The limited job prospects of displaced workers : evidence from two cities in China

S P D I S C U S S I O N P A P E R NO. 0613 37889 The Limited Job Prospects of Displaced Workers: Evidence from Two Cities in China Gordon Betcherman Niels-Hugo Blunch October 2006  The Limited Job Prospects of Displaced Workers: Evidence from Two Cities in China Gordon Betcherman Niels-Hugo Blunch October 2006  Abstract The economic restructuring in China over the past decade has resulted in displacement of millions of workers who had been employed in the state sector. This has posed tremendous challenges economically, socially, politically, and culturally. For several years, Chinese policies attempted to cushion the shock by requiring state-owned enterprises to provide living allowances and reemployment services to workers that had been displaced. There have been relatively few empirical studies that have tracked the experiences of these displaced or xiagang workers. This study uses survey data from two large industrial cities to analyze the labor market situation of over 2,000 workers two years after they had been observed as displaced and unemployed. The findings point to the high rates of labor force withdrawal of xiagang workers and the relatively low proportion who find another wage job in the formal sector. It also documents the large number of workers who find work in the informal sector which seems to act as an important safety net. Not surprisingly, education is an important determinant of post- layoff labor market outcomes. Active labor market interventions do not seem to make a substantial difference although there is some evidence from the duration analyses that training does help workers find employment more quickly than they would have otherwise. JEL Classification: J200, J210, J230, J240, J630, J640 Keywords: Displacements, determinants of activity and labor market status, formal employment and self-employment, unemployment duration, China.  The Limited Job Prospects of Displaced Workers: Evidence from Two Cities in China Gordon Betcherman and Niels-Hugo Blunch 1. Introduction China's economic reform began in 1978 and during the next 15 years, state- and collectively-owned enterprises that had once been the bulwark of the economy became increasingly non-viable. By the mid-1990s, half of these enterprises were loss-making and China initiated a massive effort to restructure the state-owned sector. Between 1995 and 2001, the number of state-owned enterprises (SOEs) fell from 118,000 to less than 54,000 and more than 35 million state workers were laid off. For many reasons, the labor adjustment that accompanied this restructuring represented a massive challenge. First, there was the sheer number of workers involved. Second, the prospect of job loss was a major cultural shock in a country where the "iron rice bowl" had traditionally provided workers and their families with cradle-to-grave security provided by the work unit. Although China had initiated state-sponsored social protection programs (pensions, health, unemployment benefits, etc.) as early as the mid- 1980s, these were not well developed by the mid-to-late 1990s when the layoff numbers mounted. Third, although China's economic growth was generating large numbers of new jobs, the displaced workers from the state sector generally were not well suited to fill them. Most were relatively uneducated and few had the skills that the expanding private sector was seeking. Moreover, displaced workers tended to be in the northeast and central regions, far from the coastal area where the new economy was centered. Concerned about these challenges, as well as potential social conflict, the Government in 1997 instituted a unique program to regulate the downsizing. All SOEs with surplus workers were to assume responsibility for their displaced (xiagang) workers for a period of up to three years to cushion the shock and to help the workers find The authors Gordon Betcherman, The World Bank Group, gbetcherman@worldbank.org and Niels-Hugo Blunch, Washington and Lee University, blunchn@wlu.edu wish to thank Amit Dar, David Ribar, Bert Hofman, and participants at a World Bank Seminar for helpful comments and suggestions. Remaining errors and omissions are our own. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. The authors would like to acknowledge financial support from the World Bank's Social Protection Unit and China Labor Market AAA Program  reemployment. Enterprises were expected to set up Reemployment Service Centers that would provide xiagang workers with living allowances, retraining and other employment services, and make social security contributions on their behalf. Only after three years were workers who could not find new jobs (or not eligible for pensions) transferred to the unemployment insurance system and social assistance. Although this labor adjustment system based on enterprise responsibility undoubtedly provided some security (intangible as well as tangible) to the xiagang workers, many SOEs could not, or did not, fulfill their obligations because of their poor financial situation. In 2001, the Government started to phase out the Reemployment Service Centers and by 2003, this experiment was largely over. There have been few empirical studies of the impact of this restructuring on the workers affected. Dong (2004) reviews the literature which, as she notes, has been based on data from large cities, with no evidence on the experience of workers laid off from SOEs in more remote communities.1 The existing research finds that SOE restructuring has been associated with increases in urban poverty because large percentages of displaced workers have not found work again. Women, the poorly-educated, and workers with health problems had especially low reemployment rates. Exit rates from the labor force were very large. In all available studies, only a minority of xiagang workers reported being reemployed. The evidence is mixed in terms of whether workers who did find new employment gained or lost in terms of earnings. It is clear, however, that job loss reduced access to benefits such as health insurance. There is virtually no analysis of the impact of interventions on the reemployment of displaced workers. One exception is Bidani et al. (2004) which assesses the impact of retraining programs for xiagang workers in Wuhan and Shenyang. That study, which uses the same database used in this study, found that training improved reemployment probabilities in Wuhan but had no effect in Shenyang and had a modest impact on earnings in Shenyang but not in Wuhan. This paper uses survey data from these two large industrial cities to analyze what happened to xiagang workers during the period when the Reemployment Program was in place. It tracks the situation of workers who were xiagang in 1998, observing their experiences over the next two years. The data allow us to describe the characteristics of 1Studies included in Dong's review are Appleton et al. (2002); Cai (2002); Giles, Park, and Cai (2003); and a preliminary version of this study. 2  the displaced workers, their labor market experiences over the 1998-2000 period, the types of work that the reemployed found, and the impact of retraining and other programs provided by the Reemployment Service Centers and the municipal labor bureaus. The remainder of the paper is structured as follows. The economic context in Shenyang and Wuhan is briefly summarized in section 2. The data and the study methodology are discussed in Section 3. In Section 4, we turn to the question of what happened to the displaced workers, describing their labor market situation two years after they were observed with xiagang status. This includes an analysis of the quality of work of those who had found new jobs by 2000, focusing in particular on the distinction between workers who were self-employed (in the informal sector) and those who had found formal wage employment. Section 5 presents multivariate analysis (both static and dynamic) of the determinants of labor market status, employment, self-employment, and unemployment duration. Finally, conclusions and policy implications are presented in Section 6. 2. Economic Background for Shenyang and Wuhan2 The analysis in this paper covers two of China's largest cities, Shenyang and Wuhan. Shenyang, in Liaoning Province in the northeast, had a population of 6.9 million in 2000 while Wuhan, in central Annhui Province, had a population of 7.5 million. Both cities had been major centers of heavy industry in the first four decades of the planned economy and, as a result, both were heavily affected by the economic restructuring of the 1990s. The economic and employment situation in Shenyang and Wuhan during the period covered in this study is summarized in Table 1. The two local economies were roughly comparable in terms of local GDP, although Wuhan's was somewhat more dynamic.3 This reflects the fact that Wuhan enjoys better connections to the rest of China, with a more developed rail system, better communications, and more opportunity for developing trade and commerce. Both Shenyang and Wuhan had experienced annual GDP growth rates in excess of 10 percent over the period 1996-2000, but growth in 2This section builds extensively on previous work that we have been involved in (Bidani et al., 2004). More data on the economies of Shenyang and Wuhan are available in that study. 3The average annual disposal income of urban residents in 2000 in Wuhan was 6763 yuan, while it was only 5850 yuan in Shenyang. However, despite lower incomes, Shenyang residents saved more in the aggregate than Wuhan residents. The difference in the savings rate indicates either a scarcity of investment opportunities or reduced consumer confidence leading to lower spending. 3  Wuhan had been higher (5-6 percent higher in 1996-97 and 1-2 percent higher in 1998- 2000). Given the relatively strong high economic growth, labor market performance was not good in either city. However, the employment picture was clearly more favorable in Wuhan. Employment in Wuhan rose from 4.064 million in 1996 to 4.178 million in 2000, a gain of about 120,000 jobs. In Shenyang, employment actually declined by 55,000 over this period. In both cities, self-employment grew quickly