Labour market insecurities in China

China is suffering from mass unemployment. Millions of former lifetime employees have been laid-off since 1993. Before market transition, the Chinese labour regime was characterized by a state labour allocation system in which all formal employees in publicly owned enterprises in urban areas were offered lifetime employment. The institutional arrangement for lifetime employment, very uniquely, were interrelated with workplace-based social security arrangement, in which all-formal employees under the state labour allocation system enjoyed social security. Basically, the problem of unemployment (except for youth unemployment) was non-existent.

During the reform era, the Chinese state, mainly for the purpose of consolidating its rule, found it in its own interest to abolish the institutional arrangement of lifetime employment and to build a market-oriented labour system as replacement. State-imposed institutional changes in this direction, however, were largely past-dependent rather than path dependent. Institutional choices made to push through the abolition of lifetime employment and the institutionalization of unemployment was delayed by the existence of a workplace-based social security system. As a result of this institutional embeddedness, massive lay-offs rather than high open unemployment occurred in urban China in the mid-and late 1990s. Millions of previously permanent employees were laid off from SOEs and COEs, but they still maintained employment relations with their original work-units.

Because of institutional embeddedness, many employment and unemployment policies promulgated by the central government to cope with massive lay-offs have confronted failure in implementation. At the core of this policy, implementation failure has been the reality that most laid-off workers have refused to terminate employment relations with their original work-units because of fear of losing social security entitlements. As massive lay-offs are rooted in social security arrangements embedded in the pre-existing labour system, no unemployment policy purporting to transform lay-offs into formal unemployment can succeed without thoroughgoing social security reform.

Given the fact that the comprehensive social security reform is still pending, local governments now play a crucial role in breaking the hindrance which institutional embeddedness causes to market transition by creating transitional arrangements for laid-off workers to deal with social security issues.