More than two decades into an era of sustained reform, China’s labor force has
experienced fundamental transformations. At the inception of the reform in 1978, an
overwhelming majority of the labor force was either employed in urban state-owned
enterprises (SOE) or as agricultural workers in rural communes. The reform has led to
dramatic changes in the distribution of jobs. By the end of the 1990s, about one third of
the rural labor force had moved into non-farm activities (see Table 1), and about threefifths
of the urban labor force had found employment outside of the state sector, in urban
collectives, joint ventures and private enterprises (see Table 2). Connecting the ruralurban
labor markets, there were about 77 million rural migrants working temporarily in
cities in 2000 (Cai, 2003).
Prior to reform, job changes were either prohibited or controlled by responsible
government agencies. The fundamental shifts in the distribution of employment across
sectors and ownership categories that have occurred under reform require an allocative
mechanism for labor far more flexible and sensitive than nations have ever achieved with
administrative controls. The emergence of a functioning labor market has been essential
to this transformation, a fact that the Chinese Government recognizes. A series of reform
policies and deregulations was instrumental in the emergence of labor markets. But due
to the incomplete nature of reform, some existing policies and institutions still prevent the
labor market from efficient operation. The uneven institutional evolution of labor markets
and their regulation has profound social and political consequences for China. Dealing
with this labor-market transformation is one of the most challenging tasks facing the
Government and the Chinese Communist Party, and the ways in which laws, regulations,
and institutions evolve in response to this challenge raise a series of questions of great
academic and policy interest. The goal of our paper is to address some of these questions
and to discuss and evaluate the ways in which answers are evolving.