Outsourcing and labor migration in China

Outsourcing has been increasing in recent years as more firms in the developed countries have decided to outsource part of their production activities to their subsidiaries or local firms in the developing countries. Outsourcing either reduces a firm’s cost of labor or gives a firm better access to the local market so as to gain a larger market share. This rise in outsourcing activities has created both new opportunities and challenges to the developing countries, not only in the product market but also in the labor market. This is especially true for China, as its labor market adopted a soviet-style command-and-control system for many decades before China’s economic reform in the State-Owned Enterprises (SOEs) started in 1998. This paper will analyze the impact of outsourcing on the productivity of the SOEs and hence labor migration between the state sector and the non-state sector. The paper will then discuss how the development of a market-oriented labor market can intensify this impact of outsourcing. Finally, the paper will draw policy implications for China’s labor market reform in the presence of increasing outsourcing. 53 * I would like to thank Kenneth Swinnerton, Bob Bednarzik, and participants at the ILAB Symposium on Improving Labor Market Opportunities and Security for Workers in Developing Countries for their valuable comments on an earlier version of the paper. I am also grateful for the financial support from the Bureau of International Labor Affairs at the Department of Labor. 1 The latest population census conducted in November 2000 in China revealed that the economically active population had reached 711.5 million. By some estimates as much as 25 percent of this labor force is redundant (including disguised unemployment). 2 In most of the years since 1985, the SOEs have employed 70 to 75 percent of the urban employees, and provided wages account for over 60 percent of total urban household income (China Labor Statistical Yearbook 1999, p.78). Outsourcing and labor migration in China With increasing international competition following China’s accession to the World Trade Organization (WTO), more and more foreign companies in the developed countries are outsourcing their production activities to China to capture the cheap labor market and to compete for the huge product market. This increase in outsourcing has increased foreign capital inflow into China in terms of both foreign direct investment (FDI) and foreign portfolio investment. Since 1993, China has been the second largest FDI recipient country after the United States (UNCTAD, 1999). Outsourcing from the developed countries into China has increased competition in China’s labor, as well as product, market. However, the impact on the labor market has not received much attention until very recently, partly because the percentage of employees in the foreign-owned enterprises in China was quite small up until the late 1990s. However, since then it has increased exponentially to reach 15% of total employment. This paper will focus on how outsourcing from the developed countries into China (hereafter referred to as foreign outsourcing) will change the relative productivity in the state and non-state sectors and hence the labor migration between them. Labor migration becomes an important issue as more farmers are released from farming, as a result of China's rural economic reform, and more urban workers are either employed but redundant or are already laid-off because of the state-owned enterprise (SOE) reforms. Although urban workers in the state sector only account for 30 percent of the total labor force, with the rest being in the rural sector, their employment and the re-employment of those laid-off are critical to push the economic reform forward. This is mainly because of two reasons. First, most urban households live on jobs, while most rural households live on land. Employment in the state sector has been not only the basic source of urban household income, but also a key channel for receiving most of the social services provided to urban residents. Unemployment is a much more apparent and devastating problem for urban families than for rural households. Limited employment supporting services combined with the absence of social institutions to deliver basic social services, such as unemployment benefits, pensions, 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 working on lands to become a ‘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 labor market to facilitate the settlement of this floating population will not only release the burden of redeployment of surplus urban labor and support the continuation of SOE reform, but it will also allow the deepening of rural economic reform, which due to increased agriculture productivity will lead to more rural to urban labor migration. 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. 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 re-employment 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).