Collective shrinkage

The dramatic shrinkage of employment in China's collective sector illustrates the country's rapid economic transformation and the ability of its workforce to adapt to structural change without social upheaval.

The downsizing of China's urban workforce continues at a phenomenal pace, according to the most recent official data. The National Bureau of Statistics (NBS) reported total urban employment of 108.4m workers at the end of the second quarter, a year-on-year decrease of 1.66m workers or just over 1.5 per cent. But the broad picture of stagnant job opportunities in the cities (as well as in rural areas, where total employment has also held relatively steady in recent years) conceals some striking changes at the microeconomic level.

Not surprisingly, jobs have continued to shift toward the urban private sector, which showed year-on-year employment growth of more than 22 per cent in the quarter to June 30. But although state enterprises shed substantial quantities of labour during this period – roughly 4.9m workers, nearly matching the 5m new jobs created by private firms – the most dramatic proportional decline was in collective-sector employment, which fell by more than 14 per cent in the year, or around 1.8m workers.

With barely 10m employees at the end of June, China's urban collective enterprises might seem like minor players in the labour market. But as recently as early 1993, these entities – small, low-technology enterprises typically run by local 'neighbourhood committees' – employed more than 36m people. The dramatic shrinkage of the collective sector illustrates both China's rapid economic transformation and the ability of the workforce to adapt to structural change without major social upheaval. Urban collectives expanded rapidly during the 1980s, officially encouraged both to soak up surplus labour and to meet social needs that the state sector met inadequately or not at all. This was especially true in the construction, catering and consumer goods production sectors. Like their rural counterparts, the township and village enterprises (TVEs), the urban collectives had the advantage of being controlled by small-scale levels of government, which limited their access to official bank credit and encouraged greater market orientation than in the state sector.

But the same market forces that helped the collective sector flourish in the decade before 1989 may have assured its decline as economic reforms deepened thereafter. Urban collective employment fell slightly in 1992, the year that Deng Xiaoping's 'southern tour' launched the bubble economy of the mid-1990s, and continued to decline gradually over the next five years. This suggests that the collectives were under pressure both from booming job opportunities in other urban sectors and, in manufacturing, from competition with low-wage TVEs.

Period of extreme austerity In 1998, however, something very different seems to have happened. The collectives shed an astounding 9.2m jobs during the year, or nearly a third of total employment. Since this was accompanied by a fall in state sector employment as well, it seems clear that the collapse of export markets in China's regional trading partners, combined with a sudden sense of official panic about problems in China's own financial system, must have led to a period of extreme austerity and a sharp rise in urban unemployment.

And unlike the TVEs, which were also hard hit by the Asian crisis, the urban collectives have showed no sign of renewed expansion. Even as macroeconomic conditions improved over the past five years, collective employment fell by more than 2m a year.

The decline has been sharpest in manufacturing and construction, the two fields that have traditionally employed most collective sector workers. According to NBS figures, only two broad collective sectors emerged relatively unscathed from the 1998 crisis and its aftermath. They were 'education, culture and arts, and radio, film, and television', where employment actually rose, from 400,000 to 530,000 between end-1997 and end-2001, and 'healthcare, sports and social welfare', down only slightly, from 620,000 to 540,000 workers over the same period.

04-1-13The pattern is an intriguing one. If collective sector manufacturing is in steep decline while white-collar workers have largely held their own, the most plausible explanation is increased competitive pressure and improving productivity as firms shed labour. Although efficiency is difficult to estimate directly, one observation that tends to support this view is the strong growth of average wages in collective enterprises – most of which, unlike their state sector counterparts, have limited access to bank credit and other forms of disguised subsidy. In the quarter to June 2003, urban collective firms raised salaries per worker by an average of 11.1 per cent, despite shrinking their workforce so drastically in the previous year that their total wage bill actually declined by 4 per cent. It therefore seems likely that many of the workers made redundant were contributing little or nothing to their employers' revenues, implying rapid gains in efficiency from 'doing more with less'.

The collective sector now employs less than 2 per cent of China's population in every province except Beijing, where political factors may have encouraged the city authorities to take a more lenient view about 'soft budget constraints' for neighbourhood committees. Even so, the sector's neardisappearance offers lessons for Beijing's trading partners as its WTO commitments take effect. Despite being a traumatic year for China's workforce, 1998 passed without significant incident.

Opening Chinese markets to foreign competition will impose further strains on the labour market, but the effects of these should be more subtle and gradual than those that followed the 1998 shock.