The Determinants of Labor Supply of Informal Sector: Two Hypotheses on Self-Employment

  • Xinxin Ma


The self-employed sector is a representative informal sector, and it has influence on income inequality as noted in previous studies. In China, along with the economic transition and economic development, the number of self-employed workers (“Geti Gongshang Hu”) in urban regions increased greatly, and the labor market is segmented by the informal sector and formal sector which seems to be similar with the developed countries and other developing countries. Why is there a large growth in self-employment in urban China during the economic transition period? There are two hypotheses proposed to answer this: the disguised unemployment hypothesis and the business creation hypothesis. Chapter  6 investigates the mechanism of becoming a self-employed worker based on these two hypotheses. It is found that excepting the older generation group in 2013, compared with employees, a worker in the self-employment sector does not gain more, and there seemingly is no better choice in urban China, which means the disguised unemployment hypothesis is supported. It also indicated that the liquidity constraint problem may be a main obstruction factor for the new business creation and innovation in China.


  1. Amit, R., Glosten, L., & Muller, E. (1990). Entrepreneurial ability, venture investments, and risk sharing. Management Science, 36(10), 1232–1245.CrossRefGoogle Scholar
  2. Bates, T. (1990). Entrepreneur human capital inputs and small business longevity. The Review of Economics and Statistics, 72(4), 551–559.CrossRefGoogle Scholar
  3. Blanchflower, D. G., & Meyer, B. (1992). A longitudinal analysis of young entrepreneurs in Australia and the United States. In R. G. Gregory & T. Karmel (Eds.), Youth in the eighties, papers from the Australian longitudinal survey research project. Canberra: DEET and Centre for Economic Policy Research, Australian National University.Google Scholar
  4. Blau, D. M. (1985). Self-employment and self-selection in developing country labor markets. Southern Economic Journal, 52(2), 351–363.CrossRefGoogle Scholar
  5. Blau, D. M. (1987). A time-series analysis of self-employment in the United States. Journal of Political Economy, 95(3), 445–467.CrossRefGoogle Scholar
  6. Borjas, J. (1986). The self-employment experience of immigrants. The Journal of Human Resources, 21(4), 485–506.CrossRefGoogle Scholar
  7. Bruce, D. (1999). Do husbands matter? Married women entering self-employment. Small Business Economics, 13(4), 317–329.CrossRefGoogle Scholar
  8. Cai, F., Du, Y., & Wang, M. (2005). Transition and development of the labor market China. Beijing: Commercial Press (In Chinese).Google Scholar
  9. Catherine, Y. C., Gang, I. N., & Yun, M. (2005). Self-employment and wage earning in Hungary. Review of Development Economics, 9(2), 150–165.CrossRefGoogle Scholar
  10. Chen, G., Demurger, S., & Fournier, M. (2005). Wage differentials and ownership structure of China’s enterprises. Economic Development and Cultural Change, 53(4), 933–958.CrossRefGoogle Scholar
  11. Demurger, S., Li, S., & Yang, J. (2012). Earning differentials between the public and private sectors in China: Exploring changes for urban local residents in the 2002s. China Economic Review, 23(1), 138–153.CrossRefGoogle Scholar
  12. Deng, Q. (2007). Earning differentials between urban residents and rural migrants: Evidence from Oaxaca Blinder and quantile regression decompositions. Chinese Journal of Population Sciences, 2, 8–16 (In Chinese).Google Scholar
  13. Dimova, R., & Gang, I. N. (2007). Self-selection and wages during volatile transition. Journal of Comparative Economics, 35(3), 612–629.CrossRefGoogle Scholar
  14. Dong, X., & Bowles, P. (2002). Segmentation and discrimination in China’s emerging industrial labor market. China Economic Review, 13(2–3), 170–196.CrossRefGoogle Scholar
  15. Dunn, T. A., & Holtz-Eakin, D. (2000). Financial capital, human capital, and transition to self-employment: Evidence from intergenerational links. Journal of Labor Economics, 18(2), 282–305.CrossRefGoogle Scholar
  16. Earle, J. S., & Sakova, Z. (2000). Business star-ups or disguised unemployment? Evidence on the character of self-employment from transition economics. Labor Economics, 7, 575–601.CrossRefGoogle Scholar
  17. Evans, D. S., & Jovanovic, B. (1989). An estimated model of entrepreneurial choice under liquidity constraints. Journal of Political Economy, 97(4), 808–827.CrossRefGoogle Scholar
  18. Evans, D. S., & Leighton, L. (1989). Some empirical aspects of entrepreneurship. American Economic Review, 79(3), 519–535.Google Scholar
  19. Haggard, S., & Huang, Y. (2008). The political economics of private sector development in China. In L. Brandt & T. G. Rawski (Eds.), China’s great economic transformation. Cambridge: Cambridge University Press.Google Scholar
  20. Hamilton, B. H. (2000). Does entrepreneurship pay? The Journal of Political Economy, 108(3), 604–631.CrossRefGoogle Scholar
  21. Hanley, E. (2000). Self-employment in post-communist Eastern Europe: A refuge from poverty or road to riches. Communist and Post-Communist Studies, 33(3), 379–402.CrossRefGoogle Scholar
  22. Harris, J. R., & Todarro, M. P. (1970). Migration, unemployment and development: A two sector analysis. American Economic Review, 60(1), 126–142.Google Scholar
  23. Holtz-Eakin, D., Joulfaian, D., & Rosen, H. S. (1994). Sticking it out: Entrepreneurial survival and liquidity constraints. Journal of Political Economy, 102(1), 53–75.CrossRefGoogle Scholar
  24. International Labor Organization (ILO). (1972). Employment, incomes and equality: A strategy for increasing productive employment in Kenya. Geneva: ILO.Google Scholar
  25. Jackson, J., & Mach, B. (2009). Job creation, job destruction, labour mobility and wages in Poland, 1988–1998. Economics of Transition, 17(3), 503–530.CrossRefGoogle Scholar
  26. Knight, J., & Song, L. (1999). The rural-urban divide: Economic disparities and interactions in China. Oxford: Oxford University Press.CrossRefGoogle Scholar
  27. Le, A. T. (1999). Empirical studies of self-employment. Journal of Economic Surveys, 13(4), 381–461.CrossRefGoogle Scholar
  28. Lentz, B. F., & Laband, D. N. (1990). Entrepreneurial success and occupational inheritance among proprietors. Canadian Journal of Economics, 23(3), 563–579.CrossRefGoogle Scholar
  29. Lewis, W. A. (1954). Economic development with unlimited supplies of labor. Manchester School of Economic and Social Studies, 28(2), 139–151.CrossRefGoogle Scholar
  30. Lu, Z., Wang, X., & Zhang, P. (2012). Do Chinese state-owned enterprises pay high wage? Economic Research, 3, 28–39 (In Chinese).Google Scholar
  31. Ma, X. (2009). The enterprise ownership reforms and the change of wage structure in China: Comparison of gender wage profiles differentials by ownership. Journal of Chinese Economic Studies, 6(1), 48–64 (In Japanese).Google Scholar
  32. Ma, X. (2011). Immigration and labor market segmentation in urban China: An empirical analysis of income gaps between migrants and urban register workers. Japanese Journal of Comparative Economics, 48(1), 39–55 (In Japanese).CrossRefGoogle Scholar
  33. Ma, X. (2014). Wage policy: Economy transition and wage differentials by sectors. In K. Nakagane (Ed.), How did Chinese economy change? Evaluation on economy systems and policies after the economy reform period. Tokyo: Kokuseisioyin (In Japanese).Google Scholar
  34. Ma, X. (2015). Economic transition and wage differentials between public and private sectors in urban China. Chinese-USA Business Review, 14(10), 477–494.Google Scholar
  35. Ma, X. (2016). Determinants of the wage gap between migrants and local urban residents in China: 2002–2013. Modern Economy, 7, 786–798.CrossRefGoogle Scholar
  36. Ma, X., & Deng, Q. (2016). Economic transition and self-employment of migrants in urban China. Journal of Chinese Economic Studies, 13(1), 78–92.Google Scholar
  37. Maddala, G. S. (1983). Limited-dependent and qualitative variables in econometrics. New York: Cambridge University Press.CrossRefGoogle Scholar
  38. Marx, K. (1867). Capital (Vol. 1). London: Harmondsworth, Penguin.Google Scholar
  39. Minami, R., & Ma, X. (2010). The Lewisian turning point of Chinese economy: Comparison with Japanese experience. China Economic Journal, 3(2), 165–181.CrossRefGoogle Scholar
  40. Minami, R., & Ma, X. (2014). Labor market and Lewisian turning point in China. In R. Minami, F. Makino, & K. Kim (Eds.), Lewisian turning point in the Chinese economy. London: Palgrave Macmillan.CrossRefGoogle Scholar
  41. National Bureau of Statistics (NBS) of China. (1999). China statistical yearbook. Beijing: Chinese Statistics Press.Google Scholar
  42. National Bureau of Statistics (NBS). (2000). China statistical yearbook 1999. Beijing: Chinese Statistics Press (In Chinese).Google Scholar
  43. National Bureau of Statistics (NBS). (2008). China statistical yearbook 2007. Beijing: Chinese Statistics Press (In Chinese).Google Scholar
  44. National Bureau of Statistics (NBS). (2014). China statistical yearbook 2013. Beijing: Chinese Statistics Press (In Chinese).Google Scholar
  45. National Bureau of Statistics (NBS) of China. (2015). China statistical yearbook. Beijing: Chinese Statistics Press.Google Scholar
  46. Song, L., & Appleton, S. (2006). The fight between gaining interests group and non-gaining interests group in Chinese labor market: Searching for job and government intervention. In F. Cai & N. Bai (Eds.), Transition and migrants in China. Beijing: Social Sciences Academic Press (In Chinese).Google Scholar
  47. Todarro, M. P. (1969). A model of labor migration and urban unemployment in less developed countries. American Economic Review, 69(1), 486–499.Google Scholar
  48. Wang, M. (2003). Wage differentials in the transition period: An econometric analysis on the discrimination. Quantitative & Technical Economics, 5, 94–98 (In Chinese).Google Scholar
  49. Wu, X. (2006). Communist cadres and market opportunities: Entry into self-employment in China, 1978–1996. Social Forces, 85(1), 389–411.CrossRefGoogle Scholar
  50. Xie, E. (2012). Transitions to non-farm self-employment in China. Economic Research, 2, 54–66 (In Chinese).Google Scholar
  51. Xie, S., & Yao, X. (2006). An analysis on the discrimination on migrants. Chinese Agriculture Economics, 4, 39–55 (In Chinese).Google Scholar
  52. Xing, C., & Luo, C. (2009). Income inequality between migrants and local urban residents: A semiparametric approach. Quantitative & Technical Economics, 10, 74–86 (In Chinese).Google Scholar
  53. Yamada, G. (1996). Urban informal employment and self-employment in developing countries: Theory and evidence. Economic Development and Culture Change, 44(2), 289–314.CrossRefGoogle Scholar
  54. Ye, L., Li, S., & Luo, C. (2011). Industrial monopoly, ownership and enterprises wage inequality: An empirical research based on the first national economic census of enterprises data. Management World, 4, 26–36 (In Chinese).Google Scholar
  55. Yin, Z., & Gan, L. (2009). Wage differentials between public and nonpublic sector in China. Economic Research, 4, 129–140 (In Chinese).Google Scholar
  56. Yueh, L. (2009a). Self-employment in urban China: Networking in a transition economy. China Economic Review, 20(3), 471–484.CrossRefGoogle Scholar
  57. Yueh, L. (2009b). China’s entrepreneurs. World Development, 37(4), 778–786.CrossRefGoogle Scholar
  58. Zhang, J., & Xue, X. (2008). State and non-state sector wage differentials and human capital contribution. Economic Research, 4, 15–25 (In Chinese).Google Scholar
  59. Zhang, J., & Zhao, Z. (2015). Social-family network and self-employment: Evidence from temporary rural-urban migrants in China. IZA Journal of Labor & Development, 4(1), 4.CrossRefGoogle Scholar
  60. Zhang, Q. F., & Pan, Z. (2012). Women’s entry into self-employment in urban China: The role of family in creating gendered mobility patterns. World Development, 40(6), 1201–1212.CrossRefGoogle Scholar

Copyright information

© The Author(s) 2018

Authors and Affiliations

  • Xinxin Ma
    • 1
  1. 1.Hitotsubashi UniversityTokyoJapan

Personalised recommendations