it is necessary
to gain the answer from the particularity of China's economic growth and
unemployment. In fact, it is not a simple research on numerical relationship for the
coexistence of a country's economic growth and the unemployment, because the
speed of economic growth and growth patterns will affect the employment level as
well.
15
1.3 Define the Basic concept
Construction of the theoretical system based on a particular concept, definition of
concept will provide better entry points of theory studies, also be able to formation
of powerful explanatory of theory from grasping the intrinsic concepts’ links. The
core concept include: economic growth, unemployment, unemployment rate, urban
unemployment rate.
1.3.1 Economic growth
In general, “economic growth” is the productivity growth of a country or region in a
certain period (the first quarter, one year, three year, five or ten years, etc.),
including the products and services’ growth of output.
According to Palgrave’s Dictionary of Economics, economic growth generally is
defined as "a measure’s change rate by using constant price to calculate the national
income per capita, the most widely used is the growth rate of per capita gross
domestic growth”
[2].
Our article’s "Economic Growth" concept is gross domestic
product growth (GDP) in one year, while the GDP growth rate as a measure of
economic growth.
1.3.2 Unemployment
Unemployment is the part of the individuals in the labor force who are without jobs
and they have actively looked for work within a certain period, they are completely
idle. As defined by ILO (International Labor Organization, ILO), there must be three
conditions: first they have ability to work; second they are not working; third they are
willing to work and looking for a job now.
We can classify the population of one economic into different types by their
16
employment status. At first, divide the total population into working age and
non-working age in a certain point of time, and then put working-age population into
the labor force and not in Labor Force. Furthermore, partition the labor force into
employed and unemployed. So unemployment is the part of Labor Force population
who are not employed.
Thus, a total population of the stock of the economy can be divided into a
corresponding part of Figure l-4.
Total Population
In working age
Not in labor force
In non-working age
Labor force
Employed
Unemployed
Figure 1-4 Partition of the total population
1.3.3 Unemployment rate, urban unemployment rate
Unemployment rate stands a percentage of total labor force.
Unemployed workers
∗ 100%
Total labor force
Unemployed workers
=
∗ 100%
Unemployed + Employed
Unemployment rate =
17
Urban unemployment rate is the percentage in urban.
Urban unemployed individuals
∗ 100%
Urban labor force
Urban unemployed individuals
=
Urban unemployed + Urban employed
Urban unemployment rate =
1.4 Outline of thesis
The thesis tries to explore why in China high economic growth coexists of high
unemployment, both in empirical analysis and normative analysis. Empirical analysis
focus on describe, explain and predict, and the other analysis are concern with law
and recommendations. In this paper, using empirical analysis, we demonstrate and
expound how the three factors: China's economic growth, transition and
over-utilization of labor force, working together to bring about the coexistence of
high growth and high unemployment, and thus give a complete explanation on
Okun's paradox in China. On this basis, using normative analysis, introduce value
judgment to make
the appropriate policy recommendations to reduce
unemployment.
Thesis ideas are as follows: found the relationship between phenomena through
analysis of real data. The coexistence of high-economic-growth and high
unemployment in China means Okun's law variation. Then explored the economic
reasons of which I focus on China's economic growth pattern, background of
economic transition and over-utilization of labor force. So we can find out the
policies and measures that can help to reduce unemployment and raise the
employment opportunities.
18
The thesis will be organized as following:
Chapter 1: introduction. Firstly, we point out there coexists the highly economic
growth and high unemployment lead to the topic we want to analysis; secondly,
define some basic concepts and introduce the method we use, the basic thoughts
and the structure; and at the last, the output.
Chapter 2: theory overview. We try to summarize the findings of Western theories of
unemployment, the Marxist theory of unemployment and the research of
relationship between economic growth and unemployment, and then find out their
limitation. Then we do the same to the relevant research in China. From these we
present our understanding.
Chapter 3: Analyze the relation between economic growth and unemployment. This
chapter first provided historical statistical data of economic growth on China's
yearbook and the unemployment rate according to data from the author estimates,
describing the general status in China. On this basis, through the empirical
judgments obtained between economic growth and unemployment we think that
there is no negative correlation between them (Okun's Paradox). Finally we
considered the coexistence attributed to three factors working together: China's
economic growth model, economic transformation, and over-utilization of labor
force.
Chapter 4: analysis of China's economic growth mode and effect of employment
growth. This chapter is seeking partly interpretation of the paradox, based on the
finding that the Chinese economic growth model gave weak support on the
employment. In our opinion, capital deepening occurred in China, relate to the
Chinese stage of development (industrialization accelerate the development) and its
19
resource allocation mechanisms; In addition, the artificial distortions of factor price
are also important causes.
Chapter 5: analysis of the effect of transition on unemployment. The purpose of this
chapter is partly explaining the phenomenon of coexistence from the perspective
that the transition manifests the unemployment and increase the unemployment
rate. China is in transition from a planned economy to a market economy, in this
context, China's unemployment rate is closely related to the transition. The Chinese
economy appears high growth and high unemployment due to the combined effect
of various factors.
Chapter 6: Over-utilization and unemployment. This chapter firstly defined the
“over-utilization”, based on which analyze the causes and the effect of crowding out.
We think that, due to the over-utilization of employees, a lot of job opportunities
were diverted, causing the unemployment of some should be employed.
Chapter 7: Suggestions of reducing unemployment. On the basis of the previous
analysis, sum up how to increase job opportunities and decrease unemployment
rate.
Chapter 8: Conclusion.
20
2 Theoretical overview
2.1 The review of relevant western economic theories
2.1.1 Western Theories of Unemployment
In Western countries, researchers on unemployment can be traced back to the
classical economists. The theories were developed from 1930s. Now many schools of
economics have developed their relative complete theory system, such as Keynesian
School, Monetarism, and development economics.

Classical voluntary unemployment. The theory regarded as the first modern
school, with private ownership of productive means as a precondition and
perfect competition as the assumption
[3].
The high real wage may lead to
unemployment, nevertheless it resulting from high nominal wage. So, if to solve
this problem, lower wage and slack monetary policy are the effective ways to
eliminate the excessive money wage under the premise that workers accept
lower wage and not ask for salary arise while price level rising. The low-interest
policy and the elastic wage policy can help to eliminate unemployment and get
full employment.
This theory is able to, under certain condition; reveal the relationship between
the wage
rate and
unemployment,
and
between labor
supply and
unemployment. But this is unrealistic for its too strict assumptions.
Furthermore, it thinks of the unemployment as the contradiction between labor
supply and demand of labor to deal with, without considering other aspects
of economic system, in particularly the economic growth. Thus, this theory has
insurmountable limitations [4].
21

Involuntary unemployment in Keynesian theories. Keynesian economic theory
analyzes unemployment as a core problem, trying to make macroeconomic
policies to achieve full employment. “Men are involuntarily unemployed if, in the
event of a small rise in the price of wage-goods relatively to the money-wage,
both the aggregate supply of labor willing to work for the current money-wage
and the aggregate demand for it at that wage would be greater than the existing
volume of employment”
[5].
For Keynes involuntary unemployment existed if
the supply of labor would be forthcoming to validate a rise in the demand for
labor associated with an increase in effective demand, that is, deficiency of
effective demand, which are connected with three basic components:
consumption propensity, marginal efficiency of capital, and the liquidity
preference.
Using this, Keynes refuted Say’s law [6] and the classical unemployment based on
it,
and demonstrated
the
long-standing possibility
of
"involuntary
unemployment". Keynes’s suggested policies to reduce the "involuntary
unemployment" are: stimulate consumption and expand effective demand,
encourage investment (including improves people's confidence and lower
interest rates, etc.), create new jobs and so on.2 Like Classical economics, the
analyses of Keynesian economics still not consider other aspects of economic
system, and not include the relation between the unemployment and economic
growth.

The Neoclassical synthesis theories of unemployment. Neoclassical synthesis is a
postwar academic movement in economics that attempts to absorb the
macroeconomic thought of John Maynard Keynes into the thought of
2
Say's law is an economic principle of classical economics stating that "products are paid for with products" and
"a glut can take place only when there are too many means of production applied to one kind of product and not
enough to another". In Say's view, a rational businessman will never hoard money; he will promptly spend any
money he gets "for the value of money is also perishable."
22
neoclassical economics. The unemployment theory of the synthesis has
dominated the mainstream economics. Their development of Keynesian theories
manifest with the improvement of Phillip’s Curve and the analysis on the
complication of unemployment and inflation [7].
In 1958, the British economist Phillips, by examining the statistic data of UK
nominal wage growth and unemployment, he used a curve to describe the
observation that there was an inverse relationship between money wage
changes and unemployment [8]. In 1960 Paul Samuelson and Robert Solow took
Phillips' work and made explicit the link between inflation and unemployment:
when inflation was high, unemployment was low, and vice-versa [9].
So we find that the theories of this school had indirectly linked economic growth
and unemployment, and for their points were achieving full employment
through stimulating economic growth, using inflation to decline the real wage to
increase the labor demand. The target is to find the effective way to decline the
real wage so essentially disconnected to the economic growth.

The unemployment theories of Monetarism. Monetarism is mainly associated
with the work of Milton Friedman, who theorized there exists NAIRU
(Non-Accelerating Inflation Rate of Unemployment) which refers to equilibrium
unemployment rate in the absence of interference in the absence of various
temporary frictions such as incomplete price adjustment in labor and goods
markets
[10].
On the basic of this thought Friedman repudiated the validity of
Phillip’s Curve. The suggestions he gave to resolve unemployment were: let the
initiative adjustment work, abolish the minimum wage laws and the labor union
intervention.
23
In Friedman’s theory, there is an assumption that the unemployment much with
other production factors, which means there is a equilibrium value of the labor
force and capital on a certain scale of production, and the expansion of the
production may lead to the spontaneous regulated unemployment - the natural
rate of unemployment. However, it’s a pity that he did not point out this or do
the empirical study [11].

Sticky-Wage theory of neo-Keynesians. The neo-Keynesians generally looked at
labor contracts and as a source of price and wage stickiness to generate
equilibrium models of unemployment [12].
 Long-term labor contract brings about nominal wage stickiness
 Implicit contract theory
 Efficiency wage theory
 Insider-outsider theory
The characteristics of the theories above are: They all studied the
unemployment problem, on the background of private ownership and perfect
market economy. They just focus on unemployment rarely considering the
relations of other economic factors
[13].
Therefore, theories may not be
appropriate for explaining the unemployment problems in China because China
has its particularity that it is a developing country in the transition from the
planned economy to the market economy.

The Dual Sector model of development economics [14]. Development Economics
is a branch of economics which deals with economic aspects of the development
process in low-income countries. Its focus is not only on methods of promoting
economic growth and structural change but also on improving the potential for
24
the mass of the population. They discussed the unemployment problem
occurred in the growth of a developing economy in terms of a labor transition
between two sectors. The "Dual Sector Model" is a theory of development in
which surplus labor from traditional agricultural sector is transferred to the
modern industrial sector whose growth over time absorbs the surplus labor,
promotes industrialization and stimulates sustained development.
The author Lewis
[15]
holds the view that the traditional agricultural sector had
typically low labor productivity; and marginal productivity is even negative; in
contrast, labor productivity in the modern industrial sector is relatively high and
less employees, the relatively high wages can lead to the transfer of the labor
force from the traditional sector to modern industrial sector. In their view,
speeding up the capital accumulation in the modern industrial sector can
enhance the absorption of labor force in the traditional agricultural sector so
that work out the unemployment problem in the dual sector model.
2.1.2 Research on the relationship between the economic
growth and unemployment

Okun’s Law: Okun’s Law describes the relationship between quarterly changes in
unemployment and quarterly changes in real GDP. It studies the relationship
between economic growth and the unemployment in order to measure the
potential output. The potential output refers to the highest level of real GDP
output at full-employment and Okun’s Law is the measurement of this output.
Okun use unemployment rate as a variable representing the impact of the idle
resource on the output, the loss of output caused by the deviation of the
obtained and natural unemployment rate plus the actual achieved amount
received that “potential output” [16].
25
There are two basic versions of improved Okun’s Law:
 One is on the basis of the view that as long as the unemployment rate
deviates from the natural rate, there will be a negative impact on economy.
The equation is:
( − )=
(2.1)
is potential output or GDP at full-employment;
is actual output;
is the natural rate of unemployment;
is actual unemployment rate;
is the factor relating changes in unemployment to changes in output.
By the analysis of the US quarterly data (not annualized) of GNP and
unemployment rate from 1947 to 1960, Okun said that a 3% increase in
output corresponds to a 1% decline in the rate of unemployment.
 Another version is in order to avoid the error in the amount of potential
output. Okun's law can be expressed as: if the amount of actual output
continued above the trend growth rate of the output in the year, the
unemployment rate will decline.
The equation is:
∆ ⁄ =
− ∆
(2.2)
or
∆ =−
(∆ ⁄ − )
26
and
are as defined above;
∆
is the change in actual output from one year to the next;
∆
is the change in actual unemployment from one year to the next;
k is the average annual growth rate of full-employment output.
Using 1962-1988 data on the results obtained is:
∆ = −0.4( − 2.5)
Thus if the output growth rate of a particular year is 4%, it means that the
unemployment rate was 0.6%; or we can calculated that the unemployment
rate fell 1%, output growth should reach 5%.
Okun's law states the long-term effects of a specific growth targets on
unemployment. As a rule of thumb it shows that output growth and
unemployment rate are negatively correlated, which has been well confirmed in
the U.S. economy.

Economic growth, human capital and the unemployment:
The accumulation of human capital is the core problem of growth theory and the
labor theories, in an economy the degree of human capital in labor force and the
proportion of high-skilled labor directly affect the speed of economic growth. In
Mincerian Equations [17] (1974), the logarithms of earnings of an individual are a
linear function of his schooling years and a quadratic function of his working
experience. Following Topel [18] the human capital version of the earning function
can be written as:
ln
=
+
+
ℯ+
ℯ
(2.3)
27
Where,
: human capital;
: time of studying in school;
ℯ: working experience.
So equation (1) can be written as:
ln
= ℱ( ,
ℯ)
(2.4)
Differentiating equation (2) yields:
̇
=ℱ ̇+ℱ
ℯ
ℯ̇
(2.5)
As can be seen from the above equation, the accumulation of human capital is
achieved through the learning process in schools and the "learning by doing [19]"
process. Equation (2.5) can be understood as, when there is unemployment in
the labor market, investing human capital can be seen as a production process
absorbing two inputs (learning time, work time). So unemployment will have a
negative impact on human capital accumulation in the economy. The knowledge
gained from the school can be effective when combined with specific work
experience; the unemployment hinders the process of the school knowledge
transforming to the human capital and reduces the effect of education.
Based on the Cobb-Douglas production function
[20]
=
, Luciano
Mauro and Gaetano Carmeci [21] established an endogenous growth model in the
labor market:
∗
=−
(1 − )
(1 −
∗) (
)
<0
(2.6)
28
Where u∗ is the equilibrium unemployment rate, g
is economic growth rate,
is the efficiency of the scholastic system ( 0 <
< 1 ). In this model
unemployment hindered the obtaining of experiences which meant a negative
long run relationship between growth and equilibrium unemployment.
Meanwhile, they used data on a panel of 15 OECD countries covering the period
1965-1995 supporting the model predictions, demonstrated that investment in
education could play positive role on economic growth, and confirmed the
negative correlation between unemployment and the long-term economic
growth.
Public unemployment insurance system is another influencing factor of human
capital acquisition. Harris Dellas [22] demonstrated a result of their negative effect
on the incentive to accumulate human capital, starting from the impact of the
type (general, sector). The unemployment insurance leads to an increased
supply of low skilled and to higher unemployment among the low skilled both in
the short and long term rate. In addition, unemployment insurance reduces the
average quality of labor force, leading to decline of long-term productivity,
slowing economic growth. So in his opinion, the economy having more human
capital may grow faster through technological innovation.
2.2 Marxist theory of unemployment
Marxist classical economist gradually developed their own theory of unemployment
in the process of studying the Western system of wage labor and unemployment [23].
Marxian class theory of unemployment can be summarized basically as follows [24]:
29

First, according to them labor-power becomes a commodity;

Second, point out that the "unemployed" people are essentially a relative
surplus population (a "reserve army of labor"), and find out that material basis of
the relative surplus population is the increasing organic composition of capital;

Third, differentiate three basic parts of relative surplus population [25]:
 The floating part refers to the temporarily unemployed ("conjectural
unemployment");
 The latent part consists of that segment of the population not yet fully
integrated into capitalist production - for example, part of the rural
population. It forms a pool or reservoir of potential workers for industries;
 The stagnant part consists of marginalized people with "extremely irregular
employment". Its lowest stratum (excepting criminals, vagabonds and
prostitutes) "dwells in the sphere of pauperism", including those still able to
work, orphans and pauper children, and the "demoralized and ragged" or
"unable to work".

Fourth, demonstrate the relative surplus population is not only a product of the
capitalist society but also the requirement for the capitalist existence and
development.
But we cannot ignore that these Marxist classical theory of the unemployment at
least have clear limits in the following aspects:

Does not discuss the problem of unemployment in socialism society. Marxist
classical theory only analyzed the unemployment problem of capitalism
concluded that the relative surplus population or unemployed persons existed
30
just in the capitalist mode of production, and in the socialist society there is no
unemployment, which is obviously one-sided.

Lack of analysis of the cause of the unemployment or the formation mechanism
from an economic point of view. Most of Marxist discussed the root system of
unemployment saying that the problem totally attributed to the capitalist system
itself, instead of the economic root-cause.
2.3 Research on the situations in China
The foreign research on China's economic growth mainly focused on the following
aspects:
 The factors influencing the economic growth (Ebrayim Elham, 2002 [26]; Franklin
Allen, 2002 [27]; B. Andreosso-O'Callaghan, 2000 [28]; Lei Ding and Kingsley E.
Hayens, 2004 [29])
 Economic growth and structural transformation (Loren Brandt, Chang-tai Hsieh,
2004 [30])
 Economic growth and inequality (Derek C. Jones, Cheng Li, Ann L. Owen, 2003
[31])
 Chinese economic growth data analysis (Eduardo Borensztein, Jonathan D. Ostry,
1996 [32]; Rawski, Thomas G. 2001 [33])
Researches in China are generally in three areas:
 Researches on Chinese economic growth. The study of economic growth focus
on the driving force, the source, the growth patterns, the quality of growth, the
comparative study in growth, the convergence, the capital formation, the
industrialization, and factors contribution rate, normally not directly related to
31
the relationship between economic growth and unemployment.
 Research about employment and unemployment in China. The studies focus on
analyzing current situation of employment in China, the cause of unemployment,
urban labor surplus, statistical problems of unemployment and employment,
policies for controlling unemployment and definitions comparisons of
unemployment between domestic and abroad. In these studies, different people
obtained quite different unemployment rate, the highest estimation was 25%
and low only 3%. The differentiation came from the inconsistent of statistic
range. Meanwhile, most of these studies did not involve economic growth.
 Researches on the relationship between economic growth and employment.
Though there had a lot of research in this area, still did not draw a unified
conclusion. For instance some scholars, using Chinese data of economic growth
and employment to determine the elasticity of employment growth, through
which to estimate the relations of economic growth and employment, finally
came out that the employment were less and less when economic grew. Some
scholars believed that since the late 90s of the 20th century, China's urban
employment has not grown, or even absolute decline. However some studies
suggested that China's economic growth leads to the employment growth.
 Researches on the causes of the coexistence between China's high economic
growth and of high unemployment rate. According to the coexistence, though
some scholars have tried to explore its causes, the current research was not
thorough, and there isn’t a complete explanation of the phenomenon with logic
consistent. Some scholars tried to give an explanation from the theory of
technological progress, other scholars did from the dominance of disguised
unemployment in state-owned enterprises, industrial restructuring, the transfer
32
of rural surplus labor force, the development of information technology point of
view to give explanations, but these have generally not involved in China's
Inherent problems in economic growth. Therefore, it needs to further explore
the economic growth and unemployment.
2.4 Chapter summary
This thesis tries to analyze the relationship between Chinese economic growth and
unemployment and the economic logic behind this relationship. We believe that
China's economic growth and unemployment does not negative coexist which means
the deviation of Okun's Law, including two situations: First, economic growth rate
decreases, the unemployment rate also fell; Second, economic growth rate rises, the
unemployment rate also rose.
China's deviation of Okun's Law is the latter situation in which the coexistence
between high growth and high unemployment.
We believe that in China the relationship between unemployment and economic
growth will be different from the mature market economy because China is country
not open up a long time and in the process of accelerating industrialization,
increasing the organic composition of capital, with economic characteristics of dual
structure, economic transformation, and excess labor supply. Therefore, China's
deviation cannot be fully explained with a single theory, but from the character of
China's economic growth and unemployment to find the answer. Accordingly, this
paper explores from China's economic growth mode, the background over economic
transformation and the over-utilization of labor force.
33
3 Analysis on the relationship between
China
economic
growth
and
unemployment
The chapter firstly provides based on historical statistical yearbook on China's
economic growth data and unemployment data based on the author’ estimates, a
general description of the unemployment and growth of China's economic
respectively. Then on this basis, make a judgment of the analysis on the relationship
of economic and unemployment.
3.1 The economic growth and unemployment in China
3.1.1 China's economic growth
Since the introduction of market-based economic reforms in 1978, China has become
the world's fastest growing major economy, the world's largest exporter and second
largest importer of goods. In twenty years, the average annual GDP growth was 9.5%.
Table 3-1 and Figure 3-l reflects the 1978-2008 China's GDP changes.
34
5,000,000
GDP
4,500,000
Million US Dollars
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
-
Figure 3-1 China in 1978-2008 (in US$ Million)
Source: United Nations Statistics Division-National Accounts Main Aggregates Database
From figure above we can see that compared to in 1978, GDP increased nearly 20
times.
Table 3-1 China Economic growth in 1978-2008
GDP (in RMB100 million)
Indices of GDP
Year
At current Price
At constant 1978 price
Preceding year = 100
Year of 1978 = 100
1978
3,645.2
3,645.20
111.7
100.0
1979
4,062.6
3,922.24
107.6
107.6
1980
4,545.6
4,228.43
107.8
116.0
1981
4,891.6
4,450.79
105.2
122.1
1982
5,323.4
4,851.76
109.1
133.1
1983
5,962.7
5,380.32
110.9
147.6
1984
7,208.1
6,196.84
115.2
170.0
1985
9,016.0
7,031.59
113.5
192.9
1986
10,275.2
7,654.92
108.8
210.0
35
1987
12,058.6
8,540.70
111.6
234.3
1988
15,042.8
9,503.04
111.3
260.7
1989
16,992.3
9,889.43
104.1
271.3
1990
18,667.8
10,268.53
103.8
281.7
1991
21,781.5
11,212.64
109.2
307.6
1992
26,923.5
12,809.23
114.2
351.4
1993
35,333.9
14,595.38
114.0
400.4
1994
48,197.9
16,505.47
113.1
452.8
1995
60,793.7
18,309.84
110.9
502.3
1996
71,176.6
20,143.38
110.0
552.6
1997
78,973.0
22,013.36
109.3
603.9
1998
84,402.3
23,737.54
107.8
651.2
1999
89,677.1
25,549.21
107.6
700.9
2000
99,214.6
27,699.87
108.4
759.9
2001
109,655.2
30,000.00
108.3
823.0
2002
120,332.7
32,726.61
109.1
897.8
2003
135,822.8
36,007.29
110.0
987.8
2004
159,878.3
39,637.90
110.1
1,087.4
2005
184,937.4
44,121.50
110.4
1,210.4
2006
216,314.4
49,713.24
111.6
1,363.8
2007
265,810.3
56,755.76
113.0
1,557.0
2008
314,045.4
62,223.56
109.0
1,707.0
Source: China Statistical Yearbook 2010;
Undoubtedly, no matter in total amount or in quantity per capita, either over the
world or in developing countries, China's economic growth rate is second to none,
and it can be called "economic exceed-high growth country."
36
As can be seen from the table 3-2, China's economic growth rate is the highest
compared with both developed and developing countries. As the rapid economic
growth, by 2007, China has became the third largest economy over the world, GDP
per capita reached $1,500; since 2000, China has entered the ranks of middle income
countries. “It now has the world's second largest nominal GDP at US$6.05 trillion,
although its per capita income of US$4,300 is still low and puts the PRC behind
roughly a hundred countries.” [34]
Table 3-2 GDP Annual Growth (%): BRIC, Italy, Japan, USA and Western Europe (Currency: US$)
GDP Annual Growth rate (in %)
Country
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
8.40
8.31
9.10
10.00
10.10
11.30
12.70
14.20
9.60
9.10
10.05
5.09
4.74
7.25
7.15
6.39
7.68
8.06
5.62
-7.90
India
4.03
5.22
3.77
8.37
8.30
9.30
9.44
9.63
5.12
7.66
Brazil
4.31
1.31
2.66
1.15
5.71
3.16
3.96
6.09
5.14
-0.19
Italy
3.69
1.82
0.45
-0.02
1.53
0.66
2.04
1.48
-1.32
-5.04
Japan
2.83
0.21
0.26
1.41
2.74
1.93
2.04
2.36
-1.23
-5.23
4.17
1.09
1.83
2.50
3.58
3.06
2.67
2.14
0.42
-2.63
3.59
1.44
0.52
0.36
1.97
1.51
3.00
2.84
0.94
-3.66
China
Russian
Federation
United
States
Western
Europe
Source: United Nations Statistics Division-National Accounts Main Aggregates Database
China's economy grows in high speed, the quality of growth is improving at same
time, and the growth rate is gradually stabilized. It can be seen from Figure 3-2, 1992
as the boundary, the stability of China's economic growth has undergone great
changes. Before 1992, economic growth fluctuates a lot during 1978 - 1992. Average
growth rate of GDP is 9.6%, but the highest is 15.2%, the lowest rate is 3.8%, the
37
range of the highest and lowest is 11.4 percent. During 16 years of period 1993-2008,
average growth rate of GDP is 10.4%, the highest growth rate is 14.2%, the lowest
growth rate is 7.6%, the range of the highest and lowest is 6.6 percent. These figures
show that China economic growth has been steady, and the quality of growth
continues to increase.
16.0
GDP growth rate (in %)
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Figure 3-2 China GDP Growth rate in 1978-2008
Source: United Nations Statistics Division-National Accounts Main Aggregates Database
Table 3-3 Contribution of the Three Strata of Industry to GDP Growth
Primary Industry
Secondary Industry
Tertiary Industry
Year
Growth rate
Contribution
Growth rate
Contribution
Growth rate
Contribution
1978
5.97%
28.2%
4.14%
47.9%
0.16%
23.9%
1979
2.23%
31.3%
6.13%
47.1%
2.27%
21.6%
1980
3.84%
30.2%
1.30%
48.2%
1.93%
21.6%
1981
4.09%
31.9%
2.40%
46.1%
1.62%
22.0%
1982
3.37%
33.4%
4.41%
44.8%
2.94%
21.8%
1983
4.69%
33.2%
6.37%
44.4%
6.22%
22.4%
38
1984
2.75%
32.1%
8.44%
43.1%
8.86%
24.8%
1985
2.18%
28.4%
6.09%
42.9%
3.98%
28.7%
1986
3.68%
27.1%
6.29%
43.7%
4.81%
29.1%
1987
4.20%
26.8%
8.88%
43.6%
6.76%
29.6%
1988
2.36%
25.7%
4.07%
43.8%
5.05%
30.5%
1989
4.26%
25.1%
2.35%
42.8%
2.36%
32.1%
1990
1.29%
27.1%
6.36%
41.3%
6.65%
31.5%
1991
1.95%
24.5%
9.65%
41.8%
7.50%
33.7%
1992
3.11%
21.8%
13.46%
43.5%
7.24%
34.8%
1993
5.41%
19.7%
12.43%
46.6%
8.85%
33.7%
1994
4.22%
19.9%
10.25%
46.6%
6.25%
33.6%
1995
2.64%
20.0%
7.24%
47.2%
4.70%
32.9%
1996
0.54%
19.7%
4.70%
47.5%
4.64%
32.8%
1997
0.45%
18.3%
1.73%
47.5%
4.26%
34.2%
1998
-0.05%
17.6%
2.26%
46.2%
3.67%
36.2%
1999
0.18%
16.5%
4.56%
45.8%
4.88%
37.8%
2000
0.76%
15.1%
3.61%
45.9%
5.15%
39.0%
2001
0.63%
14.4%
3.64%
45.2%
4.60%
40.5%
2002
0.62%
13.7%
6.29%
44.8%
4.50%
41.5%
2003
2.52%
12.8%
7.17%
46.0%
5.35%
41.2%
2004
0.54%
13.4%
7.40%
46.2%
5.60%
40.4%
2005
0.75%
12.1%
7.45%
47.4%
6.30%
40.5%
2006
1.73%
11.1%
8.32%
47.9%
8.58%
40.9%
2007
1.62%
10.8%
7.38%
47.3%
6.36%
41.9%
2008
0.45%
10.7%
2.54%
47.4%
4.79%
41.8%
Source: China Statistical Yearbook 2010
From the industrial structure of China's economic growth ,the slowest growth is in
39
primary industry, secondary industry is growing fastest, Meanwhile, the contribution
of different industry share in GDP has also changed a lot, since the early 1980s ,the
proportion of primary industry decreased from more than 30% down to 10.7% in
2008, The output of tertiary industry in GDP has increased, since the early 80s, from
20% up to nearly 42% in 2008; secondary industry's share of GDP has been relatively
high, remaining at 46 percent, nearly half.
100%
Tertiary
Industry
Secondary
Industry
Primary
Industry
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Figure 3-3 Composition of GDP in 1978-2008
40
15%
Primary
Industry
12%
Secondary
Industry
Tertiary
Industry
9%
6%
3%
0%
-3%
Figure 3-4 Growth Rate of Each industry in 1978-2008
Source: China Statistical Yearbook 2010
3.1.2 Reason of China’s economic growth
The key point of whether a country can achieve sustainable economic development
is that if there is a good support system promoting economic growth, or what we
called economic driven factors. As a developing country in transformation from
traditional planned economy into a market economic system, China is experiencing
transforming the dual-sector economy into industrialization and modernization.
According to the classification criteria of economic development stage raised by
some development economists, now China economy is in a stage of economic
take-off, there is great potential for growth
[35].
From the point of Washington
Consensus, for the market economy, as long as property rights are clearly defined,
the market-price mechanism can fully work, economy will be able to automatic grow
[36].
However, this theory may not strictly apply to the countries in transition as the
economic recession in some Eastern European countries that used shock therapy.
41
From China's actual situation, the definition of property rights is still not clear, the
development of the market needs to be further improved, and the traditional
economic theory cannot well explain the constant high economic growth in China.
3.1.3 Unemployment in China
1) The registered urban unemployment rate tends to rise:
China is now facing a severe employment situation: the annual increased population
at working-age is more than 10 million; about 150 million rural surplus of labor force
need to shift to non-agricultural areas; in urban areas exist a large number of laid-off
and unemployed population. At the same time, employment absorption capacity of
economic growth showed a downward trend. In 1998, GDP growth rate is 7.8%,
employment rate increased by 1.16%; in 2008 GDP growth rate is 9.6%, employment
increased by only 0.63%3.
Currently the outstanding problem in urban labor market is the serious
unemployment. The published official unemployment rate is just the registered
unemployment rate. According to the statistics by the Ministry of Human Resources
and Social Security of China, at the end of 2008, the registered urban unemployment
rate was 4.2%. Compared with some developed countries, the registered
unemployment rate is clearly not very high. For example, in 2008 the unemployment
rate was 7.3% in Germany, the unemployment rate of U.S. reached 5.8%, and in Italy
it was 6.7%4. It must be noted that in these countries, the unemployment rate is
obtained through a sample survey, which is a surveyed unemployment strictly
defined following the international standards. But the unemployment rate in China is
3
The detailed data resources can be found in the following chapter.
4
The figures come from the database of United Nations Statistics Division
42
only a registered one; its definition does not follow the international standards. Thus,
while the registered unemployment rate has become so far the main indicator to
monitor unemployment, there are shortcomings: First, does not strictly define the
unemployed time, unemployment may be confused with employment, lowering the
accuracy of targets; the second is registration of the unemployed workers not
included laid-off workers; thirdly it only contains those workers with an urban
household. All in all, the unemployment rate generated by the registration system
compared with the actual unemployment, is at a low state, greatly underestimated
the true level of unemployment in urban areas. Therefore, the registered
unemployment rate is a partly reflection of the unemployment, it is difficult to fully
reflect the true situation.
However, the fact that the registered unemployment rate rose many years in a row
and reached a high level of 4.2% (see Figure 1-3) shows that the current urban
unemployment problem is very serious. In fact, through more accurate statistics
reflecting real level of unemployment, such as through the "Fifth Census" to get the
unemployment rate, in 2000, China's urban unemployment rate is over 8.2%, much
higher than the "warning" level of 7% and level of many developed countries in the
world. The relevant domestic research institutions and the World Bank estimate that
China's urban unemployment rate is actually about 8% to 10%.
2) Several different sets of data of urban unemployment rate:
To determine the relationship between economic growth and unemployment, we
must first clearly know the real situation of unemployment, which means to clear
how
much
China's
current
unemployment
rate.
About
China’s
current
unemployment problem, a number of research institutions and experts had their
own words. Some research results are more optimistic, and others think the
43
employment problem is very serious. So, what is the real situation of China's current
urban unemployment?
Data listed in Table 3-4 are the urban unemployment rate extrapolated based on the
survey about labor force in five cities, held by Institute of Population and Labor
Economics. The five cities are: Shanghai, Wuhan, Shenyang, Fuzhou and Xi’an.
Directly calculation of the surveyed unemployment rate would result in a tendency to
overestimate. Cai Fang, Wang Meiyan
[37]
think there are three main reasons: first,
the fifth census data shows that the city's unemployment rate are higher than the
countryside, and the cities covered have a higher unemployment rate in urban cities
(according to the fifth census data, the non-weighted average unemployment rate of
the domestic 345 cities and regions was 7.91%, Shenyang is 16.08%, 10.57% of
Shanghai, Fuzhou is 9.51%, 11.83% in Wuhan, Xi’an is 8.22%). Second, the main part
of the survey may be over-estimated because it is possible to include some of the
personnel withdraw the labor market. Third, after checks it showed that many
“actually working” interviewees enjoying the laid-off subsidies, unemployment
insurance and minimum living guarantee were unwilling to disclose their working
conditions. Therefore, refer to the information of the additional investigations in
2002 and fifth census in 2000, by setting a number of assumptions; we can estimate
the "real" unemployment rate.
Table 3-4 The urban unemployment rate estimated by the Chinese Academy of Social Sciences
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
Unemployment
6.0%
7.5%
7.3%
7.0%
-
-
-
8.8%
9.4%
The actual urban unemployment rate, there are different data. According to the fifth
census, actual urban unemployment rate of China is about 8.3% in 2000. The census
is another information source for comprehensively knowing the employment and
44
unemployment. As the census held only every 10 years, its results are difficult to
meet timeliness requirements for the unemployment rate. Moreover, since the
choosing of "unemployed" does not strictly follow the international definition of
unemployment, the coverage of the census of unemployment is much greater than
the standard of ILO which means there is an overestimation of unemployment. The
reason is, if following a more stringent standard of unemployment, many of the
unemployed people covered in the census will be the economically inactive persons
[38].
In addition, many experts and scholars calculate urban unemployment rate by
different ways, for example, Xiong Zuyuan and Yu Dong [39] through establishing an
adjustment factor to calculate the true unemployment rate and the number of urban
unemployment. Adjustment factor = (census unemployment rate / registered
unemployment rate) × 100%. Then they used the adjustment factor multiplied by the
registered urban unemployment rates each year to obtain the real unemployment
rate in urban areas each year (see Table 3-5). Two groups of census unemployment
data were used: First, the urban unemployed rate of the fourth census in 1990 of
3.86%; the second is the urban unemployment rate of the fifth census in 2000 of
8.2%. In the processing of data, from 1990 to 1995, by using the coefficient 1.6 which
is the result of the urban unemployment rate 3.9% of fourth census divided by the
registered unemployment rate 2.5% in 1990; from 1996 to 2002, by using the
coefficient 2.6 which is the result of the urban unemployment rate 8.2% of fourth
census divided by the registered unemployment rate 3.1% in 2000. So it obtained the
real unemployment rate in 2001 was 9.4%. 2002 was10.4% in 2003 was 11.2%.
The calculation of adopting the adjustment factor approach is clearly closer to the
truth, but this method has obvious shortcomings. One of the premises of the
projections is assuming that the census unemployment rate is a true reflection of
45
urban unemployment and the gap between the census unemployment rate and
registered unemployment rate is the real reflection of unemployment situation
excluded from registered unemployment rate, added which the result can cover the
shortage of registered unemployed system, getting the fully and accurately data. The
second premise is: assume the gap between the census unemployment rate and
registered unemployment rate in the same year can replace the gap in the adjacent
years. The feasibility of such hypothesis is needed to explore, so the credibility of the
results is not high.
Table 3-5 Other two groups of data about the urban unemployment rate
Year
1980
1985
1990
1991
1992
1993
1994
1995
Group 1
—
—
4.0%
3.7%
3.7%
4.2%
4.5%
4.6
Group 2
0.02%
7.20%
—
—
—
—
—
1.6%
Year
1996
1997
1998
1999
2000
2001
2002
2003
Group 1
7.8%
8.1%
8.1%
8.1%
8.1%
8.1%
9.4%
10.4%
Group 2
2.9%
4.2%
5.5%
6.9%
8.3%
10.3%
—
—
Resource: Data in group 1 came from Xiong Zuyuan, Yu Dong (2004). Data in group 2 came from Zhou Tianyong
(2003), “What the Actual Urban Unemployment Rate Is in China?”, Finance & Trade Economics.
Zhou Tianyong [40] hold the view that the country's official statistic, due to a number
of factors, cannot record the real urban unemployment rate, and not possible to
publish the real unemployment data; and investigations in certain places are easy to
impact by limited number of samples, affecting the accuracy; it is impossible to have
national investigation due to expenses, cost and institutional constraints. So he took
a new approach, that using the comparison between the moderate and the actual
urban labor force participation rate (LFPR) to analyze the real past and current
unemployment rate of China. Zhou thought that it should be more scientific and
objective using the stable factor of labor force participation in urban population over
the past 20 years. The labor force participation in urban population refers to the
46
urban employees’ share of total urban population. As the composition of
middle-aged, teenagers, young adults in total population did not changed a lot in
year, according to the dependency ratio and the appropriate ratio of working-age
population, except for voluntary unemployment at home, labor force participation in
urban population, is generally a more stable constant coefficient.
Rʹ = ∑ L / ∑ P
(3.1)
In where L is urban labor force and P is the total urban population. Assume there is a
stable labor force participation urban population due to the age composition,
working length and social custom. This data can be summed considering long-term
historical data, the future changes in age composition, as well as changes in other
factors. Zhou Tianyong obtained the average labor force participation in rural
population of 53% using the data in the 1980-2002 and the formula. Set 55% as labor
force participation in urban population in a constant Rʹ . By the following formula to
calculate the real unemployment rate in urban areas:
U = (Rʹ − R) × P Lʹ = (55% − R) × P Lʹ
(3.2)
U is the true unemployment rate in urban areas, R is the actual urban employment
rate, Lʹ is the total supply of urban labor. The larger the gap between the actual
labor force participation in urban population and 55%, the higher the actual
unemployment rate is. Data in Table 3-5. Seen from the table, the calculated urban
unemployment rates since 1996, are significantly higher than the official registered
unemployment rate, but the problem is that before 1996 the number fluctuates a lot,
and in some years such as 1980, the calculated unemployment rate even lower than
the registered unemployment rate which are clearly not reliable.
In the summary, results about the China's urban unemployment rate varied by
different institutions, different people and different methods. Although the
47
unemployment rate calculation is based on different definitions, level of
unemployment rate vary widely, they all reflect the same trend in the unemployment
rate: it is continue to climb.
However, in order to quantitative analyze relationship between economic growth
and unemployment in China we need a more accurate method of estimating urban
unemployment rate in China. It is still a problem that how much is China's current
urban unemployment rate? No one speak clearly. As the unemployment rate is
becoming an important measure of macroeconomic performance indicators, we
need to establish an investigation system following international standards and
regularly publish the unemployment rate in China.
3) The calculation of urban unemployment rate in this paper:
In order to empirically analyze the relationship between economic growth and
unemployment in China, we use the following method to estimate the actual
unemployment rate in urban China:
Urban Economically Active Population = Total Economically Active Population –Rural
Employed Persons
Urban Unemployed Population = Urban Economically Active Population – Urban
Employed Persons
Urban unemployment rate = Urban Unemployed Population / Urban Economically
Active Population
As the rural household contract system ensures everyone has a responsibility
farmland, the rural labor can get work in non-agricultural sectors, or be considered as
48
agricultural employment, public unemployment rate is very low5. Therefore, in the
case of not get the real unemployment rate in rural areas, we put the rural employed
population and economically active population equivalent; it will not produce a great
error. (The results are in table 3-6)
Table 3-6 China Urban unemployment in 1978-2008
Year
Total Economically Rural Employed
Urban
Urban Employed
Active Population
Persons (in
Economically
Persons (in
(in million)
million)
Active Population
million)
Urban
Unemployed
Population
Urban
unemployment
rate
①
②
③=①-②
④
⑤=③-④
⑥=⑤/③
1978
4,068.2
3,063.8
1,004.4
951.4
53.0
5.3%
1979
4,159.2
3,102.5
1,056.7
999.9
56.8
5.4%
1980
4,290.3
3,183.6
1,106.7
1,052.5
54.2
4.9%
1981
4,416.5
3,267.2
1,149.3
1,105.3
44.0
3.8%
1982
4,567.4
3,386.7
1,180.7
1,142.8
37.9
3.2%
1983
4,670.7
3,469.0
1,201.7
1,174.6
27.1
2.3%
1984
4,843.3
3,596.8
1,246.5
1,222.9
23.6
1.9%
1985
5,011.2
3,706.5
1,304.7
1,280.8
23.9
1.8%
1986
5,154.6
3,799.0
1,355.6
1,329.3
26.3
1.9%
1987
5,306.0
3,900.0
1,406.0
1,378.3
27.7
2.0%
1988
5,463.0
4,006.7
1,456.3
1,426.7
29.6
2.0%
1989
5,570.7
4,093.9
1,476.8
1,439.0
37.8
2.6%
1990
6,532.3
4,770.8
1,761.5
1,704.1
57.4
3.3%
1991
6,609.1
4,802.6
1,806.5
1,746.5
60.0
3.3%
1992
6,678.2
4,829.1
1,849.1
1,786.1
63.0
3.4%
1993
6,746.8
4,854.6
1,892.2
1,826.2
66.0
3.5%
1994
6,813.5
4,880.2
1,933.3
1,865.3
68.0
3.5%
1995
6,885.5
4,902.5
1,983.0
1,904.0
79.0
4.0%
5
On the basis of the data from the fifth nationwide population census, we know that the rural unemployment
rate in 2000 is 1.15%.
49
1996
6,976.5
4,902.8
2,073.7
1,992.2
81.5
3.9%
1997
7,080.0
4,903.9
2,176.1
2,078.1
98.0
4.5%
1998
7,208.7
4,902.1
2,306.6
2,161.6
145.0
6.3%
1999
7,279.1
4,898.2
2,380.9
2,241.2
139.7
5.9%
2000
7,399.2
4,893.4
2,505.8
2,315.1
190.7
7.6%
2001
7,443.2
4,908.5
2,534.7
2,394.0
140.7
5.6%
2002
7,536.0
4,896.0
2,640.0
2,478.0
162.0
6.1%
2003
7,607.5
4,879.3
2,728.2
2,563.9
164.3
6.0%
2004
7,682.3
4,872.4
2,809.9
2,647.6
162.3
5.8%
2005
7,787.7
4,849.4
2,938.3
2,733.1
205.2
7.0%
2006
7,824.4
4,809.0
3,015.4
2,831.0
184.4
6.1%
2007
7,864.5
4,764.0
3,100.5
2,935.0
165.5
5.3%
2008
7,924.3
4,727.0
3,197.3
3,021.0
176.3
5.5%
Source: Data in line ①, ②, ④ come from China Statistical Yearbook 2010, other are calculated.
3.2 Relationship
between
economic
growth
and
unemployment in China
3.2.1 The deviation of China economy from Okun’s Law
In general, a country's economic growth will bring about demand expansion,
employment increasing and unemployment decline. Okun's Law describes the
unemployment rate and economic growth showed the reverse changes in the
relationship, that is unemployment rate falls when economy grows. As an empirical
rule, Okun's Law has been well confirmed in practice. However in China, economy
maintains a high growth rate, while unemployment rate is also high. Does this mean
the China economy is away from the Okun's Law, showing inconsistent development
path with Okun's Law?
50
Table 3-7 Changes of Chinese GDP and unemployment rate in 1978-2008
Year
Unemployment rate
Unemployment changes
GDP growth rate
Changes of GDP growth
1978
5.3%
1979
5.4%
0.1%
7.6%
-4.1%
1980
4.9%
-0.5%
7.8%
0.2%
1981
3.8%
-1.1%
5.3%
-2.5%
1982
3.2%
-0.6%
9.0%
3.8%
1983
2.3%
-1.0%
10.9%
1.9%
1984
1.9%
-0.4%
15.2%
4.3%
1985
1.8%
-0.1%
13.5%
-1.7%
1986
1.9%
0.1%
8.9%
-4.6%
1987
2.0%
0.0%
11.6%
2.7%
1988
2.0%
0.1%
11.3%
-0.3%
1989
2.6%
0.5%
4.1%
-7.2%
1990
3.3%
0.7%
3.8%
-0.2%
1991
3.3%
0.1%
9.2%
5.4%
1992
3.4%
0.1%
14.2%
5.0%
1993
3.5%
0.1%
14.0%
-0.2%
1994
3.5%
0.0%
13.1%
-0.9%
1995
4.0%
0.5%
10.9%
-2.2%
1996
3.9%
-0.1%
10.0%
-0.9%
1997
4.5%
0.6%
9.3%
-0.7%
1998
6.3%
1.8%
7.8%
-1.5%
1999
5.9%
-0.4%
7.6%
-0.2%
2000
7.6%
1.7%
8.4%
0.8%
2001
5.6%
-2.1%
8.3%
-0.1%
2002
6.1%
0.6%
9.1%
0.8%
11.7%
51
2003
6.0%
-0.1%
10.0%
0.9%
2004
5.8%
-0.2%
10.1%
0.1%
2005
7.0%
1.2%
11.3%
1.2%
2006
6.1%
-0.9%
12.7%
1.4%
2007
5.3%
-0.8%
14.2%
1.5%
2008
5.5%
0.2%
9.6%
-4.6%
Source: The GDP growth rates come from China Statistical Yearbook 2010, other data are calculated.
The Okun’s Law can be stated as:
u −u
= − (y − y
)
Where, u is the unemployment rate of period t, u
t-1, u − u
y
( > 0)
(3.3)
is the one of the last period
is the change of unemployment rate; y is the GDP growth rate of t,
is the one of the last period, y − y
is the change of GDP growth rate.
Because unemployment rate decreases when GDP growth rate increases, there is a
minus in front of
.
Then make a comparison between China's GDP growth rate and the unemployment
rate. Table 3-7 shows data of China's urban unemployment rate and GDP growth and
their changes among the years in 1978-2008. Figure 3-5 is drew curves of
unemployment rate and economic growth based on the data in the table. It can be
seen from the figure, though there is climbing trend in unemployment when
economic growth decrease in some years, on the whole, the unemployment rate did
not change in the opposite direction of the economic growth. The economic growth
rises, and the unemployment rate also climbs instead of declining. Especially since
1998, the unemployment rate and economic growth showing a consistent trend of
change, that there is a coexistence of high economic growth and high
unemployment.
52
16.0%
Unemployment
GDP growth
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Figure 3-5 Chinese unemployment rate and GDP growth rate in 1978-2008
Figure 3-6 is the scatter diagram of unemployment rate and GDP growth rate, the
horizontal axis is the unemployment rate, the vertical axis is the GDP growth rate. It
can be seen from the figure that the points of annual economic situation follow
discrete irregular distribution, unemployment rate and GDP growth do not show the
reverse changes in the relationship.
53
16.0%
14.0%
GDP growth rate
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Unemployment rate
Figure 3-6 Scatter Diagram showing unemployment rate and GDP growth rate in 1978-2008
Figure 3-7 reflects the relation of changes between the unemployment rate and the
GDP growth. From it we can see an irregular distribution of the points of economy
behalf. According to Okun's Law, when y − y
previous month has increased, then u − u
should decline; when y − y
> 0, that GDP growth from the
< 0, that the unemployment rate
< 0, then u − u
> 0. That is the points plotted
in graph should be concentrated in the second quadrant and fourth quadrant.
However, Figure 3-7 does not show this situation, we see that the points are
irregularly distributed in all quadrants.
54
8
Changes of GDP growth rate (in %)
6
4
2
0
-2.5
-2
-1.5
-1
-0.5
-2
0
0.5
1
1.5
2
-4
-6
-8
Unemployment rate changes (in %)
Figure 3-7 Relationship between changes of unemployment rate and GDP growth rate in 1978-2008
Obviously, from the above data and graphical analysis, we can draw this conclusion:
the overall Chinese economy does not fit in Okun's law, but shows a different
development path from Okun's Law. Especially since 1998, the unemployment and
economic growth showing a consistent trend of change, c there is a coexistence of
high economic growth and high unemployment in China. So, what it is the economic
logic behind?
3.2.2 Reasons for the coexistence of China's high economic
growth and high unemployment
We believe that there are several factors contributed to the coexistence of high
economic growth and high unemployment in China, not any of these factors alone
can give sufficient explanation for the phenomenon of coexisting. It is a
combinational effect of these factors:
 One is the weakening employment absorbing capacity of economic growth. We
55
will see in the following analysis, Chinese economic growth pattern is
capital-driven, high growth mainly come from the high capital investment. This
pattern is not conducive to employment expansion, and even has a crowding-out
effect on the employment because of the capital deepening.
 Another force comes from China's economic transformation.
Economic transformation highlights the problem of unemployment. When the
employment absorption of economic growth pattern is gradually weakening,
unemployment problem due to economic transformation stands out. The
economic transformation highlights the disguised unemployment born in the old
planned economic system (in state-owned economies in cities and hidden
unemployment in rural areas), resulting in a rapid rise in urban unemployment.
In addition to these two forces - the gradual weakening of employment absorption of
economic growth and the continuous release of unemployment due to the economic
transformation – a third force plays a role on strengthening the coexistence of the
high growth and high unemployment, that over-utilization of labor forces, which led
to jobs occupation and unemployment. These three forces working together result in
inevitable coexistence of high economic growth and high unemployment.
56
4 China’s economic growth pattern and
its employment effect
Through the analysis of Chapter III we know that China's economy maintained a rapid
growth accompanied the simultaneously rising unemployment rate, it deviated from
Okun's Law, the so-called "paradox" [41]. This chapter will find the explanation for the
paradox.
We believe that the coexistence of high economic growth and high unemployment is
related to the weakened employment absorption capacity under the economic
growth pattern in China. Economic growth is the fundamental source of increasing
employment; a fast economic growth, usually bring about the expansion of
employment and fully utilization of labor forces. However, employment expansion
varies according to the patterns of economic growth. If a country is extremely rich in
labor resources, the pattern of growth to make full use of the comparative advantage
of labor forces is most conducive way to full-utilization of labor resources. China has
abundant labor resources and perfect elastic supply of labor, therefore, faster growth
in labor-intensive industries can create as many jobs as possible. In contrast,
capital-intensive or capital-driven pattern of economic growth is a non-conducive
mode to the expansion of employment, under which economic growth will not
necessarily bring about a simultaneous increase in employment. So, in order to
explain why in China's economy high growth is coexisting with high unemployment,
we need to analyze the China's economic growth pattern and employment
absorption capacity of economic growth under this pattern.
The idea this chapter of is: firstly determine what kind of economic growth mode it is
in China, and then analyze influence of the growth pattern in employment. Impact on
employment can be expressed in terms of the employment elasticity of economic
57
growth.
4.1 Economic growth pattern and employment
4.1.1 Definition of "Economic growth pattern"
For a long time, an important content of economic research is rational allocation of
resources. Rational allocation of resources is a prerequisite for economic growth,
rational allocation of resources is to achieve the ultimate goal of economic growth.
The rational allocation of resources is the rational allocation of production factors.
Economic growth refers to the combination of productive factors and how they were
used, or the construction of productive factor inputs and factors productivity in
process of economic growth. Inputting factors of production aims to maximize their
output, in other words, the portfolio and allocation of the elements directly links
with the quantity and quality of output. Following this, the division of type of
economic growth, mainly based on the contribution and configuration of various
elements for economic growth.
Economic growth and outputs primarily rely on increase in the productive factor
inputs. Generally factors of production include capital, labor and technology, which
are necessary in production processes. Meanwhile, the result of a country's
economic output often depends on the combinations of these elements.
The generally speaking pattern of economic growth actually refers to the mode of
economic growth. Economic growth model has two meanings: First, economic
growth relies mainly on a significant increase in factor inputs, or by increased
efficiency of the factors to achieve. Accordingly, the understanding of economic
growth mode is mainly on extensive or intensive way to realize the economic growth.
58
The second refers to combinations of various productive elements to promote
economic growth, simply refers to the types of the resource structure of the
economic growth. Accordingly, the understanding of the economic growth model is
refers to knowing economic growth mainly depends on which factors, that economic
growth was mainly driven by capital or labor. The "economic growth pattern" in this
paper refers to the second situation.
4.1.2 Economic growth pattern and employment
As the employment levels of the workforce is decide by the need of labor force by
economic growth, therefore, economic growth is essential to maintain a high rate of
employment conditions. When there is little change in technical conditions,
economic growth is a negatively correlated to the unemployment rate, the
combination of amount of labor input and the corresponding capital can promote
economic growth in a certain rate. On the contrary, a certain rate of economic
growth requires a certain amount of labor input, which means create some
employment opportunities. The level of labor demand depends on the economic
growth. Faster economic growth has larger demand for labor, resulting in higher level
of employment and lower unemployment rate; if the demand of slow economic
growth for labor is relatively small, the level of employment is low and
unemployment rate is high.
We can find that economic growth is a prerequisite for employment growth;
employment levels is affected by economic growth speed, economic growth
determine the level of labor demand, namely employment growth. But in real
economy, economic growth and employment growth are often inconsistent,
promoting job growth is not only depends on economic growth, but also on the
elasticity of employment growth. From China's actual situation, economic growth is
59
rapid in recent years, economic growth rate remained at a high level, but
unemployment rate rose meanwhile, higher economic growth did not create more
employment opportunities. This is because the expansion of employment led by
economic growth depends on elasticity of employment growth, while the elasticity of
employment growth is closely relate to the choice of economic growth mode.
Therefore, when economy grows in a certain speed, the contribution of economic
growth to employment growth depends on the mode of economic growth. When the
economic growth is driven mainly by the capital, it does not necessarily bring about a
corresponding increase in employment. This is because the expansion of
employment opportunities depends not only on how fast capital accumulation, but
also depends on the type of investment contains technical route, the intensity of the
different factors of production. Expansion of employment opportunities are often the
results in combined with effective in human capital and physical capital.
4.2 The capital-driven economic growth pattern in
China
Since reform and opening up, China's economy has maintained rapid growth, greatly
enhanced overall national strength, social productivity has improved significantly. In
2008, China's GDP reached 4,416 billion dollars. From 1978 to 2008 GDP grows by
about 20 times and the average annual growth rate of 10.01%6. Accumulation of
capital, growth of labor inputs and the increase in total factor productivity is three
source of economic growth, but the strongest driving force of China's economic
growth over the past 30 years is the rapid accumulation of capital.
6
The figures come from the United Nations Statistics Division-National Accounts Main Aggregates Database
60
4.2.1 Capital elements and China's economic growth
Capital is one of the key drivers of economic growth. The amount of capital stock and
capital formation speed can promote or limit economic growth. In a certain average
productivity of social capital, economic growth depends on the domestic capital
accumulation and the inflow of foreign capital. Such as the United States enhanced
the accumulation of domestic capital after World War II, it had a large amount of
foreign capital inflows and a speed-up development of economic. During the
1945-1985, the driving forces behind the U.S. economic growth are the growth of
capital and labor inputs, the capital’s contributions is the most significant reason of
U.S. economic growth
[42].
Maddison[43] had an of analysis of three-factor in 22
developing countries and regions between 1950-1965: economic growth, labor,
capital and resource allocation efficiency; he obtained the conclusion: contribution of
growth of capital input to economic growth in developing countries is more than in
developed countries. The increase in the capital is the most important source of
economic growth.
To analyze the relationship between capital element and economic growth, we must
first determine the size of the capital stock over the years. Perpetual Inventory
Method is a common method of capital stock estimation
[42] ;
in general, under the
discrete-time conditions, the perpetual inventory method can be expressed using the
following formula:
=
Where,
+ (1 −
is the final capital stock,
replacement index,
,
)
(4.1)
,
is investment in period t,
is the capital stock of the last period,
is
is the investment
. Perpetual Inventory Method is used to estimate the capital stock in steps as below:
(1) establish an initial value; (2) according to the deflator, transform the investment
61
series at current prices in national accounts into real investment series,; (3) Select
the Reset Rate; (4) calculate the capital stock series by the defined the perpetual
inventory method.
In practice, the usual way to estimate China's capital stock series is: (1) through the
census or certain assumptions to estimate a whole social capital stock in a certain
period; (2) to obtain the number of annual investments years by sectors, and
converted the numbers at current prices into ones at constant prices; (3) according to
composition of all kinds of assets in annual investment, based on the specifically
investigated average use life of all kinds of assets (the interval time from put into use
until to be completely scrap), estimates annual capital scrap value, and brings
together; (4) cut the value of capital scrap to obtain the real increment of assets each
year; (5) project the number of capital stock over the years according to the
principles that capital stock of last year plus capital increment of this year equal to
capital stock this year.
Table 4-1 lists the Chinese capital stock data in 1979-2007, use the Li Bin’s estimation
[44],
extend the Holz (2006) [45] estimation method.
Table 4-1 Chinese capital stock and GDP (at constant price in 2000)
Capital Stock at
GDP at constant 2000
Capital Stock at
GDP at constant 2000
constant 2000 price
price
constant 2000 price
price
(in RMB billion)
(in RMB billion)
(in RMB billion)
(in RMB billion)
1979
3,529.80
1,404.86
1994
12,199.68
5,911.88
1980
3,871.03
1,514.53
1995
13,240.34
6,558.17
1981
4,209.09
1,594.17
1996
14,482.18
7,214.90
1982
4,551.33
1,737.79
1997
15,875.25
7,884.68
1983
4,930.28
1,927.11
1998
17,331.55
8,502.24
1984
5,367.61
2,219.57
1999
18,897.36
9,151.14
Year
Year
62
1985
5,846.66
2,518.56
2000
20,624.17
9,921.46
1986
6,385.99
2,741.82
2001
22,443.66
10,745.31
1987
7,019.70
3,059.08
2002
24,331.44
11,721.92
1988
7,739.58
3,403.77
2003
26,545.34
12,896.98
1989
8,471.12
3,542.17
2004
29,482.36
14,197.39
1990
9,109.95
3,677.95
2005
33,204.88
15,677.97
1991
9,725.60
4,016.11
2006
37,834.83
17,504.54
1992
10,453.38
4,587.97
2007
43,182.59
19,593.55
1993
11,280.54
5,227.73
Source: Li Bing, Zeng Zhixiong.(2008): “Recalculating the Changes in China's Total Factor Productivity: 1978-2007”,
The Journal of Quantitative & Technical Economic 200
We can see in Table 4-1, China's capital stock increases from 1979 of RMB 3530
billion, up to RMB 43,183 billion in 2007, with an average annual increase of 9.37%
nearly 30 years. It is basically consistent with the trend of economic growth. To test
the role of capital stock of GDP, we do the regression analysis of the data in table 4-1,
using GDP as the dependent variable and capital stock in each as variable. The results
of regression of GDP (also in table 4-1) and the capital are shown in figure 4-1, table
4-2.
63
25,000
20,000
GDP
15,000
10,000
y = 0.479x - 228.4
R² = 0.995
5,000
0
0
10,000
20,000
30,000
40,000
50,000
Capital Stock
Figure 4-1 The Scatter plot of relationship between capital stock and GDP
The Scatter plot figure shows that, GDP are proportional to the whole society capital
stock, and have a high correlation, the correlation coefficient of 0.995.
Table 4-2 The output of regression analysis of capital stock and GDP
SUMMARY OUTPUT
Regression Analysis
Multiple R
0.997932021
R Square
0.995868319
Adjusted R Square
0.995715294
St. Err
340.8065192
Included Observations
29
df
SS
MS
F
Significance F
Regression Analysis
1
755883140.5 755883140.5 6507.870037 1.00181E-33
Residual
27
3136025.255 116149.0835
Total
28
759019165.7
Coefficients
St. Err
t Stat
P-value
Lower 95%
Upper 95%
Intercept -228.432767 108.8821144 -2.097982469 0.045400904 -451.8404096 -5.025124735
K
0.479628733 0.005945464 80.67137062 1.00181E-33 0.467429648 0.491827817
64
According the obtained coefficients, we can draw the regression equation:
= −228.433 + 0.479629
And the value of F statistic is high, showing high significant. Equation shows that the
inputs of capital stock directly promote GDP growth. Capital stock per unit can
promote increase in 0.48 unit of GDP.
4.2.2 Effect of Investment on China's economic growth
The investment in national income statistics includes investment in fixed assets and
inventory. Inventory has a reverse-cycle characteristic; in good time inventory
dropped due to the soaring sales; when there is economic recession, inventory has
risen. In contrast, the effect of investment on economic growth mainly due to the
investment in fixed asset. The improving effects of investment can be divided into
horizontal and growth. Horizontal effect refers to not change the slope of the
balanced-growth path, only change the location. Growth effect means a change in
the growth rate of the balanced growth path [46]. The neo-classical growth model [47]
shows that output growth can be divided into capital growth, labor growth and total
factor (TFP) these three parts, more investment accelerates capital accumulation,
stimulating economic growth through capital deepening. J. Bradford DeLong and
Lawrence H. Summers estimated investment in equipment and economic growth of
25 high-growth countries in the 25 years of 1960-1985, and found that every 1
percentage point increase in the equipment investment share of GDP led to unit
labor output growth rise 0.3 to 0.4 percentage points [48].
Table 4-3 The investment in fixed assets and GDP
Year
Nominal
Growth rate Price index of Real investment Growth rate
investment in of nominal investment in in fixed assets
of real
Indices of
GDP
GDP
GDP
At constant
growth
65
fixed assets
investment fixed assets
at constant
investment at preceding 1991 price
(in RMB
in fixed
at 1991 =
1991 price (in
in fixed
billion)
assets
100
RMB billion)
assets
1991
559.45
23.9%
100.0
559.41
1992
808.01
44.4%
115.3
700.79
1993
1,245.79
54.2%
146.0
1994
1,637.03
31.4%
1995
2,001.93
1996
year = 100
rate
(in RMB
billion)
109.2
2,178.15
9.2%
25.3%
114.2
2,487.45
14.2%
853.46
21.8%
114.0
2,835.69
14.0%
161.2
1,015.84
19.0%
113.1
3,207.17
13.1%
22.3%
170.7
1,173.06
15.5%
110.9
3,556.75
10.9%
2,297.40
14.8%
177.5
1,294.42
10.3%
110.0
3,912.42
10.0%
1997
2,494.11
8.6%
180.5
1,381.76
6.7%
109.3
4,276.28
9.3%
1998
2,840.62
13.9%
180.1
1,576.88
14.1%
107.8
4,609.83
7.8%
1999
2,985.47
5.1%
179.4
1,663.95
5.5%
107.6
4,960.17
7.6%
2000
3,291.77
10.3%
181.4
1,814.71
9.1%
108.4
5,376.83
8.4%
2001
3,721.35
13.0%
182.1
2,043.35
12.6%
108.3
5,823.10
8.3%
2002
4,349.99
16.9%
182.5
2,383.77
16.7%
109.1
6,353.01
9.1%
2003
5,556.66
27.7%
186.5
2,979.46
25.0%
110.0
6,988.31
10.0%
2004
7,047.74
26.8%
196.9
3,578.58
20.1%
110.1
7,694.13
10.1%
2005
8,877.36
26.0%
200.1
4,436.60
24.0%
110.4
8,494.31
11.3%
2006
10,999.82
23.9%
203.1
5,416.09
22.1%
111.6
9,479.65
12.7%
2007
13,732.39
24.8%
211.0
6,507.76
20.2%
113.0
10,712.01
14.2%
2008
17,282.84
25.9%
229.8
7,520.94
15.6%
109.0
11,676.09
9.6%
Source: The investment in fixed assets, Price index of investment in fixed assets and Indices of GDP are from
Chinese National statistical Database
In the case of China, economic growth and fixed asset investment growth has a close
relationship. Taking into account that only since 1991 there is the price index of fixed
asset investment, so to examine the stimulating effect of total fixed asset investment
on economic growth, only select sample data from 1991. Do the regression analysis
of the annual total fixed asset investment and GDP increment at constant prices in
1991-2009 (Table 4-3), using increment of GDP as dependent variable, investment in
66
fixed assets and its one-year lagged as variables, obtained results are shown in Figure
4-4.
Table 4-4 Result of regression analysis of investment in fixed assets and increment of GDP
SUMMARY OUTPUT
Regression Analysis
Multiple R
0.980160304
R Square
0.960714221
Adjusted R Square
0.955101967
St. Err
59.88997744
Included Observations
17
df
SS
MS
F
Significance F
Regression Analysis
2
1227991.004 613995.5019 171.1815248 1.44427E-10
Residual
14
50215.33157 3586.809398
Total
16
1278206.335
Coefficients
St. Err
t Stat
P-value
Lower 95%
Upper 95%
Intercept 232.6164406 25.58212062 9.092930334 2.99293E-07 177.748249 287.4846321
It
0.612379101 0.123042872 4.976957148 0.000203014 0.348478388 0.876279814
It-1
-0.57986591 0.147794917 -3.923449578 0.001529537 -0.896854475 -0.262877336
So using the obtained coefficients, the regression equation is:
∆GDP = 232.6 + 0.61I − 0.58I
The result tells us, the increments of GDP are proportional to the investment in fixed
assets, between whom there is a high correlation, R = 0.96. But we should notice
that, the increments of GDP vary inversely as the first-order lag of the investments in
fixed assets, which may reflects high depreciation.
67
4.2.3 Analysis of effects of capital on economic growth
Analysis of the reasons for economic growth, aggregate production function
approach can be used for the factor inputs and factor productivity growth in the
contribution of accounting, the factor inputs of the contribution to economic growth
and total factor productivity to economic growth contributed to distinguish.
According to the Solow–Swan growth model [49], assuming technology as A, it began
with a production function of the Cobb-Douglas type: Q = Y = AK L
=
AF(K , L ) we can get the growth function GY = GA + αGK + βGL. In which GY is
the output growth, GA is the multifactor productivity (TFP) growth, GK is the
capital growth and GL is the labor growth; α, β are the capital and labor elasticity
of economic growth. Using the above decomposition equation we can isolate the
effect of factor inputs and factor productivity on economic growth.
In a report published by the Renmin University of China saying, according to China,
with rapid economic growth, contribution of elements inputs and factor productivity
to economic growth are also change accordingly. From 1979 to 2007, capital
contribution to GDP reached 53.5%, is the main driving force of economic growth,
contributions of labor added by human capital and total factor productivity (TFP) to
the economic growth are 25.3% and 21.2%. From 2000 to 2007, capital contribution
to GDP growth reached the high level of 66%, while the contribution of labor added
by human capital rapid declined to 10.5%. TFP’s contribution to economic growth has
been maintained at a high level. From 1979 to 2007, the average contribution of TFP
to economic growth is 21.2%. From the 1980s to the 1990s, TFP growth rate has
doubled; the contribution rate increase by 20 percentage. In the 21st century, growth
rate and contribution rate of TFP significantly decline [50], see in table 4-3.
68
Table 4-5 Factors contribute to economic growth rate
1979-1989
1990-1999
2000-2007
1979-2007
Capital
43.6%
54.5%
66%
53.5%
Labor
45.6%
14.7%
10.5%
25.3%
TEP
10.8%
30.8%
23.5%
21.2%
Source: the report “China's Economic: 2009”, published by Institute of Economics of Renmin University of China
We can see that China's economic growth was mainly driven by the capital while
labor's contribution is relatively weak.
4.3 Weakened employment absorption capacity of
economic growth
4.3.1 The concept of employment elasticity
In order to observe and measure the relationship between economic growth and
employment to people often use the concept “employment elasticity of economic
growth”. The so-called employment elasticity is the percentage change in the
number of jobs according to the change in economic growth by one percentage point,
reflecting the ability of economic growth to absorb the labor force. The greater the
elasticity of employment, the more the unit economic growth to improve
employment growth; when the level of employment elasticity is low, the unit
economic growth promotion of the level of employment growth is low, even if the
economy remains growing fast, there isn’t a strong pull of the employment. When
employment elasticity is positive, the high-elastic economic growth stimulating
employment well, and low-elastic economic growth’s effects on employment is low.
When the employment elasticity is negative, the effect of economic growth on
employment can be divided into two cases: one is "crowding-out" effect, which
69
comes from the positive economic growth accompanied by employment decrease,
the greater the absolute value of employment elasticity, the greater the
crowding-out effect on employment; the smaller the absolute value of employment
elasticity and crowding-out effect on employment is smaller too; the other is
"absorptive" effect, which comes from negative growth in the economy but increase
in employment, then the greater the absolute value of employment elasticity , the
greater
absorptive effect of employment, the smaller the absolute value of
employment elasticity ,employment absorption is smaller as well. In addition, if the
employment elasticity is zero, indicating no growth stimulating effect on employment
growth. Of course, in the case of economic growth is zero, employment elasticity
would not exist.
Elasticity is usually calculated using the differential equation. Assuming growth rate
of output is GY, the employment growth is GL, the employment elasticity is K, and
then the coefficient of employment elasticity can be expressed with a mathematical
formula as follows [51]:
K = Employment growth rate⁄Output growth rate = GL/GY
(4.2)
Changes in the scope of employment elasticity: When GL > GY, then k > 1, the labor
absorption of economic system grew faster than the output growth, employment
elasticity is greater than 1, decline in labor productivity; when GL = GY, then k = 1,
labor absorption of economic system is equal to its output growth, the employment
elasticity of labor productivity is equal to 1; when GL < GY, then k <1, labor
absorption of economic system grows slowly than the output growth, employment
elasticity coefficient is less than 1, labor productivity increased. In general not
considering a negative growth of output and employment, the employment elasticity
is always positive; while in the real economy there is an upward trend in labor
productivity, the employment elasticity is less than 1. Generally, the employment
70
elasticity changes between 0 and 1, that 0 < k < 1. When k closer to 1, the greater the
employment elasticity, the stronger the economy's ability to absorb labor force is;
when k closer to zero, the smaller the employment elasticity, the economy's ability to
absorb labor force is getting weaker.
4.3.2 Absorption
capacity
of
the
employment
and
employment elasticity by three strata of industry
China's capital-driven economic growth pattern caused a serious imbalance between
industrial structure and employment structure. (See in table 4-4).
Table 4-6
Primary Industry
Year
Secondary Industry
Output Employment Employment
proportion proportion
1978
28.2%
70.5%
1979
31.3%
69.8%
1980
30.2%
1981
elasticity
Output
Tertiary Industry
Employment Employment
proportion proportion
47.9%
17.3%
0.05
47.1%
17.6%
68.7%
0.21
48.2%
31.9%
68.1%
0.16
1982
33.4%
68.1%
1983
33.2%
1984
elasticity
Output
Employment Employment
proportion proportion
elasticity
23.9%
12.2%
0.40
21.6%
12.6%
18.2%
0.47
21.6%
13.1%
0.58
46.1%
18.3%
1.33
22.0%
13.6%
0.78
0.26
44.8%
18.4%
0.76
21.8%
13.4%
0.30
67.1%
0.08
44.4%
18.7%
0.36
22.4%
14.2%
0.56
32.1%
64.0%
-0.05
43.1%
19.9%
0.60
24.8%
16.1%
0.51
1985
28.4%
62.4%
0.08
42.9%
20.8%
0.34
28.7%
16.8%
0.18
1986
27.1%
60.9%
0.05
43.7%
21.9%
0.49
29.1%
17.2%
0.34
1987
26.8%
60.0%
0.08
43.6%
22.2%
0.27
29.6%
17.8%
0.34
1988
25.7%
59.4%
0.09
43.8%
22.4%
0.14
30.5%
18.3%
0.20
1989
25.1%
60.0%
0.29
42.8%
21.6%
-0.14
32.1%
18.3%
0.11
1990
27.1%
60.1%
N.A
41.3%
21.4%
N.A
31.5%
18.5%
N.A
71
1991
24.5%
59.7%
0.09
41.8%
21.4%
0.06
33.7%
18.9%
0.14
1992
21.8%
58.5%
-0.10
43.5%
21.7%
0.09
34.8%
19.8%
0.21
1993
19.7%
56.4%
-0.14
46.6%
22.4%
0.10
33.7%
21.2%
0.30
1994
19.9%
54.3%
-0.07
46.6%
22.7%
0.06
33.6%
23.0%
0.27
1995
20.0%
52.2%
-0.11
47.2%
23.0%
0.08
32.9%
24.8%
0.37
1996
19.7%
50.5%
-0.13
47.5%
23.5%
0.19
32.8%
26.0%
0.37
1997
18.3%
49.9%
0.02
47.5%
23.7%
0.19
34.2%
26.4%
0.18
1998
17.6%
49.8%
0.37
46.2%
23.5%
0.08
36.2%
26.7%
0.17
1999
16.5%
50.1%
N.A
45.8%
23.0%
N.A
37.8%
26.9%
N.A
2000
15.1%
50.0%
0.65
45.9%
22.5%
-0.11
39.0%
27.5%
0.23
2001
14.4%
50.0%
0.23
45.2%
22.3%
0.05
40.5%
27.7%
0.14
2002
13.7%
50.0%
0.20
44.8%
21.4%
-0.35
41.5%
28.6%
0.34
2003
12.8%
49.1%
-0.17
46.0%
21.6%
0.12
41.2%
29.3%
0.28
2004
13.4%
46.9%
-0.15
46.2%
22.5%
0.29
40.4%
30.6%
0.36
2005
12.1%
44.8%
-0.78
47.4%
23.8%
0.37
40.5%
31.3%
0.21
2006
11.1%
42.6%
-0.57
47.9%
25.2%
0.34
40.9%
32.2%
0.19
2007
10.8%
40.8%
-0.18
47.3%
26.8%
0.34
41.9%
32.4%
0.05
2008
10.7%
39.6%
-0.14
47.4%
27.2%
0.13
41.8%
33.2%
0.18
Source: The output proportions and employment proportions come from China Statistical Yearbook 2010,
elasticity of employment are calculated.
First, the primary industry has high-employment, low-output characteristics. In 2008,
employment of primary industry accounts for 40% of total employment and output
value accounts for only 11% of GDP. Secondary industry shows a high growth, and
low employment. In 2004, the output value of secondary industry accounted for 47%
of GDP, while the employments share only 27% of total employment. It has a high
output proportion and low employment share, showing tendency to capital-intensive
and high-tech employment. The tertiary industry has a low overall level, the
employment share and output share are 41% and 33%.
72
1.5
Primary Industry
Secondary Industry
1
Tertiary Industry
0.5
0
-0.5
-1
Figure 4-2 The calculated elasticity of employment of the Three Strata of Industry
Table 4-4 lists the employment elasticity of economic growth by three industries. The
employment elasticity of three industries all have downward trend. However, the
three industries have different employment absorption. These figures showed that
economic growth of primary industry has the weakest stimulating effect on the
employment growth; the stimulating effect of economic growth on employment in
second industry is higher than in primary industry, but after 1991, it is tend to be
more significantly reduced; the tertiary industry has the strongest stimulating effect
of economic growth on employment.
The contribution of the primary industry to employment can be expressed as a
"reservoir" of surplus labor. The overall level of employment elasticity in primary
industry is lower, but fluctuates a lot. The fluctuation reflects employment changes in
the second industry and tertiary industry. When the employment absorption of
second industry and tertiary industry decreases, the employment elasticity of
primary industry rises; when the employment absorption of second industry and
73
tertiary industry rise, the employment elasticity of primary industry will decline.
The changes in employment elasticity of the secondary industry reflect the results of
company to eliminate redundant (this issue will be discussed in Chapter five). On the
other hand, it reflects the increase in level of capital-intensive. The second industry is
the most capital-intensive industry, and the degree of capital intensity rises in recent
years. The increase in capital intensity, results in decrease in employment absorption
of capital and the capital crowding out of employment. The secondary industry is
growing fastest and the output accounts for the largest of the total GDP (Table 4-4
shows that, in recent years, 50% of the GDP comes from the second industry).
Therefore, when promoting economic growth, due to the weakening of employment
absorption and the capital’s exclusion of employment, the secondary industry has a
gradually decline in employment elasticity of economic growth, which also leads to
the weakening stimulating effect of high economic growth on employment.
The capacity of employment absorption in tertiary industry is the strongest. The
employment increase relies on China's tertiary industry at the present. In general,
the tertiary industry is relatively labor-intensive industry, with higher employment
elasticity. However, the problem is in the China's tertiary industry did not be fully
developed; therefore, the industry's ability to absorb employment is not sufficient.
Decline in employment absorption of the secondary industry and inadequate
development of tertiary industry, causes the advantage of China's labor resources
not been fully used, directly lead to the decline in overall Chinese economy
employment elasticity.
74
4.3.3 Overall employment elasticity of China’s economic
growth
Table 4-7 The employment elasticity of China economic growth
Year
GDP Growth rate
Employment growth rate
Employment elasticity of GDP
1979
7.6%
2.2%
0.29
1980
7.8%
3.3%
0.42
1981
5.3%
3.2%
0.61
1982
9.0%
3.6%
0.40
1983
10.9%
2.5%
0.23
1984
15.2%
3.8%
0.25
1985
13.5%
3.5%
0.26
1986
8.9%
2.8%
0.32
1987
11.6%
2.9%
0.25
1988
11.3%
2.9%
0.26
1989
4.1%
1.8%
0.45
1990
3.8%
17.0%
4.44
1991
9.2%
1.1%
0.12
1992
14.2%
1.0%
0.07
1993
14.0%
1.0%
0.07
1994
13.1%
1.0%
0.07
1995
10.9%
0.9%
0.08
1996
10.0%
1.3%
0.13
1997
9.3%
1.3%
0.14
1998
7.8%
1.2%
0.15
1999
7.6%
1.1%
0.14
2000
8.4%
1.0%
0.12
75
2001
8.3%
1.3%
0.16
2002
9.1%
1.0%
0.11
2003
10.0%
0.9%
0.09
2004
10.1%
1.0%
0.10
2005
11.3%
0.8%
0.07
2006
12.7%
0.8%
0.06
2007
14.2%
0.8%
0.05
2008
9.6%
0.6%
0.07
Source: The data for calculating the employment elasticity come from China Statistical Yearbook 2010
Compared with developed countries and developing countries, employment
elasticity in China is obviously very low.
From the overall view, the stimulating
effect of China's economic growth on employment shows a continually weakening
trend. This happens because capital grows faster compared to labor (employment)
growth. Faster growth of capital promotes rapid economic growth, but at the same
time employment will not be increased accordingly. The faster capital growth due to
the economic growth of capital-intensive industries is higher than the growth in
labor-intensive industries.
76
5 Effect of economic transformation on
unemployment
China is in the transformation process from planned economy to market economy,
the changes unemployment rate is closely related to the institutional reform, and the
point of relationship between economic growth and unemployment, has a clear the
characteristics of the economies in transition. Economic transformation gradually
reveals those disguised unemployment formed in the old planned economic system
(disguised unemployment in state-owned economy in urban areas, disguised
unemployment in rural areas), resulting in a rapid rise in urban unemployment. The
weakened employment absorption capacity of high economic growth driven by
capital and rising unemployment due to economic transformation work together to
bring about the co-existence of high growth and high unemployment. Thus,
economic transformation is undoubtedly an important reason for the phenomenon
of coexistence.
5.1 Disguised unemployment led by the planned
economic system
Yuan Zhigang in his "economics of unemployment”
[52]
said that in pre-capitalistic
society, there is no unemployment problem, only after a large increase in labor
productivity and the establishment of employment relationship between capital and
labor there would be the genuine unemployment. In a market economy,
unemployment is usually open exist, but in the planned economy, a slogan is to
“eliminate unemployment”. In fact it is an unavoidable reality that labor need to
work with other production factors.
77
Though China has the most population over the world, labor resources are relative
surplus productive resources compared to other productive resources, it still had
achieved the goal of full employment at the expense of sacrificing economic
efficiency and the of optimal allocation of economic resources. Actually in planned
economy period, although unemployment was eliminated, it still needs either a
reasonable ratio between the labor force and other factors of production under
certain conditions, or optimal allocation of labor resources. In the planned economy
the open unemployment just changed into disguised unemployment.
5.1.1 Employment suppression under the strategy of
prioritizing development of heavy industry
Before economic reform the objective of China economic growth was prioritizing
development of heavy industry, by macro-economic policy of distorting the price,
highly-centralized planned resource-allocation system and the micro-management
system lacking of autonomy. In this strategic environment production factors were
non-substitutable. In other words, although labor force is the most abundant
resources of production, the economic development at that time were highly
capital-intensive not labor-intensive. In the period of 1952-1980, the industrial
investment severely focused on the heavy industry. Because heavy industry was
highly capital-intensive but with weak labor absorptive capacity, the implementation
of prioritizing development of heavy industry means abandoning a lot of job
opportunities [53].
This industrialization strategy of excluding labor resources was not consistent with
the comparative advantage of China at that time, however after the determination of
this development strategy, a series of related institutional arrangements came into
being, including the household registration system of separating urban and rural
78
populations, and its supporting employment system in urban areas, which effectively
hindered the transfer of labor forces in sectors, in regions and in different systems of
ownership. To ensure the implementation of the strategy government established
urban employment system and the household registration system, forced
state-owned enterprises and rural areas take in those labor forces that cannot be
naturally absorbed when economy grew. Behind the surface of "full employment" in
urban areas there was actually a huge amount of ineffective labor. These ineffective
labor resources had become "institutional unemployment”7 during the planned
economy system.
Therefore, in the planned economy era, the institutional unemployment was born,
but it is only in a "latent" state, in the form of "hidden unemployment" existing.
5.1.2 Disguised unemployment in urban areas cause by the
Planned Economy system
Disguised unemployment means the formally not content combination of labor and
means of production, also known as hidden unemployment or underemployment.
The reason why it is unemployed is workers are not being used or fully occupied, that
is under-utilization of labor. The reason why it is disguised, because it is a situation
that people are working, they still have payment of wages by employers. The
definition is always relative to a specific economic goal; due to objectives of different
agents in different economic system, the definitions and measurements of disguised
unemployment are different. At a word, works are underemployment, having their
own jobs, but the ability to work not been fully exploited, often in semi-unemployed
or idle.
7
Institutional unemployment is the unemployment caused by the particular economic institutional
arrangements or institutions reform, some scholars call “constitutional unemployment”.
79
As in the planned economy period, the labor resource allocation implementing an
employment system of unified recruiting, unified deployment, and unified utilization
and unified management, therefore, for a long time, employment in state-owned
enterprises seems more as a political task or social welfare service. It must under
arrangements of government directives, not considering the marginal cost and
marginal productivity of labor, no matter the enterprises need or not. In this
conditions, business use the labor resources regardless of cost, and need not do
cost-benefit analysis, on the contrary it just take into account the size, the number of
staff and the performance, those factors affecting status, power, payment of
organization. Obviously, the more workers they absorb, the greater the size of
state-owned enterprises are. Seen in the planned economy absorbing more labor is
obviously good for business, more precisely, well for the enterprise manager, so
there are external pressure and internal stimulation on business leaders to expand
enterprise scale and increase the number of employees. Thus, in the traditional
planned economy system, state-owned enterprises have unlimited demand for labor,
the demand curve is a horizontal line. Though this kind of employment system could
successfully eliminate overt unemployment at the expense of profitability loss,
actually it does not eliminate the labor force idle and waste. Disguised
unemployment is hidden inside state-owned enterprises in the form of "redundant
worker" and "surplus labor on job", so that the open unemployment changed to the
special disguised unemployment due to the planned economic system. It is
estimated that in the planned economy period, the accumulated disguised
unemployment in urban industries, accounting for 20% - 30% of total number of
employees [54].
80
5.1.3 Massive
disguised
unemployment
led
by
the
“Urbanized suppression” in rural areas
Some economists use the "dual economy"
surplus existing in rural areas. Lewis
[15]
[14]
to explain the phenomenon of labor
hold the view that in developing countries,
few urban industrial sectors are surrounded by massive traditional agricultural
sectors, which formed a dual economic structure prevailing in developing countries:
one side is the traditional agricultural sectors which can only maintain a minimum
standard of living; the other is the modern industrial sectors trying to maximize the
profitability with high labor productivity through advanced technology.
Lewis model explains the growth of a developing economy in terms of a labor
transition between traditional agricultural sectors and modern industrial sectors,
pointing out that in traditional agricultural there are "unlimited supply" of labor
whose marginal productivities are zero, that is surplus labor. The modern sector looks
for the profit-maximization, the marginal production of the two sectors are not equal.
Lewis thought the economic development as the growth of modern sectors by
capital accumulation, absorbing the surplus labor in the traditional sector. As long as
in the agricultural sector surplus labor exists, this process will be repeated until all
the surplus labors in agricultural sectors are absorbed, promoting industrialization
and stimulates sustained development. This means that there is massive surplus
labor in traditional sectors, while no in the modern sectors. However if labor
transitions between sectors are hindered by some institutional obstacles, there may
be a lasting wage differential between urban and rural areas but no corresponding
labor transition
[55].
The Dual Sector model cannot explain this case which is the
situation in China before economic reform.
Before the reform, due to the high proportion of heavy industry, capital accumulation
81
in urban areas did not cause the corresponding raise in the labor absorption capacity
and the transition of rural surplus labor. In order to have enough labor for
agricultural production to ensure prioritizing development of heavy industry and
limit the number of people who can enjoy the low-price farm product it must have
some regulations to restrict the population transition of labor in rural and urban
areas. The regulations of “Urbanized Suppression” have come into being, in order to
prevent the migration of workers from the countryside to the cities; the most
important one is the household registration system. In 1958 the National People's
Congress passed the “Regulations of P.R.C. Concerning Household Registration”,
setting that farmers are not in the exceptional circumstances and permitted by
relevant departments, in principle, they cannot changed to non-agricultural
household. The implementation of household registration system hinder movements
of rural labors to those high-productivity sectors, in other words, it makes a huge
amount of rural labor stuck in the low-productivity agricultural sectors, not only
causing serious underemployment in rural areas, but also impede the effective
increase of agricultural productivity [56].
5.2 Employment expansion in the early reform period
5.2.1 Employment expansion in rural areas
At the end of 1978, contract responsibility system as the main forms of rural
economic reforms in full swing. Implementation of this system is preliminary release
farmers from the land. At the same time, accompanied by the liberalization of
agricultural production and market, farm households as an independent commodity
producers face the market, their entrepreneurial enthusiasm has been increasing
rapidly. In 1979-1994, China's rural employment show rapid growth. This rapid
expansion of rural employment, mainly achieve through the following three ways:
82

First, the opportunities for efficiently using labor resources within the
agricultural sectors increase. According a study of the Ministry of Labor it
estimated that from 1979 to 1994 within 16 years, the opportunities of effective
use of agricultural labor were increased by about 50% [57];

Second, speed up the transition of rural labor to urban manufacturing,
commercial and service industries. It is estimated that from 1979 to 1994,
approximately 30 million migrant workers moved to cities for employment.

Third, the excellent employment growth of non-agricultural sectors in rural areas.
It is estimated that in 1979-1994, the non-agricultural industries in rural areas
produce nearly 100 million new jobs. The employments of non-agricultural
industries in rural areas are concentrated mainly in the township and village
enterprises. In that circumstance, due to the household registration system and
the limits of urban employment system, the rural surplus labor could not move
to cities on a large-scale, so vigorously developing township and village
enterprises is the main way to absorb rural surplus labor.
Table 5-1 Rural employment of township and village enterprises
Number of employed
Employment growth
Number of employed
Employment growth
persons (in million)
rate
persons (in million)
rate
1979
290.9
2.9%
1994
1,201.7
-2.7%
1980
300.0
3.1%
1995
1,286.2
7.0%
1981
297.0
-1.0%
1996
1,350.8
5.0%
1982
311.3
4.8%
1997
1,305.0
-3.4%
1983
323.5
3.9%
1998
1,253.7
-3.9%
1984
520.8
61.0%
1999
1,270.4
1.3%
1985
697.9
34.0%
2000
1,282.0
0.9%
Year
Year
83
1986
793.7
13.7%
2001
1,308.6
2.1%
1987
880.5
10.9%
2002
1,328.8
1.5%
1988
954.5
8.4%
2003
1,357.3
2.1%
1989
936.7
-1.9%
2004
1,386.6
2.2%
1990
926.5
-1.1%
2005
1,427.2
2.9%
1991
960.9
3.7%
2006
1,468.0
2.9%
1992
1,062.5
10.6%
2007
1,509.0
2.8%
1993
1,234.5
16.2%
2008
1,545.1
2.4%
Source: The Chinese National Statistical Database
5.2.2 Employment expansion in urban areas
Number of employed persons in urban areas increased from 951 million in 1978 to
1992 of 1,786 million, of which the state-owned units from 745 million to 1,089
million, an increase of 46%; apart from the state-owned enterprises (including
collective units, stock cooperative unit , joint units, limited liability corporations,
shareholding corporations, private enterprises, units with Funds from Hong Kong,
Macao & Taiwan and self-employed individuals) in employment from 1978 of 206
million to 474 million in 1992, an increase of 130% [58].
In the reform process from 1978 to the early 1990s, it creates nearly totaled 220
million new jobs in urban and rural areas. These created job opportunities absorbed
newly-increased labor force in this period and part of accumulated rural surplus
labor over the past 30 years. The main reason of these achievements is that the
"institutional" environment has changed: the ownership system restructuring, the
formation of variety of economic sectors, the preliminary breakthrough in the
situation of urban-rural separation the and so on. All these changes result in more
efficient utilization of resources, faster capital accumulation, more reasonable
84
industrial structure, bring about the employment expansion, releasing latent
unemployment, especially of rural surplus labor.
5.3 Rising unemployment led by market transformation
5.3.1 Dominance of the disguised unemployment in urban
areas
Since 1992, established a socialist market economic system since the reform
objectives, reform continued to deepen, resulting in state-owned sector of the
economy "on the job unemployment" quickly brings to the surface, a new era of
Chinese unemployed a great source of supply. Since the mid-1990s, increasing
competition in the market exposed the state-owned enterprises and aging
equipment, unreasonable structure, poor management and heavy losses, so that it
can no longer continue to be "hidden unemployment" approach to accommodate
redundant. In early 1997, the Chinese government announced a new policy,
according to this standard, a company must be hidden unemployment into open
unemployment, businesses cannot continue to accommodate internal "redundant"
and the existence of hidden unemployment. Far below the marginal productivity of
those enterprises to pay the labor costs of "hidden unemployed" will be "filtered
out" enterprises, the social re-configuration. At this point, the problem of hidden
unemployment state-owned enterprises clearly exposed [55].
85
120.0
100.0
99.0
100.0
90.0
94.0
90.0
81.5
(in million)
80.0
60.0
56.3
40.0
20.0
0.0
1995
1996
1997
1998
1999
2000
2001
Figure 5-1 Number of laid-off workers in State-owned Units
Source: China Labor Statistical Yearbook
Figure 5-1 is the number of Chinese workers laid off from state-owned enterprises [59].
It can be seen from the figure that in the 1997 - 2001, the number of laid-off workers
of state-owned enterprises amounted to over 47 million, more than 900 million
people each year. Therefore, the dominance of disguised unemployment in
state-owned enterprises caused the rapid rise in urban unemployment, which is
inevitable economic phenomenon in the economic transformation from a planned
economy to a market economy.
At the same time, the employment absorption capacity of state-owned sectors is
declining. According to data of the National Bureau of Statistics, in 1978 the
state-owned sectors absorbed 3.92 million newly incoming labor forces, equal to 125%
of the same year the sum of urban incoming labor force and the number of new
graduates of university and college students (312,160,000)
[60].
This means that, in
addition to the newly urban labor force, the state-owned sectors could still provide
0.8 million jobs for the migrant rural labor. In 2008 national new urban jobs was 8.6
million, but the state-owned sectors only absorbed 0.2 million, no longer the main
86
channel.
China is in the process of transition to market economy; with the deepening of
reform, the proportion of employed population in urban state-owned economies
accounts for the total urban employed population was in a gradual downward trend,
presenting in the aspect of decline in employment absorption and increasing the
release of laid-off workers, which would surely cause unemployment rising.
5.3.2 The pressure of transition of rural surplus labor to cities
on urban employment
Agricultural labor continuously transferring from the traditional economic sectors to
the modern economic sectors means an important indicator of a country into the
process the modern economic growth. In the mid-1980s, “urbanized suppression”
began in the small towns, resulting in the concentration of rural labor force and other
elements in towns. After 1990s, corporate recruitment, grain marketing system,
household registration system reform and the open of real estate market, causing a
large number of rural labors moved to cities. At the same time, labor forces
absorption capacity of the township and village enterprises in rural areas continued
to decrease. Thus, the rural surplus is transferred from the countryside to the cities
for employment due to the wage differential [61].
During 1990s, when a large number of agricultural labors moved to the cities, due to
institutional reform and industrial restructuring, urban workers facing a serious
situation of laid-off. The competition of agricultural labor and urban labor force are in
many jobs not at same level, through which the demands of different types of labor
forces can be satisfied. However as time goes on, on the one hand the urban labor
force are diminishing the conditions of selected jobs; on the other hand, with the
87
increasing work-searching experience and development of employment skills rural
migrant workers continued to improve their own employment competitiveness. In a
word, the competition between urban and rural labor force for limited jobs is
inevitable.
The two forces mentioned above, caused a severe situation of urban employment in
China during a period of time. It is estimated that there are 17.5 million of urban
laid-off workers; in addition, there are about 150 million rural surplus labor need to
be transferred [62].
5.4 Dominance of the disguised unemployment and
economic growth
As mentioned earlier, dominance of the disguised unemployment directly because of
the deepening of economic reform and market requirements of companies to reduce
labor costs and improve labor efficiency, forcing the state-owned units increase
efficiency by reducing redundant staff. Ultimately the reason is that there is a large
number of redundant staff in state-owned enterprises, who should be diverted from
the current job, so there's a lot of disguised unemployment converted into open
unemployment.
The question is if the increase in open unemployment means a downward bending in
the curve of economic growth?
A study suggests that between 1996 and 1998 in China the economic losses caused
by increased unemployment accounting for 2% to 7% of GDP
[63].
This conclusion is
calculated based on Okun's model. However, this estimation did not take the
increased effect of efficiency brought by laid-off workers into account. As the
88
redundant staff is the invalid workers whose marginal productivity is zero or even
negative, though nominally they had a job, in fact did not make direct contribution
on production. Therefore, if business had too much redundant staff, corporate
downsizing would not affect the output, it may also increase output.
It has been proved that, at this stage in China, increasing in the number of laid-off
workers caused by the dominance of disguised unemployment does not affect
economic growth. For example, in 1998 compared with 1991, the number of
employees in state-owned units decreased significantly, from 106.64 million down to
90.58 million. Value of individual industrial production of workers in state-owned
enterprise increased from RMB 7,583 Yuan in 1991 to 1998 of 36,860 Yuan, nearly 4
times, at constant prices increased by 2 times, and thus the GDP growth rate
maintained a growth rate of 7%. In 2000-2004, staff in state-owned enterprises from
81.02 million reduced to 67.1 million, and value of average industrial production they
created doubled, the annual economic growth rate was more than 9%8.
There are different reasons for the substantial increase in labor productivity of
workers in state-owned enterprises: an important one is the increasing organic
composition of capital, while significantly reducing the number of workers of
state-owned units is also an important reason. It shows that reduction of redundant
staff did not only affect the economic operation, but also improve the quality of
economic growth ensuring the normal growth of the national economy. So though
the layoffs caused by the dominance of disguised unemployment increased
unemployment, at the same time the economy has maintained a rapid growth, which
partly explains the coexistence of high growth and high unemployment.
Thus, in the transition period, economic reform in China used “downsizing for
8
The figures are calculated from the data in the National Statistics Database
89
efficiency” in state-owned enterprises as a means to promote economic growth,
while produced a large number of laid-off workers. Therefore, there is a direct
correlation between economic growth and unemployment caused by the economic
system reform, which is an important reason for the variations of Okun's Law.
90
6 Over-utilization of labor force and
unemployment
Through the analysis of first two chapters we know that, because of the weakening of
employment absorption capacity and the increasing urban unemployment caused by
economic transformation, there is the phenomenon of coexistence between high
economic growth and high unemployment. We believe that, in addition to the above
two forces, the over-utilization of labor force also led to jobs diversion and
unemployment.
Over-utilization of labor force is a Chinese characteristic, but not noticed
phenomenon. It results in low employment or unemployment, which is a new
problem in the emergence of China's economic growth.
6.1 Definition and classification
6.1.1 Definition
The so-called over-utilization of labor forces will be defined as: employed person (or
worker) are in the status over the average social working time and intensity in the
longer term, namely, human resources are excessive used in a longer period.
Narrowly defined over-utilization of labor forces, refers to the workers working a
longer period of time over the average level of society, generalized including
overwork exceeds the industry average intensity in a longer period. Here it is the
excessive use of human resources, not mean working overtime over a certain period
in some industries.
Of course, working intensity varies between different industries of different countries
91
in different stages of economic development, but the basic human working capacity
and intensity should be established in a certain period of time and occasion, that
there is a general constant.
6.1.2 Classification
At present, from the supply and demand of human resources, over-utilization of
labor forces in China can be divided into the following two categories:
 Human resources in short supply. This means that when the supply of human
resources is much lower than the demand, there are not enough qualified
workers to enter the industry or field, resulting in over-utilization of insider
employees.
For instance, workers in the IT industry, software industry, R&D staff in some
high-tech fields (such as pharmaceuticals, new materials), as well as some
non-general managers would be overwork in long time. The internal mechanism
is: these industries have high degree of internationalization, but the overall level
of these industries in domestic are lower than the international level, in a
relatively short period of time it is difficult for a large number of current human
resources to reach the high reference level; at the same time, high salary and
high treatment for employees in these industries increased the use-cost of new
entrants, which increase the difficulty for novice into the field, resulting in
employment difficulty in the field. Therefore people have been engaged in these
industries must be overwork.
 Oversupply of human resources. When there is oversupply of such human
resources, employers often employ people with long-term form of overtime.
Such specific areas as extractive industries (coal mining, mining, etc.),
92
construction, garment processing, low-tech manufacturing production line, the
taxi industry and so on.
The internal mechanism is: Under the transition of China’s urban-rural dual
structure, a large number of rural migrant workers enter these areas, and when
quantity of these entrants greatly exceeds actual needs in these areas there is a
crowding effect on human resources. These overflow persons put huge pressure
on those on-the-job workers to reduce wage, under which workers only accept
wages far below the level they deserve, in case that there are insufficient
management for labor protection. Long-term sustainable low payment, force
those staff to work overtime and overload so that form the over-utilization of
labor forces.
6.2 The causes of the over-utilization of labor forces
and its negative effects
6.2.1 The causes of the over-utilization of labor forces
Now the over-utilization of labor forces in China has its specific causes and operating
mechanism:
 Human resources cannot reasonably transfer and the urban-rural dual structure.
China now adopts the urban-rural dualism system of household registration
which makes the workers in those industries mainly composed by what we call
"rural migrant workers", those workers in cities but in the rural household
register. These workers do not have urban household registration to have a
variety of subsidies and welfare, and must accept low wages in the industry, only
by working overtime they can make a living.
93
 The imperfect social security system. China's current situation is that the social
security level is too low and poor enforcement of labor and employment laws.
Current social security system covers only 12% of workforce; the majority of
other workers did not get benefits from the social security system, thus creating
the foundation of reducing wage.
 Different human resources operating mechanism in different ownership
structures. In general, the over-utilization of labor forces occurs in the
state-owned or quasi-state sectors less than in the non-state-owned economic
sectors. Since the official supervision of implementation of labor protection
system in non-state-owned sectors is not enough, there left a large space to
overwork. Significant reduction of employees in state-owned enterprises is also
the formative factor of the over-utilization of labor forces, while it is one success
factors of state-owned enterprise reform.
 Implementation of labor protection system is not standardized. During the
period of China's rapid economic development, many enterprises, especially
private enterprises kept investment in labor safety and labor protection to a
minimum in order to obtain high profits. On the other hand, in many high
economic growth areas labor protection departments only monitor if wages paid
on time, often ignoring the supervision of working hours.
6.2.2 Trends and negative effects of over-utilization of labor
forces
In the future new employment space in China's will be those sectors with higher
elasticity of employment in the main cities, such as the service industries in which
94
exist more over-utilization of labor forces. Now in China's economy, the
over-utilization of labor forces will continue to exist, even for a long time, and have
the tendency of expansion. Though it is an intrinsic reason for China's rapid economic
development, in the long run, it will play a greater negative effect on China's
economic growth.
 The negative impact on workers who are overworking.
Such as in IT industry over-utilization of labor forces, resulting in the long-term
human resources within the industry cannot take normal vocations or be in the
state to further increase, or even cannot guarantee the normal rest and physical
recovery, so that their production capacity and creativity will decline. Many elites
in the industry death from overwork, as is this case. Overwork of low-end
employees, will make them premature ageing so that increase the social pension
costs; as the same time, these people do not have opportunity for
self-improvement because of the overwork and education of their next
generation might be severely affected.
 Another is to suppress the expansion of employment. The second is to suppress
the expansion of employment. The crowding effect of the over-utilization on
other workers in the industry, result in those employable people cannot find jobs,
so that the actual employment in the sector would be significantly lower than
the number of people should be employed.
 And the negative impact on the country's overall competitiveness. In this
mechanism the quality of labor resources cannot be improved on the job, so it
cannot help set up learning-based mechanism and the learning organizations in
China like those international organization in developed country. Therefore,
expansion of over-utilization of labor forces will have a greater negative effect on
95
China's overall competitiveness, affecting the country's long-term development.
6.3 Unemployment resulted from over-utilization of
labor forces
6.3.1 The crowding effect on employment
1) Short specification
Over-utilization of labor forces resulting in crowding out other workers in industry, so
the actual employment in the sector should be significantly lower than the number
of people should be employed.
We use the formula to illustrate the effects of this over-utilization on employment
(unemployment):
Firstly we define the over-utilization rate of labor force. ℯ is the over-utilization rate
of labor force,
is the legal working hours (or intense) per week,
is the real
working hours (or intense) per week of employed person, then we have:
ℯ=
× 100% =
− 1 × 100
(6.1)
As the labor intensity is not easy to quantify, here we use
as working time.
Currently, the statutory average weekly working time is 40 hours,
= 40.
When
= , that is, the actual average weekly working time or intensity of
employees equal to the statutory weekly working time or intensity, over-utilization
rate of labor force is zero, there is no over-utilization of labor forces.
96
When
> , that is, the actual average weekly working time or intensity greater
than the statutory number, there is over-utilization of labor forces; and the higher T
is, the greater over-utilization is.
Secondly, suppose
is the quantity of people in over-utilization,
is the number
of people of crowding out (those who should be employed but not), then we have:
=
Assuming
×ℯ
(6.2)
= 80 hours, according to (1), over-utilization rate of labor forces was
100%. Then according to (2), we get
= , that the number of jobs which were
crowded out is just the number of people in a state of over-utilization.
Through the above analysis we know that, due to the over-utilization rate of labor
forces, there are, varying degrees (depending on the size of B), losses of
opportunities to absorb employment in certain industries and areas. However it does
not result in reduction of output growth in these, thus economic growth and
employment growth are not synchronized.
2) Diagrammatic analysis
Under the assumption that there is approximate infinite labor supply, the use of
labor forces should make the marginal productivity of labor forces reduce to zero.
But zero wages is impossible. The capital application should be: the marginal
productivity of labor forces equals to the current wage level. Figure 6-1 can be used
to illustrate this.
97
Marginal production of labor
N
W
O
P
M
R
Labor inputs
Figure 6-1
In Figure 6-1, the amount of capital is fixed. OW is China due wages. In this case, if
the marginal production of labor in capital department is zero, the number of
workers employed should be OR. However, departments only employed OM when
pay the wages, so area WNP is the capital surplus, is profit. The area OWPM was
income of labor forces.
However, China’s current wages, did not reach the standard level as shown in Figure
6-1. Lower wages force workers to extend working time, and overwork also led
increase of daily wages. The statutory general working time is 40 hours per week, but
many workers’ in the actual working hours are more in more than 70 hours per week.
This crowding effect of over-utilization of labor forces on employment is as a result of
low wage. (See Figure 6-2):
98
Marginal production of labor
N
P’
W’
P
W
O
M’
M
R
Labor inputs
Figure 6-2 Crowding-out effect of over-utilization of labor force
Figure 6-2 shows, due to over-utilization of labor forces the lower hourly presents a
false high level of daily wage, so that the level of the daily wage increases from the
equilibrium level of W in the normal market up to the W'. When the wage level
reaches to W', the corresponding marginal product of labor is P', then the amount of
labor resources employed is M', lower than that at the normal wage level W. This
crowding out is caused by over-utilization, which caused unemployment, the amount
of unemployment should be MM'.
6.3.2 Capital surplus resulted from over-utilization of labor
forces under low wages
In China's under current condition of low wages, when the level of hourly wage is
much lower than the level of deserved wages and there is overwork, still appear high
capital surplus, this will also further reduce the proportion of the labor forces in
national income distribution.
In Figure 6-3, when current level of hourly wage W" lower than the theoretical
99
hourly-wage level W, the same amount of capital will hire more amount of labor (in
hours), in the figure from M to M", then the surplus of capital will be higher than
capital gains under normal conditions, from WNP to W"NP" at the normal level of
wage. This is China's current situation that higher profitability of investment in
low-wage industry.
Marginal production of labor
N
W’
W
P
P’’
O
M M’’ R
Labor inputs
Figure 6-3 Low wage and Capital surplus
But when obtain this profit, it did not bring about significant increase in employment,
the reason is: the expansion of employment actually offset by over-utilization of
labor forces. The employment development should have be led by capital earning
and economic growth were all offset by over-utilization of labor forces, and even in
some specific sectors there are negative growth in employment.
100
7 Suggestion
for
unemployment
reducing
the
7.1 The negative impact of unemployment
Strictly speaking, it is impossible for an economy to achieve full employment.
Appropriate proportion of unemployment is normal phenomenon in the process of
economic development, and has a certain positive social and economic impact. The
existence of unemployed is an important condition for labor market continues to
operates, for example, unemployed people would be competitive pressures in a
certain industry, forcing people in the industry to work harder to enhance workers'
motivation and so on. But when unemployment exceeds a certain limit or critical
point, the negative impact of the unemployment on the economic and social
development will be felt.
Unemployment has the most direct impact on the economy, whose strongest
affection is the loss of output
[64].
With the increase in the unemployed and the
unemployment rate, consumption will thus shrink and firm profit will thus fall
significantly. From the macroeconomic perspective, unemployment represents a
waste of human resources idle and willing to work and capable of working people
and the related productive resources are not used in the production and other
economic activities. When there exist a large number of idle human resources, it
shows that the overall efficiency of a country's macro-economic losses. In addition,
the large number of unemployed workers, the unemployed and those who will be
chasing other jobs to maintain the survival of the unemployed and their families to
pay a certain price, the community will therefore not possess from the unemployed
for the community to make greater ability to contribute to benefit.
101
For those unemployed individuals and their families, unemployed means a decline in
their income resulting in personal and family economic hardship and lifestyle
changes. As a result of unemployment, the decline in income level cause the decline
in consumption level and consumption quality, or even lead to family crisis, the
chance for their children's education will be reduced. In addition, people are
long-term unemployed will be of exclusion out of social interaction from the original
circle, resulting in damage to their self-esteem. Both in the developed economies,
developing or in the transition process economies, high unemployment accompanied
by young people’s desperation for the future, sudden increase of suicide rates,
increased crime rates, expanding the poorer segments of society, and then resulting
social unrest and political instability.
7.2 Suggestion of reducing the unemployment
China's labor market is facing severe pressure on unemployment. It is a
socio-economic problem that cannot be ignored; therefore, expanding employment,
reducing unemployment should become the focus of all attention.
The
measures
for
expanding
employment
opportunities,
lowering
the
unemployment rate are directly related to the content of the previous discussion,
these measures include:
 Implement strategy for developing economic growth and employment growth
simultaneously. Employment growth depends on economic growth, both on the
pattern of economic growth and the technical line. The choice of economic
growth model, in essence, is a selection of resource.
China’s current overall productivity level is low, labor resources is the richest
102
resources all over the world, capital resources, technological resources are
relatively scarce. So, when considering the technological line and the choice of
factors of production, we should pay attention to the comparative advantage of
abundant labor resources, instead of scarce capital and other resources. In
particular facing to the worsening unemployment, in order to achieve
maintaining a steady economic growth, they are bound to select the economic
growth pattern that full use of labor resources, save the capital resources as
economically as possible, implement the strategy of developing economic
growth and employment growth simultaneously.
 Increase the performance evaluation indicators linked to unemployment
governance, job creation. Through analysis, we know that different patterns of
economic
growth
means
different
employment
absorption
capacity,
capital-driven economic growth pattern is limited to promote growth in
employment. Despite China's capital-driven economic growth pattern is related
to its stage of development, the growth pattern appears more to do with human
factors, especially the government (central and local government).
China has carried a lot of capital-intensive investment projects, who strongly
drive the economic growth but have weak employment promote, resulting in the
broken of the chain between economic growth and falling unemployment, that
“Okun’s paradox. "
Therefore, to change this pattern of growth, we believe, increase indicators
related to unemployment control and job creation in the performance
evaluation of governance can encourage local governments consider both
economic growth and employment in the developing process, which can play an
active role on the expansion of employment, lower unemployment.
103
 Accelerate the marketization reform of capital rate and the marketization reform
of urban labor force.
The priority for future development strategy is to encourage increasing the
ability to absorb employment in all industries, not only in labor-intensive
industries, but also in including technology-intensive industries so that economic
growth can play a more significant leading role on employment. Therefore, we
should speed up the marketization reform of capital rate and the marketization
reform of urban labor force, so that our allocations of resources in various
industries are more in line with the reality of capital scarcity, relative surplus of
labor; with the same economic growth rate, better use of labor elements,
increasing employment needs.
 Vigorously develop the tertiary industry, enhance employment elasticity.
The analysis of employment elasticity showed that, the tertiary industry with the
greatest employment elasticity is the industry absorbing the most labor force,
should be the main channel for employment growth. But now the development
of China's tertiary industry is not full, and its potential for creating jobs has not
been fully exploited, so there is a very broad space for developing employment
in the tertiary industry.
Various service sectors in the tertiary industry have higher labor intensity.
Therefore, the development of tertiary industry should focus on the
development of services such as community service, housekeeping service,
leisure travel, property management, logistics and other industries. These
departments have advances in quickly getting return, low cost of placement,
easy to create jobs and so on. Practice tells us vigorously developing the services
104
industries has significant effect on ease employment pressure.
Therefore, the rapid development of the services sectors in the tertiary industry
is the key to improve the employment elasticity of economic growth, to expand
employment capacity, and to reduce unemployment.
 Improve the law of maximum number of working hours and the minimum wage
supporting system.
For those sectors most likely to existing over-utilization of labor force, it should
strictly regulate the maximum number of working hours; strengthen the
minimum wage security system. This is the most critical project for the
government to do, from the legislative point to gradually strengthen the
statutory restrictions of working time and labor intensity and enforcement
procedures, carry out these statutory requirements.
 Implement progressive taxation of personal income tax.
The progressive taxation of personal income tax help to curb the subjective and
intrinsic motivation of overwork in the high-end domain, form a mechanisms for
employees to get a better-off further development.
105
8 Conclusion and future work
8.1 Conclusion
In this paper, through research, we draw the following conclusions:

China's economic growth rate and the unemployment rate did not show the
opposite direction between changes in the relationship. There is a variation in
the Okun's Law, especially after 1998, high economic growth coexists with high
unemployment.

For the coexistence of high growth and high unemployment, we cannot give a
single theory for fully explaining. It must be from the own particularity of China's
economic growth and unemployment in special area to find the answer.

The thesis considers the phenomenon of coexistence between China's high
economic growth and high unemployment as the following factors:
 China's economic growth model. Through the analysis we believe that
China's economic growth model is a capital-driven growth model not
conducive to employment expansion, who led to rapid economic growth, as
well as the weakening of the employment absorptive capacity. China's
economic growth was driven by capital growth, relying on high capital
investments.
As
the
investment
gradually
concentrated
to
the
capital-intensive industries, it results in capital deepening and a decline in
employment elasticity of capital. Decline in employment elasticity of capital
means that when capital promote economic growth, the employment
absorption continues to weaken, or even exclusion of employment; the
106
broken of transmission chain between economic growth and employment
growth led to the decline in employment elasticity of economic growth.
Decline in employment elasticity of economic growth shows that while
economic growth led to increased employment, the employment growth is
decreasing; its ability to absorb employment was weakening.
 The economic transformation. Through the analysis we believe that China is
in the transition process from the planned economy to a market economy,
so the relationship between economic growth and unemployment has the
characteristics of the economies in transition. This transformation gradually
manifest the disguised unemployment formed in the old planned economic
system, resulting in the prominence of urban unemployment and rapid
unemployment rising.
 The over-utilization of labor force. We found that in China, in many
industries there are the phenomenon of over-utilization of labor force. The
over-utilization of employed people resulted in a lot of job opportunities
was diverted; causing some people with employability cannot find work;
while this over-utilization of labor force does not affect the capital earnings
and economic growth in their industries. The employment growth led by
capital profits and economic growth were offset by the over-utilization of
labor force, and even in some specific sectors or areas there were negative
growth in employment.

The effect of these above factors converge together to promote the coexistence
between China's high economic growth and high unemployment, any one factor
alone cannot give sufficient explanation for this phenomenon.
107

The elimination of unemployment is impossible because China is an country rich
in labor resources, and in a longer period of time, unemployment will not get a
great degree of ease. However, the high rate of unemployment is not only an
economic loss in output, but also related to social stability, should be
government and public attention to solve. In this study, based on the research,
put forward corresponding countermeasures and suggestions, including: the
implementation of the strategy of developing economic growth and employment
growth simultaneously; increase the performance evaluation indicators linked to
the unemployment governance and job creation; speed up the marketization
reformation of capita interest and marketization reform of urban labor force;
develop the tertiary industry, enhance its employment elasticity; perfect working
hours system and security system of minimum wage limitation.
8.2 Future work
This paper tries to explain the phenomenon of co-existence between China's high
economic growth and high unemployment from three aspects: the pattern of
economic growth, the background over economic restructuring and over-utilization
of labor force, but constrained by the length, the study time, the level of research
and data collection, the paper must have many shortcomings:
 Although compared to the official publication of the registered urban
unemployment rate, our estimated unemployment rate is closer to the truth, but
due to some limitations it cannot calculate the actual urban unemployment rate,
and real numbers may be higher, which does not affect the analysis and
conclusions in this paper. However, whether starting from the academic research
or from the real issues to consider, it should get the real situation in China.
Therefore, this issue is necessary to give further attention and discussion.
108
 This paper presents the concept of "over-utilization of labor force", and a
preliminary analysis of the impact of labor on unemployment and output.
However, due to the inherent difficulty of the problem, the limitations of
analytical methods and the lack of first-hand information, in-depth studies
(including theoretical analysis, model building and accurate quantitative
description) did not to start.
Our paper focused on the sort of economic logic behind the problem of high growth
of China economy co-exist with high unemployment, that focus on the problem
description and interpretation, and not on some measures, operational issues
in-depth exploration.
109
Reference
1. M.Okun, Arthur. Potential GNP: Its Measurement and Significance Cowles
Foundation, Yale University, Cowles Foundation Paper 190. Cowles Foundation Paper.
1962, pp. 190-191.
2. Steven N.Durlauf, Lawrence E.Blume. The definition of "economic growth". The
New Palgrave Dictionary of Economics. 2008.
3. Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. s.l. :
W. Strahan and T. Cadell, London, 1776.
4. Hicks, John, Samuel Hollander. Mr. Ricardo and the Moderns. uarterly Journal of
Economics. 1977, Vol. 91, 3, pp. 351-369.
5. Keynes, John Maynard. The General Theory of Employment, Interest and Money.
s.l. : Palgrave Macmillan, 1936.
6. Say, Jean-Baptiste. A Treatise on Political Economy. 6. s.l. : Philadelphia: Lippincott,
Grambo & Co.,, 185.
7. Blanchard, Olivier. A review of "Unemployment. Macroeconomic Performance and
the Labour Market", by Richard Layard, Stephen Nickell and Richard Jackman. 2006.
8. Phillips, William. The Relation between Unemployment and the Rate of Change of
Money Wage Rates in the United Kingdom, 1861-1957. Economica. 1958, 2, pp.
283-99.
9. Paul A. Samuelson, Robert M. Solow. Analytical Aspects of Anti-Inflation Policy.
American Economic Review. 1960, Vol. 50, 2, pp. 177-194.
10. Friedman, Milton. The Role of Monetary Policy. American Economic Review. 1968,
Vol. LVIII, pp. 1-17.
11. —. Monetary Policy: Tactics versus strategy. s.l. : Hoover Institute, 1984.
12. Mankiw, N. Gregory. The Macroeconomist as Scientist and Engineer. s.l. : Harvard
University, 2006.
13. Convergence in Macroeconomics: Elements of the New Synthesis. Woodford,
110
Michael. 2008. American Economics Association.
14.
Dual
Sector
model.
Wiki.
[Online]
http://en.wikipedia.org/wiki/Dual_Sector_model.
15. Lewis, William Arthur. Economic Development with Unlimited Supplies of Labour.
The Manchester School. 2, 1954, Vol. 22, pp. 91-139.
16. Okun, Arthru M. Potential GNP: Its Measurement and Significance”, reprint in A.
Okun: The Political Economy of Prosperity. s.l. : Brooking Institute, 1969.
17. Mincer, Jacob A. Schooling, Experience, and Earnings. s.l. : Columbia University
Press, 1974.
18. Topel, Robert H. Labor markets and economic growth. Handbook of Labor
Economics. 1999.
19. John M. Dutton, Annie Thomas. Treating Progress Functions as a Managerial
Opportunity. The Academy of Management Review. 2, pp. 235-247.
20. C.W.Cobb, P.H. Douglas. A Theory of Production 18 . American Economic Review.
Supplement, 1928, 18, pp. 139–165.
21. Luciano Mauro, Gaetano Carmeci. Long Run Growth and Investment in Education:
Does Youth Unemployment matter? Di.S.E.S. working papers. s.l., Italy : University of
Trieste, 2003. 69.
22. Dellas, Harris. Unemployment insurance benefits and human capital
accumulation. European Economic Review. 4 1997, Vol. 41, pp. 517-524.
23. Munro, John. Some Basic Principles of Marxian Economics. s.l. : University of
Toronto, 2007.
24. Flank, Lenny. Contradictions of Capitalism: An Introduction to Marxist Economics.
s.l. : Red and Black Publishers, 2007.
25.
Reserve
army
of
labour.
Wiki.
[Online]
http://en.wikipedia.org/wiki/Reserve_army_of_labour.
26. Elham, Ebrayim. Human Capital Assimilation and Economic Growth-Evidence
from China. 2002.
111
27. Franklin. Allen, Stewart Myers, Richard Brealey. Principles of Corporate Finance.
2002.
28. B. Andreosso-O'Callaghan, G. Yue. Sources of Output Change in China:1987-1997:
Application of a Structural Decomposition Analysis. Applied Economics. 2002, pp.
2227-2237.
29. Lei Ding, Kingsley E. Hayens. The role of Telecommunications Infrastructure in
Regional Economic Growth of China. Australasian Journal of Regional Studies. 2004,
Vol. 12.
30. Loren Brandt, Chang-Tai Hsieh, Zhu Xiaodong. China’s Structural Transformation.
2005.
31. Derek Jones, Cheng Li, Ann L.Owen. Growth and Regional Inequality in China
During the Reform Era. 2003.
32. Borensztein, Eduardo, Jonathan D. Ostry. Accounting for China's Growth
Performance. 1996, Vol. 86, pp. 224-28.
33. Rawski, Thomas G. What's happening to China's GDP Statistics? China Economic
Review. 2001, Vol. 12, 4, pp. 298-302.
34. Anderson, Jonathan. China's true growth: No myth or miracle. Far Eastern
Economic Review. 2006.
35. H.Chenery. Comparative study of industrialization and economic growth. 1989.
36. Latin American Readjustment: How Much has Happened. Williamson, John. 1989.
Washington: Institute for International Economics.
37. Cai, Fang, Wang Meiyan, Yang Du. China's Labor Market on Crossroad. China and
World Economy. 2005.
38. Dongwei, Zhang. The international comparison of unemployment rate and
Chinese urban unemployment rate . Labor economy and labor relations. 2003.
39. Xiong Zuyuan, Yu Dong. The feasible method to calculate Chinese unemployment
rate and the number of unemployment. Statistic Analysis. 2004.
40. Tianyong, Zhou. What the Actual Urban Unemployment Rate Is in China? Finance
112
& Trade Economics. 2003.
41. Chang Yunkun, Xiao Liuyi. Effective Employment Theory and The Paradox of
Economic Growth. Economic Growth and Business Management. 2004, Vol. 2.
42. Jorgenson, Dale W. Productivity and Postwar U.S. Economic Growth. s.l. : The MIT
Press, 1995.
43. Maddison, Angus. Dynamic Forces in Capitalist Development: A Long-Run
Comparative View. s.l. : Oxford University Press, 1991.
44. Li Bing, Zeng Zhixiong. Recalculating the Changes in China's Total Factor
Productivity: 1978-2007. The Journal of Quantitative & Technical Economic. 2008.
45. Holz, Carsten A. New Capital Estimates for China. China Economic Review. 2006,
17, pp. 142-185.
46. Robert E. Lucas, Jr. Architect of Modern Macroeconomics. Journal of Economic
Perspectives. 1998, 12, pp. 171-186.
47. Solow, Robert M. A Contribution to the Theory of Economic Growth. Quarterly
Journal of Economics. 1956, pp. 65–94.
48. J. Bradford De Long, Lawrence H. Summers. Equipment Investment and
Economic Growth. Quarterly Journal of Economics. 1991, pp. 445-502.
49.
Endogenous
growth
theory.
Wiki.
[Online]
http://en.wikipedia.org/wiki/Endogenous_growth_theory.
50. China, Institute of Economic Research of Renmin University of China. China's
Economy: 2009. s.l. : Enrich Professional Publishing, 2010.
51. Research on the co-existence of high unemployment and high economic growing.
Aiqing, Wang. 2004.
52. Zhigang, Yuan. Unemployment Economy. s.l. : Shanghai Renmin Publisher, 1997.
pp. 4-6.
53. Fang, Cai. Growth and Structural Changes in Employment in Transitional China.
Economy Research. 2007, 7.
54. The World Bank. China - Reforming the urban employment and wage system. s.l. :
113
The World Bank Group, 1992.
55. Qiren, Zhou. Institutional transformation, Restructuring and Urban Employment.
Comparative Economic and Social Systems. 1997, Vol. 3.
56. Hu Angang, Cheng Yonghong. The development of Chinese employment. Review
of economic research. 2003, 51.
57. Ministry of Labor and Social Security of China. China Labor Statistical Year Book.
s.l. : China Statistics Press, 2000.
58. National Bureau of Statistics of China. China Statistical Yearbook 2010. s.l. :
China Statistics Press, 2010.
59. Angang, Hu. Employment Expanding and Chanllenge to Unemployement
(Analysis of China Employment Policy: 1949-2001). s.l. : China Human Resorce &
Social Security Publishing Group, 2002.
60. Liu Xiaming, Wei Yingqi. Convergence or Divergence?-Literature review of
China's regional economic development. Economic Research Journal. 2004, Vol. 7.
61. Jun, Zhang. Capital Orientation, Indutrialization and Economic Growth: China's
Transition Characteristics. Economic Research Journal. 2002, 6.
62. Zhang Ping, Liu Xiahui. Growth in the Open Economy and Policy Options--The
Trend Analysis of Current Economic Growth. Social Science Journal. 2004, Vol. 4.
63. Liu Yingqiu, P278. Secondary-High-Growth Economy of China. s.l. : China Social
Sciences Publishing House, 2002. p. 278.
64. William Darity, Jr. Arthur H. Goldsmith,. Social Psychology, Unemployment and
Macroeconomics. Journal of Economics Perspectives. 1996, Vol. 10, 1, pp. 121-140.
114