Building a Unified and Inclusive Labor Market

Abstract

What kind of labor market does common prosperity actually require? The development of the labor market results from a combination of market forces and institutions. The introduction of an institutional perspective implies strengthening the inclusiveness of the labor market. It should ensure that employment opportunities are open to all workers equally, that labor compensation is not influenced by factors other than job performance, and that workers are given appropriate protection and a voice. Compared with the requirements, there are three more prominent problems in the current Chinese labor market. Firstly, the labor market presents an obvious dualistic structure along many dimensions such as urban and rural areas, regions, and industries, and free flow is hindered. The segregation of the labor market not only widens the wage income gap, but is also not conducive to giving full play to the advantage of the country’s bountiful labor resources. Secondly, the structural contradiction between supply and demand leads to the coexistence of unemployment and labor shortage, and the flexible employment in new industries is likely to impact the effectiveness of the institutional arrangement of the current market. Third, insufficient labor protection restricts the market’s ability to allocate labor resources dynamically. Under the existing social security system, in particular, the unemployment insurance system needs to be improved, and there is still room to amplify the voice of workers. With the goal of common prosperity, China should establish a unified and inclusive labor market. First, by reducing inequality among different groups of people in terms of employment, livelihood, and social security, the barriers in the labor market at the urban–rural, regional, and industry levels should be broken down. Secondly, we can guide employment preferences, strengthen skill training, and promote industrial transformation and upgrading to address the structural mismatch between labor supply and demand. In particular, we can actively explore the institutions of labor protection that are compatible with flexible employment patterns so that the labor market system can keep pace with the development of new business models. Finally, the protection of workers should be strengthened through enhancing employment protection, upgrading the level of social security pooling, strengthening the function of unemployment insurance, and amplifying the voice of workers.

Authors: Zipeng Zhou, Canhui Hong, Qu Lu, Xinran Liu, Zhiyuan Li.

2.1 The Status-Quo and Development Goals of China’s Labor Market

As one of the most important production factor markets, the labor market is of profound significance to common prosperity. For one thing, the improvement of labor allocation efficiency and labor productivity is the source of full employment, higher wages, and even long-term economic growth, which is crucial to high-quality development. For another, labor income is the main source of income for most people.¹ According to the National Bureau of Statistics (NBS), the wage income of Chinese workers accounted for 56% of their disposable income in 2020. Wage income is also the main source of income inequality in most countries.² A reasonable and fair labor market is essential to achieve “common” prosperity.

Since the country’s reform and opening up four decades ago, China’s labor market has achieved important results in “preserving growth and promoting employment”, enabling workers to share the fruits of economic growth. According to the China Statistical Yearbook, by the end of 2020, there were nearly 970 mn people of working age (15–64 years old) and more than 780 mn people in the labor force, of whom 750 mn are working now. In addition to absorbing a large number of working-age people, China’s labor market keeps the unemployment rate at a reasonable level, and has made certain achievements in the distribution of the labor force. Structurally, the proportion of urban employment has continued to grow steadily since 1978, indicating that the surplus rural labor force has continued to migrate to the more efficient urban sector in the process of market opening. China Statistical Yearbook estimated that by the end of 2020, there were about 130 mn migrant workers living in cities and towns,³ becoming an important part of urban employment. The rise in the share of nonfarm employment shows the shift of labor from agriculture to secondary and tertiary industries, and the rural workforce is gradually starting to engage in more efficient nonfarm industries (Fig. 2.1). Currently, nearly 290 mn people with rural hukou are engaged in nonfarm production in China.⁴

Fig. 2.1

Source National Statistical Office, CICC Global Institute

The share of urban employment and nonfarm employment continues to increase.

The labor market has helped ordinary workers share the fruits of economic growth, as is shown by the fact that the average wages have continued to grow faster than labor productivity over the same period since 2007 (Fig. 2.2). Since 1995, the fastest growing industries in terms of wages are manufacturing, construction, and low-income services,⁵ meaning that blue-collar workers have been benefiting more from economic growth.

Fig. 2.2

Source International Labour Organization, CICC Global Institute

Average wages and labor productivity have increased significantly.

The aging issue has become an important variable affecting the sustainable development of China’s labor market. As the birth rate in China continues to decline, China’s working-age population has been declining since 2013, and we estimate that the problem of an aging labor force as well as shortages will become increasingly critical in the future. According to the bulletin of the seventh census in 2020, China’s working-age (15–64 years old) population was about 969 mn, accounting for 68.55% of the total population. The United Nations predicted in 2019 that China’s working-age population would drop to 838 mn in 2050, but the actual rate of decline presented at the moment is even faster than expected.⁶ China’s elderly population dependency ratio is likely to climb from 46.0 in 2020 to 67.3 in 2050, leading to an increasing social burden. How to cope with the aging trend has become an important issue for the sustainable development of the labor market.

The labor market should consider both efficiency and equity in order to reach the goal of common prosperity by prompting employment and enhancing the efficiency of labor allocation while ensuring equal sharing of economic growth. The development of the labor market results from the interaction between institutions and the market, and the former is the infrastructure of the latter. As a result, balancing the relationship between efficiency and equity in the labor market requires a more inclusive and unified labor market.

Both market and institutional perspectives are useful for analyzing what kind of labor market China should pursue, and the institutional perspective is more balanced between equity and efficiency. The traditional perspective of perfect competition treats labor the same as other factors, and takes the market mechanism and individual optimal decision-making as the core of analysis, which leads to the conclusion that market efficiency and equity are completely opposed and that there ought to be as little government intervention as possible. However, some scholars point out that there are inherent failures in labor markets due to externalities, public goods, economies of scale, and asymmetric information, and that protective policies can correct market failure and restore competitive equilibrium, meaning that moderate policy interventions can help improve efficiency.⁷ Both of the ideas above emphasize the role of market forces in allocating labor resources. In contrast, the institutional perspective points out that labor differs from ordinary commodities in that wages and employment are also related to the social status and self-esteem of workers, rather than simply to price and quantity.⁸ The special properties of labor force imply that institutions will influence the behavior of the various participants and thus determine the outcomes of market allocation⁹ (Fig. 2.3). Thus, institutions are another major factor affecting the labor market besides market forces.

Fig. 2.3

Source Howell and Kalleberg (2019),Footnote

Howell and Kalleberg [12].

CICC Global Institute

An institutional perspective calls for more equitable labor market institutional arrangements.

Good institutions can reconcile equity and efficiency in the labor market. Since the 1990s, the academic and policy communities have realized that labor market institutions are crucial for achieving full employment, inclusive growth, and innovation. More specifically, relying exclusively on the market for labor resource allocation may be inefficient, considering the indivisibility of human capital and the incomplete labor insurance market (e.g., due to moral hazard).¹¹ Instead, the labor market, as an institution, should provide a partial complement to the “missing” protection mechanism,¹² which implies a slower adjustment in employment relations and wages when the economy faces adverse shocks. In other words, by giving workers some security arrangements, the equilibrium outcome of the market is at the same time more efficient because of the following reasons¹³:

First, institutions have a direct impact on the efficient functioning of labor markets.¹⁴ As discussed earlier, wages and employment are related to workers’ social status and self-esteem. In addition to price, institutions broadly influence the incentives and bargaining behavior of market participants. For example, workers’ bargaining power is constrained by market structure and firm size, and their level of reservation wages and reemployment options are more related to the labor security that society can provide. It has been argued that protective measures such as unions are a substitute for flawed industrial relations,¹⁵ and that the minimum wage was originally intended to prevent firms from falling into “unhealthy competition” in the absence of coordination to keep wages down.¹⁶ In other words, a fair and secure system is not an erosion of efficiency, but rather is designed for the long-term smooth and efficient functioning of the labor market.

Second, proper regulation facilitates coordination between labor and management, and mitigates the damage to efficiency from frictions. The adjustment of labor market equilibrium is a slow growing process, and a completely unregulated market is chaotic and inefficient for both labor and management. Specifically, a response that is too fast implies dramatic fluctuations in labor relations, which is not conducive to profiting from a stable economic relationship. Conversely, too slow a response implies rigidity in labor relations, which is equally detrimental to the optimal allocation of labor. In addition, given the fact that a small number of firms have more market power and are more likely to conspire on economic behavior, workers are at a disadvantage in the search and bargaining process. Moderate regulation can therefore help smooth the process, improve the efficiency of labor matching, and avoid stalemates in negotiations due to information asymmetry and trust issues.

Finally, equity-focused institutions and regulations can enhance long-term economic performance. The relatively fair and stable income from institutions and regulations allows individuals to withstand the risks associated with educational investment, innovation, and entrepreneurship, providing a pathway for human capital enhancement and a long-term growth engine for the economy as a whole. Providing workers with financial, educational, or training assistance can help them get out of short-term difficulties and achieve dynamic and effective allocation of labor resources. In an era of globalization and rapid technological development, a fairness-focused security system can also help alleviate the public’s need for protectionist policies, which can also benefit economic efficiency in the long run.

The proposition of how to balance equity and efficiency can be further broken down into the dimensions of accessibility, fair pay, labor protection mechanism, and right to a voice.¹⁷

First, accessibility emphasizes fairness of opportunity, which stresses equal opportunities for workers to work, study, and develop their careers without discrimination on the basis of whether or not they are from urban and rural areas, the industries in which they have worked, and their age. It also means relatively smooth flow of labor across regions and industries.

Second, fair compensation focuses on outcome equity, which means that workers’ compensation is based only on job performance and no other factors. The equity should be exhibited in the relationship between labor and capital, and also in the income gap between different groups within workers.

Third, labor protection and right to voice involve long-term equity and the efficiency of labor allocation. Because workers face multiple risks such as search frictions,¹⁸ income instability, and unemployment, they need appropriate protection in terms of unemployment insurance and job search. In addition, given that labor contracts cannot cover all possible situations and need to be adapted to the latest developments in technology, preferences, and supply, the workers’ right to a voice raised via mechanisms such as labor unions and collective bargaining can help meet the requirement.

2.2 Three Major Challenges of China’s Labor Market from an Institutional Perspective

2.2.1 Challenge 1: Multiple Dualistic Structures Exist in the Labor Market, Which Affects Both Efficiency and Equity

The labor market in China is still not mature enough, and there are multiple dualistic structures. Employment and wages in the labor market are not only related to workers’ ability, but are also influenced by external factors such as institutional arrangements, industrial characteristics, discrimination, and other issues, which lead to compartmentalization of the labor force. The dualistic structures hinder the free flow of production factors and the improvement of production efficiency, and also bring challenges to the equity of wage income.

2.2.1.1 The Labor Market Is Segmented Across Urban and Rural Areas, Regions, and Industries, and the Labor Endowment Is Not Fully Utilized

The current dual structure of China’s labor market at the urban–rural, regional, and industry levels still exists, which hinders the free flow of labor and reduces the efficiency of labor supply, making it difficult to fully transform the volume advantage of labor into efficiency advantage.

There are still obstacles to the free movement of labor, and the dual structure between urban and rural areas is still obvious. First of all, the rural population still faces many barriers to mobility, which restricts their outward transfer, and the labor endowment resources are not fully utilized. The current hukou system has gradually disappeared from the labor market, but urban public services mainly serve urban residents with local hukou, meaning that rural laborers still face barriers to entering urban areas.¹⁹ For example, high urban housing prices make it difficult for migrant workers to settle in cities, and a study by Jinan University shows that the rate of urban home ownership among the migrant population is only 15.2% because most migrant workers cannot afford the high cost.²⁰ The gap in availability of resources amid the urban–rural divide reduces the willingness to move, resulting in a considerable amount of redundant labor remaining in rural areas.

Second, the income gap, employment opportunities, public services, and institutional barriers between urban and rural areas all make it difficult for rural areas to attract labor back to the countryside. A study shows that the willingness of rural people working in mega cities to return to rural areas is 5.9%, and the willingness to return starts to rise as the size of cities decreases, which to some extent reflects that cities (especially large-scale cities) reduce the willingness of labor to flow into rural areas because they can provide richer employment opportunities and more sound public service systems.²¹ At the same time, in order to live in rural areas and obtain a rural hukou, urban laborers must obtain the rights to homestead, contracted land, and the distribution of collective benefits, but this in turn would have an impact on the collective ownership of rural land.²² The problem of access to land faced by the urban population flowing into the countryside makes it difficult to solve the housing problem,²³ and also reduces their willingness to invest in the land for industrial development.

The unbalanced development of urban clusters also leads to the regional segmentation of the labor market, which is mainly reflected in the differences between prosperous eastern coastal regions and other regions. The labor flow is often restricted by geographical distance, and the unbalanced economic development of different regions makes the industrial structure diverge and form different employment ecologies, thus leading to the segmentation of the labor market. From the perspective of city cluster development, the eastern coastal city clusters and some central cities have played the role as regional leaders, while the western region lacks large cities to drive it. Consequently, the segmentation of regional labor mobility in China has gradually emerged in recent years, and the degree of free movement of labor varies among regions. Studies show that the barriers for labor to enter the provinces and cities in the eastern coastal region, such as Beijing, Shanghai, Guangdong, and Zhejiang, are increasing,²⁴ and the labor market in tier-1 cities is becoming increasingly divided from the labor market in other regions.

2.2.1.2 The Existence of Multiple Dualistic Structures Further Polarizes Wage Income Growth

Amid the current urban–rural segmentation of the labor market, there is a large gap between the wage income of urban and rural workers, both in terms of wage level and growth rate. Workers holding rural hukou can be divided into two categories: Those who migrate to urban areas for work, mainly young adults and laborers with relatively low levels of education²⁵; and those who remain in rural areas with a lack of human capital and resources, mainly traditional low-income farmers.²⁶ There is a significant gap between migrant workers and their urban hukou peers in terms of the size and grow rate of the wage income. NBS data shows that the average annual wage of migrant workers in 2020 was Rmb48,864, significantly lower than that of workers at urban private companies (Rmb57,727) and non-private companies (Rmb97,379). The wage growth of migrant workers is slow, and the average annual growth rate of their average wage in 2016–2020 is 5.8%, which is lower than that of workers at urban private (7.8%) and non-private (9.4%) companies. Moreover, the average wages of urban workers and migrant workers are gradually diverging (Fig. 2.4).

Fig. 2.4

Source NBS, CICC Global Institute

Migrant workers’ income is low and growing slowly.

2.2.2 Challenge 2: Mismatch Between the Labor Market System and the Changing Society

Another major problem facing China’s labor market is the mismatch between the labor market system and the rapidly developing economy. Employment difficulties and labor shortages coexist, and workers’ age has a significant influence on the income gap, which reflects the mismatch between the characteristics of human capital and industrial structure, the structural contradiction between labor supply and demand, and the low efficiency of market allocation. The new economy has brought new employment patterns and created new labor relations, but the existing labor legal system and protection institution are still based on the traditional “factory system”, leaving insufficient protection for workers in new industries. The mismatch between these two aspects has put forward new requirements for the labor market in terms of market mechanism and developing new institutions, respectively.

2.2.2.1 Structural Contradiction Between Labor Supply and Demand

The current labor market in China has long exhibited the phenomenon of coexistence of unemployment and labor shortages. On the one hand, the employment difficulties of college graduates have persisted for over a decade, and helping this group find employment has become an urgent problem to be solved. There were 9.09 mn college graduates in China in 2021, but there were far more young people entering the job market, including graduates who have not yet been employed and returnees from overseas. The pressure of youth employment is thus swelling.²⁷ On the other hand, China’s manufacturing industries, which are especially labor-intensive industries, have not been able to meet the labor demand since 2010, and the problem of labor shortages at certain manufacturing enterprises has been particularly prominent. As a country with a large labor resource endowment, China’s labor market shows the coexistence of employment difficulties for young people represented by college graduates and labor shortages for enterprises represented by traditional manufacturing industries.

This phenomenon is related to the mindset of young people and industrial development, but the structural contradiction means that China’s labor market is influenced by the changes in population trend on the supply side, and there is a certain mismatch with the industrial structure on the demand side. With the gradual disappearance of China’s demographic dividend, the size of the labor force is shrinking and its quality is improving. However, the transformation and upgrading of industries are not synchronized, which has led to the mismatch and also renders the current market mechanism unable to allocate labor resources effectively.

From the supply side, there is a clear trend of a higher quality but shrinking labor force. As mentioned previously, China’s labor shortage will worsen in the future, and the quantitative advantage of the population that supported the rapid economic growth in the past will gradually disappear. The continuous transfer of surplus labor from rural to urban areas in recent decades has fueled the supply of low-skilled labor and kept its wage level relatively low, reinforcing the demand for people to upgrade their education level to enter high-end industries. In addition, families prefer to have their children pursue higher education after addressing their basic needs.²⁸ This has at least two implications: First, individuals become willing to pursue education for a longer period of time; and second, families are more willing to invest resources in their children’s education rather than the number of children. According to a 2019 survey,²⁹ the biggest expense for new middle-class families is their children’s education and self-improvement, with children’s education topping all expenses at 31.2% of the total. The younger generation is spending more time pursuing education, and the proportion of people with a high school level of education or higher is increasing (Fig. 2.5).

Fig. 2.5

Source China Population and Employment Statistics Yearbook 2020, CICC Global Institute

Younger generations are more educated than prior generations.

From the demand side, however, the transformation of China’s industrial structure is slower than the change in population endowment, leading to a divergence in demand between labor-intensive and knowledge-intensive industries, with the former being in short supply and the latter showing excess demand. In the context of China’s labor endowment changing from quantitative to qualitative (Fig. 2.6), the industrial structure has not transformed at the same pace, and it was not until 2012 that the number of people employed in the tertiary sector exceeded that in the primary sector. From a survey of educational background of urban employees in 2020, we find that more educated workers gather in knowledge-intensive industries,³⁰ among which about 46 and 64% of workers with undergraduate and postgraduate backgrounds enter knowledge-intensive industries, while workers with lower education are more likely to be concentrated in primary or secondary industries. The ability of high-end industries to absorb college students, however, cannot keep up with the growth rate of supply,³¹ and the demand ratio of graduates with a college level education and above has been less than one since 2005, which also illustrates this problem. As China’s population becomes more educated and the outflow of labor from rural areas slows, labor-intensive industries will continue to face insufficient supply, while knowledge-intensive industries may not be able to absorb the rising number of highly educated talent, resulting in a situation in which supply exceeds demand and college students feel difficult to find jobs.

Fig. 2.6

Source UN, Wind, CICC Global Institute

The great transformation of the qualitative endowment of China’s labor force.

Another problem in China’s labor market is the widening intergenerational wage income gap. In the context of industrial structure transformation and the rapid development of new industries, the knowledge and skills of middle-aged and older workers can hardly meet the new demands of the labor market, which increases the difficulty for them to adapt. The percentage of middle-aged and older employed workers engaged in higher paying industries such as scientific research and technical services, information technology software services, culture, sports, and entertainment was less than 1% in 2020.³² As the digital economy develops, the repetitive jobs engaged by middle-aged and older workers are more likely to be replaced by automated machines, leading to a further decline in their income levels. In addition, it is difficult for them to update their skills in time to adapt to the development of new industries, and once they are unemployed, there are more obstacles in returning to the labor market. The aforementioned phenomena have led to the rapid decline in middle-aged and old-aged workers’ wage income as they get older. In view of the severe aging of China’s society, how to reasonably improve their skills to adapt to the rapid transformation of economic development and create a suitable employment mechanism for them will be an important proposition.

2.2.2.2 The Rise of Flexible Employment Puts New Demands on Institutional Development

In addition to the structural contradiction of supply and demand, the labor market ought to match new employment patterns, i.e., flexible employment. The digital economy currently plays a pivotal role in the national economy, giving rise to a large number of new occupations that are different from the traditional business model. According to the Ministry of Human Resources and Social Security, from 2019 to 2020, China added a total of 38 new occupations, including 23 occupations related to the digital economy. The scale of flexible employment in the digital economy continues to grow, with the number of flexible employment workers in China reaching about 200 million in 2020.³³ A total of 84 mn people work for sharing economy platforms, up 68% from 50 mn in 2015, with a CAGR of 10.9%.³⁴ However, flexible employment in China is currently deficient in terms of a supporting legal system and labor protection mechanism, which imposes challenges on the current labor market.

The new business model created by the digital economy is largely different from the traditional system in terms of employment relations and flexibility. The traditional labor market had its origins in the Industrial Revolution, which shifted labor from a decentralized to a centralized approach and shaped the modern “factory-centered” employment relationship. However, the booming global digital economy has given rise to business models that are different from traditional employment relationships, especially the production model represented by the “gig economy”, which allows people to work across platforms and enterprises at the same time, and employment has taken on a “worker-centered” character. This is clearly different from the traditional “factory-centered” employment relationship (Fig. 2.7).

Fig. 2.7

Source CICC Global Institute

Firm-centered versus worker-centered employment relationship.

The traditional labor market system is based on the “factory-centered” employment relationship.³⁵ For example, the payment of pensions, the regulation of salaries and working hours, and the guarantee of production safety, etc., are all based on factories or enterprises. However, the employment relationships of the gig-economy are more complicated, and the traditional system based on fixed workplace and working hours is not suitable for flexible employment. According to data from the International Labor Organization, only 8% of platform workers were able to establish formal employment relations with their platforms in 2019.³⁶ Under the current institutional arrangements, all protection for workers should be based on the recognition of employment relations, which leads to the lack of corresponding labor protection for many flexible workers and makes their rights and interests vulnerable to infringement.

Moreover, platforms are in a stronger position compared to workers and are able to gain stronger bargaining power by controlling the way work is organized, which may lead to unequal labor-management relations. More than half of food delivery riders in China worked more than eight hours a day in 2019.³⁷ Overwork is closely related to the way compensation is denominated. According to a study on food delivery riders in one city in 2020, less than 10% of riders are paid a base salary, and more than 70% are paid a piecemeal rate without a base salary.³⁸ In addition, if the platform’s industry concentration rises, it is possible for the platform to have a buyer’s monopoly over the labor market, such as lowering the commission for each single delivery. Individuals are in a weak position in terms of resources, time, and legal support to bargain with the platform, and there is internal competition among riders, which invariably reduces their bargaining power. Therefore, how to improve the weak position of workers in labor-management relations is an issue in the design of the new labor system.

2.2.3 Challenge 3: Building a Resilient Labor Protection Regime and Improving Workers’ Voice

In the face of economic and social changes in the labor market, the ability to quickly adjust the flexibility of employment relations with a solid labor protection institution is important for helping workers achieve full employment as much as possible, maintaining a balanced supply and demand in the labor market, and sustaining long-term economic growth. China’s labor protection institution is relatively new, and is still being refined, but this also gives China the opportunity to take advantage of the latecomer advantage, learn from advanced economies, and thereby refine the system further.

2.2.3.1 International Experience: The Pros and Cons of Rigid and Flexible Protection Institutions

Two policy models to protect labor prevail in the world³⁹: One is to protect workers’ rights and interests by raising the unemployment threshold, and the other is by strengthening unemployment insurance. The former is represented by Greece, Italy, and other southern European countries before 2007, and the institutional arrangement follows a model of “high protection + low replacement + low expenditure”, which establishes a more long-term and stable relationship between enterprises and employees through strict layoff procedures, longer notice periods for leaving employment, and higher financial compensation for layoffs. The latter model, “low protection + high replacement + high expenditure”, is represented by countries such as Switzerland and Denmark, where firms are relatively free to terminate labor relations, accompanied by fairly generous unemployment insurance benefits and strong government policies for an active labor market (Table 2.1).

Table 2.1 Analysis of the advantages and disadvantages of rigid and flexible labor market institutions

Although the model of “high protection + low replacement + low expenditure” is beneficial to employees, it is not ideal from a society-wide perspective. Strong employment protection protects workers in the short term, but in the long term, it reduces the efficient allocation of labor resources and causes inequality in employment opportunities among different groups of workers. While the “low protection + high replacement + high expenditure” strategy exposes individual workers to a higher risk of dismissal, flexible labor relations help promote labor mobility and matching efficiency, thus improving overall economic robustness. Although the employment relationship is not strongly protected by the government, generous unemployment benefits provide sufficient income security for the unemployed, reducing their fear and resistance to unemployment and making workers more open to job mobility and switching.⁴⁰ Overall, flexible labor security policies are important in helping workers achieve the fullest possible employment, and maintain a rough balance between labor supply and demand and even long-term economic growth.

2.2.3.2 Common Prosperity Requires a Flexible Protection Institution of “Low Protection + High Replacement + High Expenditure”

International experience has taught us that the model of “low protection + high replacement + high expenditure” offers better performance in ensuring full employment and maintaining the operation of the labor market. We need social security to enhance the flexibility of the economy so as to reduce the loss of resource mismatch. The increase in fiscal strength also lays the foundation for us to adopt a flexible protection institution.

Regarding low protection, the provisions on resignation should cover a larger group of people. “Low protection” is not “no protection”, but rather suggests that more workers should be covered by the flexible protection institution. China has not yet designed a clear mechanism for informal employment relations, and the termination of such employment is not governed by the Labor Contract Law because the informal relationship is not regarded as a formal contract, but by the provisions of the Civil Code on contractual relations according to the specific content of the contract.

Regarding the high replacement rate of employment, China’s social security insurance needs improvement, especially unemployment insurance. Currently, the basic pension scheme for urban employees in most provinces is managed by local governments, while the basic pension scheme for rural and non-working urban residents and their basic medical insurance are mainly managed by county (district) governments, making fund management fragmented. The current social security system still suffers from systemic frictions such as low levels of pooling of accounts and poor portability, which reduce the willingness of specific groups of people to enroll for insurance. The fact that social security is only pooled at the local level leads to poor portability, which reduces the willingness of the mobile population to pay contributions and leads to weak implementation of social security at the enterprise level, dragging down the actual coverage rate of the employed population as a whole. Ministry of Human Resources and Social Security statistics show that the coverage rates of migrant workers’ basic pension,⁴¹ basic medical care, unemployment, and work injury insurance were only 22, 22, 17, and 27% in 2017, lower than the corresponding average levels of the total urban employed population at 69, 51, 44, and 54%.

China’s unemployment insurance system currently has the overall problems of low coverage, low replacement rate, and low efficiency of use. In terms of coverage, according to the National Bureau of Statistics, the proportion of unemployment insurance recipients to the total unemployed population in 2020 (unemployment benefit rate) in China was 23.3%,⁴² while it was 48 and 49% in Denmark and Switzerland.⁴³ In terms of replacement rate, the level of unemployment insurance benefits in China does not consider the personal and family characteristics, and is lower than the local minimum wage. The per capita unemployment insurance benefit in China was Rmb1266 per month and the replacement rate was only 18.4% in 2018. In terms of the efficiency of fund use, insufficient targeting and coverage led to large surpluses in the unemployment insurance fund for several years from 2003 to 2018, and the weakly-functioning insurance was therefore not able to buffer against economic cycles. Despite the significant rise of unemployment insurance fund expenditures to Rmb211bn in 2020, the actual share of expenditures was only 20%, significantly lower compared to 64% in 2003 (Fig. 2.8).

Fig. 2.8

Source National Bureau of Statistics, CICC Global Institute

Weakening of the unemployment insurance fund.

Regarding the high expenditure, China’s government support needs to be improved, especially in terms of giving people more access to employment information. The difficulty of finding a job is particularly evident among young people who lack work experience, with the youth unemployment rate in China at 14.3% at the end of 2021, according to the NBS, higher than that in Switzerland (2%) and Denmark (10.8%).⁴⁴ This is mainly due to a lack of access to market information and unwillingness among young people to lower their expectations. They prefer to risk a longer period of unemployment and wait for their desired salary.⁴⁵ In contrast, online platforms such as “Work in Denmark” and “Job Index” in Denmark and “Jobs.ch” in Switzerland offer users the functionality of searching companies’ past job postings and guidance on salary negotiations, and provide anonymous salary distribution data by industry, job, and company. China can learn from these platforms to help workers obtain employment information.

The government and enterprises should improve skills training for the unemployed, and we believe the training projects should be systematically arranged and focus on sustainability. The participation rate in skills training is low: A total of 18.77 mn people participated in vocational training in China in 2019,⁴⁶ the per capita training hours in enterprises was 68.5 h/year,⁴⁷ the government’s per capita vocational skills training subsidy was maintained at a relatively low level of approximately Rmb500,⁴⁸ and the proportion of unemployed people participating in vocational training was only 14%. In contrast, over 60% of employees participated in vocational training in Denmark, with 82 h/year of training per capita at enterprises. Specifically, the Danish government provides vocational training for the unemployed and temporary short-time workers, with coverage rates of over 50% and 70%, respectively.⁴⁹ In addition, because the participation rate in skills training and skills evaluation levels in China are not strongly correlated with labor compensation, workers are less motivated to participate in skills training, which hinders the formation of lifelong learning habits and labor force transfer across industries and occupations.

2.2.3.3 Inadequate Protection Is also Reflected in the Lack of Workers’ Voice

The right of voice plays an important role in the protection of workers’ rights and interests, and also contributes to maintaining equity and efficiency in the labor market. The formulation of labor market regulations and the negotiation of wages and working conditions require negotiations between labor and management, and the right to voice determines which party dominates the process.⁵⁰ Generally speaking, in mature labor markets, workers are able to express their demands through collective bargaining and election of labor representatives. Some countries have strengthened the voice of all workers by expanding the benefits of collective bargaining, i.e., the benefits of collective bargaining are shared by all workers, including union members. Some countries have also reduced the likelihood of dismissal by electing work councils to represent workers and requiring that all dismissal and termination decisions be approved by the council.

The voice of workers in China is inadequate and does not provide sufficient protection. With the increasing importance attached to the protection of workers’ rights and interests, the establishment of organizations representing workers’ voices, such as labor unions and staff congress,⁵¹ are in the early stages of development, but the actual outcomes need to be improved.⁵² Workers are more satisfied with the work of labor unions in terms of cultural and sports activities and helping the poor and needy, while only 9.3% of workers were satisfied with the resolution of labor disputes, according to a study.⁵³ Meanwhile, collective bargaining is a way for workers to have a voice, but collective bargaining represented by unions suffers from the problem of insiders crowding out outsiders and usually focuses only on the rights and interests of union insiders. Finally, the continued evolution of new employment patterns also poses new challenges to enhancing workers’ voice. As the employment patterns of new industries are quite different from the traditional ones, they suffer from the lack of unions and insufficient coverage, making it difficult to protect workers’ right to voice,⁵⁴ which makes it difficult for the needs of vulnerable workers to be recognized by society.

2.3 Concluding Remarks

In China, the government should coordinate and promote the construction of a unified, mature, and fair labor factor market. We believe it is necessary to give full play to the advantages of China’s large market, to attempt to break down the market segmentation, and to make full use of the labor resource endowment. While China’s demographic dividend is diminishing, it is necessary to further break down the segmentation of the labor market at the urban–rural, regional, and industry levels; make more effective use of untapped labor supply; and steadily promote the equality of different people across employment, social security, and other aspects.

We believe China should take full advantage of its large number of university graduates to promote industrial transformation and upgrading, and expand the scale of knowledge-intensive industries. China should also take advantage of the job opportunities created by new industries and strengthen their attractiveness to highly-educated people. To address the problem of low-skilled labor being stuck in low-income industries, the government should guide and motivate enterprises to invest more in skills training. The government should establish targeted knowledge and skills training for middle-aged and older workers so that they can better adapt to new work patterns in the new economy.

We also believe China should establish a labor market that is compatible with flexible employment. It is necessary to adapt to the needs of flexible employment, change the factory-centered concept of labor relations and labor legislation, and build a worker-centered institutional framework. In addition, the anti-monopoly regulation of platform enterprises in the labor market should be strengthened, and the rules for transactions set by the platform should meet the requirements of labor standards and regulatory standards.

Finally, a more flexible labor protection system is necessary. In terms of employment protection, the flexibility of labor contracts and severance and layoff standards should be enhanced. In terms of social insurance, the scope of coverage should be expanded and the level of pooling should be improved. In terms of right to voice, the role of labor unions should be strengthened and their coverage expanded to new industries and disadvantaged groups.