Wage Differences in Urban Informal Sector of China - Essay Example

Wage differences in Urban Informal Sector of China Introduction To understand the wage differences in informal sector of China, the rural urban migration issues need to be examined. This needs the analysis of household registration system in China, the profile of migrants, explanations for rural to urban migration, and the interaction between migration and labour market evolution. Market segregation and labour market flexibility that result in wage differences need to be studied. The starting of economic reforms in China resulted in migration from rural to Urban areas. This attracted and influenced the policy makers and their decisions. Though the study of migration is not new in economics, the study considered in this context is important due to the wage differences between urban and rural areas and the informal sector of the urban areas. In this study of migration of China, the household was recognised regarding migration. Instead of number of people migrated to urban areas, the households migrated are been registered in China. Out of urban-urban, rural -rural migrations, the rural -urban migration exposed the wage differences issue. 1 2. Rural Urban Segregation and Migration The migration from rural to urban is so much important as it was assumed that the hukou system of 1950s was proposed to tie the farmers to the land. This is for supplying low cost agricultural products to the industrial sector. This restricted the mobility of the people during the great famine during s1960s. The farmers depended on collective farming and the opportunity cost for migration was very high. The migration was made easy and speeded up when china started economic reforms in 1978. 2 3. Urban Informal Sector The urban informal sector of developing countries like China absorbs who cannot find productive employment. If this point is ignored, it can be stated that it will contribute to employment and income generation. The legal status of the activities of the companies in the informal sector will fall outside the reach of the government regulations. This is due to the size of the companies having less than 10 employees and usage of simple and traditional technology. In China the government is limited to administrative resources tend to focus on large scale operations. The minimum wage legislation is enforced only in large scale establishments and informal sector was out of the reach of that legislation. One more reason for non implementation is that the companies seize to exist when the legislation is implemented. This needs the study of the determinants of employment in the urban informal sector in China. The size of the labour force of urban informal sector is due to the interactions within the economy as a whole. The absorption capacity rural areas regarding labour decides the migration and wage differences in the system. Though the urban informal sector is less in wages than the formal sector, the migration continues due to the still lesser wages in the rural areas. The urban informal sector absorbs very poor people as labour. As the sector provides income continuously without security, the poor and semi qualified people are absorbed by this sector. Particularly unskilled labour are employed and their lack of skills result in lower wages. 4. Effects of Informal Sector In the globalisation and economic reforms period the countries like china are catching up the opportunities of trade and development. International specialisation has become more effective during the period of specialisation and the liberalisation resulted in lowering the transport costs. The informal sectors discussed the macroeconomic role of labour reallocation. This analysed the effects of economic growth, production and trade patterns. This included the analysis of wages and there existed a substantial difference between the wages of formal and informal sectors. This resulted in the differences in the effects of formal and informal sectors on macro economic effects. The simulation regarding the allocation of workers, has put them across low and high productivity sectors constant. This was observed to be different growth scenario. When the simulation coincides with the high growth scenario, there existed an outflow from low to high productivity sectors. This means that the informal sector is helping the economy to grow at faster rate with low wages for the labour and the employees in that sector. The effects of the labour reallocation can be considered with these simulations. They describe the impact on economic growth and makes us to pay attention to production. The trade patterns in informal sector and the relative wages with the formal sector are known. This gave sensitivity analysis that conforms wage differences. The experiments regarding the variations between formal and informal activities that tell about the economic growth. This can be uncovered in two ways. The growth accounting exercises and the comparison of economic growth in the simulations uncovered the source of economic growth. That is the wage difference between the formal and informal sectors. The advantages in growth accounting change in production that explains the changes in the different productive factors separately. One of the important productive factors is wages. This attributed average economic growth between 1996 and 2000. The above table is adopted from http://www.cpb.nl/nl/pub/cpbreeksen/onderzoek/153/om153.pdf It can be observed that in OECD countries the population growth is slow and those countries are compelled to rely on capital and advances in technology. This resulted in speedier economic growth. In the countries like China, the technical advances are relatively less important due to increase in population. In these countries the incomes are supposed to increase due to labour supply growth, education and labour reallocation. This results from low productivity to high productivity. It was observed that the flow from the low productivity areas of the economy is contributing at least 0.5 percent per annum in the growth rate of China. This is not possible in the countries in Europe and America. The growth accounting exercises underestimate the role of informal sectors in the process of economic growth. This can give estimation for the direct effect of the labour reallocation. When the effects on the income through extra capital accumulation, are considered the estimation about the labour reallocation has been done. This resulted in wage differences between formal and informal sectors resulting in economic growth without the growth in the standards of the living conditions of labour. This can be solved by making the informal sectors formal by making them to increase their activities and bringing them into the ambit of the regulations. 3 5. Labour Reform in China Despite the wage differential in informal sector, China is having Unions. They come under the control of All china federation of trade unions which are under the control of the government and the party. This results in collective bargaining but it is absent in china due to the control of the unions by the government. This also may be a cause for the wage differentials in the informal sector as the government is not keen on reducing them through unions. The absence of legal strikes and the dispute resolution resulted in the freehand for the informal sector to rely on low wages for its employees and labour. The representation is tied with the political reform and the economic reforms cannot correct the wage differences in the informal sector in the early stages or even in the middle of the reforms. It may take much time to keep the informal sector at par with the formal sector regarding the wages without political reform. The migration of the labour from rural to urban areas can be termed as a result of economic reforms and liberalisation. This resulted in the high income in urban areas than the rural areas and made available surplus of skilled labour for the informal sector of Urban areas. Naturally, the surplus supply of labour resulted in low wages from them when compared to the formal sector. China opened the tightly controlled state economy to market processes. After 1990, external trade began along with openness. This enabled the government to receive foreign direct investment. Government started to reform ownership structure of the business and industry. This resulted in exempting the informal sector that contains employees or labour less than ten members outside the regulations regarding labour. After China entered WTO in 2002, the additional liberalisation took place resulting in increase of informal sector due to increase in the business. By 2004, China experienced the extraordinary growth and administration was successful in controlling the growth of population. This resulted in a slight decrease of surplus of labour to urban informal sector, and the wage differentials between both sectors have been reduced to a little extent. The aggregate growth coupled with the slow down in the population resulted in the enhancement of percapita income of China. The increase of wages in China's informal sector is less than the enhancement in the per capita income. This indicates that the informal sector in China is still out of the ambit of the regulations of labour. The reason is that the urban areas took the lead the rural urban migration increased despite the economic and per capita growth. This neutralised the chances of increase of wages of employees and labour in urban informal sector due to the excess of availability of labour. 4 References: 1. Xin Meng (2001) The Informal Sector and Rural-Urban Migration - A Chinese Case Study Asian Economic Journal 15 (1), 71-89. doi:10.1111/1467-8381.00124 2 Gustav Ranis, 1999, V-Goods and the Role of the Urban Informal Sector in Development, University of Chicago, ,electronic, 20-5-07, http://www.journals.uchicago.edu/EDCC/journal/issues/v47n2/EDCCv47p259/EDCCv47p259.web.pdf 3. Arjan M. Lejour and Paul J.G. Tang, 1999, Research memorandum, Netherlands Bureau for economic analysis, ,electronic, 20-5-07, http://www.cpb.nl/nl/pub/cpbreeksen/onderzoek/153/om153.pdf 4. Gordon Betcherman, 2004, LABOUR MARKET REFORM IN CHINA HOW 700 MILLION CHINESE WORKERS ARE COPING WITH GLOBAL CAPITALISM, University of Toronto, ,electronic, 21-5-07, http://www.chass.utoronto.ca/cir/library/electronicarchive/seftonlectures/SeftonLecture22nd_2003-04_Betcherman.pdf Read More