Human capital and the re‐employment of retrenchment labor in urban China

• Author: Li Yu,Yunling Liang
• DOI: http://doi.org/10.1111/rode.12596
• Published date: 01 August 2019
• Date: 01 August 2019

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wileyonlinelibrary.com/journal/rode Rev Dev Econ. 2019;23:1432–1458.

© 2019 John Wiley & Sons Ltd

DOI: 10.1111/rode.12596

REGULAR ARTICLE

Human capital and the re-employment of

retrenchment labor in urban China

YunlingLiang1

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LiYu2

1School of Economics and

Management,China University of

Petroleum, Beijing, China

2China Economics Management

Academy,Central University of Finance

and Economics, Beijing, China

Correspondence

Yunling Liang

School of Economics and Management, 18

Fuxue Road, Changping District, Beijing,

China, 102249.

Email: liangyl@cup.edu.cn

Funding information

The National Science Foundation of China,

Grant/Award Number: 71403292 and

71403303

Abstract

The inefficiency of state- owned enterprises, followed by the

economic reform in urban China, resulted in large- scale re-

trenchment during the late1990s. The laid- off workers were

middle- aged, not well educated and had accumulated a lot

of firm- specific human capital that was unlikely to be of

value in the product market. In this study, we investigate

how differently human capital affects laid- off workers’ oc-

cupation choices: self- employment, re- employment and re-

maining unemployed. Using 2002 Chinese Household

Income Project and 2009 Urban Household Survey datasets,

we find that although general human capital measured by

education is positively related to the probability of finding a

job, it is negatively associated with the probability of self-

employment. Displaced workers with more sector- specific

work experience are more likely to be self- employed than to

be employed by others. Government- sponsored training sig-

nificantly increases the likelihood of finding a job. Health is

positively associated with re- employment.

JEL CLASSIFICATION

J23, J24, J63, J64

KEYWORDS

Retrenchment, Entrepreneurship, Human capital, Sector-specific human

capital, China

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INTRODUCTION

The unemployment scars that result from the involuntary and often permanent job loss generated

by large- scale layoffs have been documented to negatively affect the likelihood of laid- off workers’

re- employment.1 The permanent loss of firm- specific human capital and the deterioration of general

human capital during a spell of unemployment, among other factors, are found to be attributed to such

employment scars, causing displaced workers to suffer both earnings losses and a degraded labor

market (Eliason & Storrie, 2006; Kroft, Lange, & Notowidigdo, 2013). Displaced workers, especially

those from plant shutdowns in the declining manufacturing industry, have found it difficult to find

new jobs or secure wages, if employed. Farber (1999) finds that those who experience job loss are

significantly more likely than those who do not to secure temporary and involuntarily part- time jobs.

Alternatively, with the slim likelihood of employment in the labor market, those who are laid off can

seek self- employment. Fairlie (2011) notes that a higher local unemployment rate is positively related

to entrepreneurship in the United States, providing evidence of “pushed entrepreneurship.”

In this study, we investigate how employment and self- employment choices are related to different

types of human capital in a labor market experiencing drastic change: China in the late 1990s when

transitioning from a socialist economy to a market economy.

In the long- term planning economy, job mobility was severely limited and workers’ incentives

to work hard were low (Fleisher & Yang, 2003). Chinese state- owned enterprises (SOEs) started to

have a significant stock of surplus workers and become inefficient and inflexible in the market, with

declined profitability and increased losses. For this reason, the central government began to lay off the

surplus labor and restructure the labor force. This radical reform in urban China, known as xia gang

(“laid off”) – first on trial in 1994 and finally launched in 1997 – resulted in a quarter or more of the

workers being laid off in the four years to 2000 (Appleton, Knight, Song, & Xia, 2002). By the end of

the 1990s, along with the restructuring of Chinese state enterprises, over 37 million workers were laid

off. Peng (2000) and Xue and Zhong (2003) estimate that the unemployed in urban areas accounted

for 8% of the total urban labor force in 1998, and 11.6% in 2000. As Figure 1 shows, before the SOE

reform, the unemployment rate in urban China was low. However, starting from 1997, it soared from

about 5% to 10% in 2002 (Feng, Hu, & Moffitt, 2017). By the end of 2002, the unemployment was

well above the average of all low- income, middle- income and high- income countr ies. Among those

laid off, those who had little education, were female, were middle- aged, worked in local government

and urban collective enterprises, or had manual and unskilled occupations ran a greater risk of being

laid off (Appleton et al., 2002; Naughton, 1997; Dong, 2003; Bai, Li, Tao, & Wang, 2000; Groves,

Hong, McMillan, & Naughton, 1995).

The state sector has been dominant in employment in the labor market since the foundation of

China. After the SOE reform, the economic structure became more decentralized over time as more

small businesses entered in the market. Figure 2 plots the employment distribution from 1996 to 2015.

The employment in the private sector rose from 11.8 million in 1996 to 34 million in 2002, increasing

by 191% in 6 years. In contrast, employment in the SOEs fell from 81 million in 2000 to 71.6 million

in 2002, decreasing by 12% in 2 years. This shift of employment from SOEs toward the private sector

is consistent with the economic decentralization process during this period. With such an exogenous

shock to employment, the laid- off workers involuntarily lose their jobs and have difficulty in finding

new jobs within a short period due to the institutional changes in the economy. Most of the laid- off

workers had worked in SOEs for many years, accumulating a lot of firm- , industry- and sector- specific

human capital that was most likely not valued in the product market due to the inefficiency of the

state sector. Re- employment is particularly hard for this group. In fact, according to the 2002 Chinese

Household Income Project (CHIP), over 95% of employees were employed in SOE firms in 1995