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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. 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