Labor market outcomes and reforms in China

Over the past few decades of economic reform, China's labor markets have been transformed to an increasingly market-driven system. China has two segregated economies: the rural and urban. Understanding the shifting nature of this divide is probably the key to understanding the most important labc market reform issues of the last decades and the decades ahead. From 1949, the Chinese economy allowed virtually no labor mobility between the rural a urban sectors. Rural-urban segregation was enforced by a household registration system called "hukou.' Individuals bom in rural areas receive "agriculture hukou" while those bom in cities are designated as " nonagricultural hukou." In the countryside, employment and income were linked to the commune-bas production system. Collectively owned communes provided very basic coverage for health, education, and pensions. In cities, state-assigned life-time employment, centrally determined wages, and a cradle-to-grave social welfare system were implemented. In the late 1970s, China's economic reforms be but the timing and pattern of the changes were quite different across rural and urban labor markets. This paper focuses on employment and wages in the labor markets, the interaction between the urban and rural labor markets through migration, and future labor market challenges. Despite the remarkable changes that have occurred, inherited institutional impediments still play an important role in the allocation of labor; the hukou system remains in place, 72 percent of China's population is still identified as rural hukou holders. China must continue to ease its restrictions on rural-urban migration, and must policies to close the widening rural-urban gap in education, or it risks suffering both a shortage of workers in the growing urban areas and a deepening urban-rural economic divide.