The latest population census conducted in November 2000 in China revealed that the
economically active population had reached 711.5 million. An estimation of as high as
25 percent of this labor force is redundant (including disguised unemployment). Although urban
workers are only 30 percent of this labor force, while the rest is rural labor, the employment of
the urban population and the reemployment of urban laid-off workers are critical to the further
deepening of the economic reform. This is mainly because of two reasons.
First, most urban households live on jobs, while most rural households live on land.
Employment in state-owned enterprises (SOEs) has been not only the basic source of urban
household income, but also a key channel to receive most social services provided to urban
residents.1
Unemployment is a much more apparent and devastating problem for urban than for
rural households. Limited employment supporting services, together with the absence of social
institutions to deliver basic social services such as unemployment benefits, pension, and health
care outside the state sector, have forced the government to restrict the SOEs from laying off
surplus workers. The development of an efficient urban labor market is crucial for the
government to extend the economic reform to the SOEs while maintaining social stability in this
transition from a planned economy to an open market economy.
Second, since China started its rural economic reform in 1978, more and more labor has
been released from land and become “floating population” in the cities, looking for jobs mainly
in the private sector, as most jobs in the state sector require urban residency permits. The
development of an efficient urban job market to facilitate the settlement of this floating
population will not only release the burden to the redeployment of surplus urban labor and
support the continuation of SOE reform, but it will also allow the deepening of rural economic
reform, which will lead to more rural to urban labor migration due to increased agriculture
productivity. On the contrary, blocking this migration trend by tightening and strictly enforcing
laws on urban residency permits will only let this river of migration overflow, increase social
tension, and slow the speed of economic reform. Meanwhile, the development of an efficient urban labor market is confronting new
opportunities and challenges from the increasing international competition following China’s
accession to the World Trade Organization (WTO). This increasing international competition
has put more pressure on the already troublesome SOEs and has put more job positions in the
SOEs in jeopardy. The SOE reform becomes inevitable to reduce the social service burdens
(including employment targets) imposed on the SOEs and enable them to compete on an equal
footing with foreign firms. Creating an efficient labor market to accelerate the redeployment of
redundant urban and rural labor is therefore essential to facilitate China’s transition to a more
open economy without triggering an unbearable unemployment problem. This is especially
important for China, the world’s most populous country. China’s stability and growth are also
globally beneficial.
The current job placement system in China’s state sector, to a large extent, still allocates
workers administratively to available positions without allowing much information exchange
between employers and employees. Such redeployment of surplus labor is neither effective nor
efficient and often results in mismatch of skills. In 1999, more than 11.2 million job vacancies
were registered, but less than 9 million job seekers successfully found a job (China Labor
Statistical Yearbook, 2000, 91-92). The reemployment rate of laid-off workers from the SOEs
was only 4.3 percent in the first quarter of 2002 (First Quarterly Report 2002, Ministry of Labor
and Social Security). Improving information dissemination of job openings is a key to develop
an efficient urban labor market. Better job opening information dissemination will facilitate the
labor redeployment by matching workers to their potential employers and providing enterprises
with more discretion in redeploying surplus labor.
A very interesting development in China’s labor market has been the rising of the nonstate
sector, which employed over 17 percent of China’s total labor force in 2000. This sector
includes wholly foreign-owned or joint-owned or share-holding enterprises. A driving force of
the growth of the non-state sector is the huge influxes of foreign direct investment (FDI). Since
1993, China has become the second largest FDI recipient country after the United States. The
foreign firms in China, together with the domestic firms in the non-state sector, have opened
many job search channels in the urban sector, including private employment agencies, newspaper
advertisements, job fairs, and Internet job boards. These channels have enabled effective
information exchange between job seekers and potential employers, offered more job
Wu: Foreign Direct Investment and Dissemination of Job Opening Information in China 3
opportunities to qualified workers, increased productivity, and led to faster wage increase in the
non-state sector, especially in foreign firms either wholly foreign-owned or joint ventures.
Given the uneven development of job opening information dissemination between the
state sector and the non-state sector, a mixed scenario of labor migration is likely to unfold as
more foreign firms enter the Chinese economy. A predictable positive outcome is that more job
information dissemination in the non-state sector provides more employment opportunities for
the surplus labor released from the state sector and agriculture. However, more job information
dissemination outside the state sector also facilitates foreign firms to recruit (or compete) highcaliber
workers from the SOEs. This can hinder the productivity in the state sector, increase the
number of non-profitable SOEs, and make SOE reform more difficult.
This paper will identify barriers to job opening information dissemination in China’s state
sector and evaluate the potential impact of market-driven job opening information dissemination
on the redeployment of China’s urban and rural surplus labor, who become urban job seekers.
The paper will demonstrate that enhanced information exchange in job openings will increase
productivity and wage as the quality of job match improves. The paper will also provide policy
insights in improving job information flow and deepening the SOE reform.
The rest of the paper is organized as follows. Section 2 reviews the development of
China’s labor market and the related literature. Section 3 uses the asset-value approach in
Davidson and Matusz (2000a and 2000b) and Shapiro and Stiglitz (1984) to develop a job search
model with two partially integrated markets: one for the state sector and one for the non-state
sector. The equilibrium in this segmented job market is derived in Appendix A to model labor
migration and productivity differences between these two sectors. Section 4 uses the theoretical
framework and available data to examine the impact of enhanced job opening information
dissemination on productivity and SOE reform. Section 5 discusses policy implications and
identifies areas for future research.