Earnings Differentials Between State and Non-State Enterprises in Urban

One of the key reasons that local officials are so interested in attracting FDI in China is employment creation. With economic reforms, a growing population, and the rising incidence of layoffs in the state sector, there is tremendous pressure on local authorities to stave off the social unrest that will result from an increasingly serious unemployment problem, particularly in urban areas. While official urban unemployment rates stand at about five percent, scholars estimate that the true unemployment rate could be two to five times that (Jiang 2002; Minqi 2001).

10 Whether FDI has actually contributed to employment creation in China is an open question, and so we take up this issue empirically here. The regression model is presented in equation (2), and, as in the section above, data are panel data for China’s 29 provinces between 1986 and 1999.

Employment, measured as the total number of remunerated jobs (including the self-employed) at year-end in a particular province, is a function of: per capita output, GDP pop ; investment, I (here again we use two measures of investment, gross and adjusted investment, which subtracts FDI from gross investment); foreign direct investment, FDI ; total foreign trade (imports+ exports = T ); and liberalization, L2, the ratio of state sector output to all industrial output. As in the wage regressions, provincial fixed effects are ? ’s, a time trend has been added to control for uniform shocks, and ? is a serially uncorrelated random error. The regression is run in logs to get elasticities, and first differences were used to address nonstationarity in the variables.

Based on these regression results, whether one uses gross or adjusted investment, FDI has no independent effect on employment. And even though using the adjusted investment measure does improve FDI’s significance somewhat, the potential impact of FDI on employment is nonetheless very small. The force of gross and adjusted investment declines across regressions IVA, and once again, we believe that the actual coefficient lies somewhere in between the two estimates of investment. Looking at the full model in VA, a one percent increase in adjusted investment will increase employment .

016 percent, meaning that an increase of one standard deviation from the mean raises employment by 1. 7 percent. A one percent increase in trade has a similar impact on employment as adjusted investment, about . 017 percent, but an increase in trade of one standard deviation from its mean increases employment by less than investment: 1. 4 percent. Still, this finding is a very significant one: trade has had a significant and positive impact on employment in China, much more so than FDI. The results on the liberalization variable are consistent with the notion that all else equal,

nonstate enterprises have generated more employment than state enterprises since reforms began. According to the regression results in VA, a one percent (standard deviation) increase in state output as a percent of all industrial output will decrease employment by 0. 05 percent (1. 8 percent). This result reflects two things: that state firms tend to be more capital-intensive than other forms of ownership that have come about as a result of market reforms, and that state firms have been shedding workers in recent years in response to the widespread impression that these

firms are overstaffed (the state sector shed nearly one-quarter of its workforce between 1995 and 1999 (Zhao 2001: 2)). An important caveat must be noted before this result can be taken as a basis for making predictions about liberalization and the future of employment. First, that liberalization has been associated with job creation says nothing about the relative quality of jobs. Although there is clear evidence that liberalization is associated with higher wages (as is FDI), there is also evidence that other measures of job quality such as security and benefits are

better in the state sector, at least for less educated workers (Zhao 2000, 2001). That said, there is no evidence that FDI has been a good source of employment creation, except, perhaps in so far as it has led to exports. The Role Of FDI In Exports The iportance of FDI in employment generation through exports, however, is worthy of further scrutiny. It is true that the share of FIE's in exports has been growing rapidly: their exports increased from less than 2 percent of total Chinese exports in 1986 to 48% in 2000. However, it is important to note that their share of imports rose during the same period from 6% to 52%.

(UNCTAD, 2002, p. 155). As we noted above, since FIE's are more capital intensive than local firms, their role in job creation is modst. For example, in 1996, these firms employed only 5. 4 million workers, or about . 8% of the total labor force. (idid). Thus, taking into account the role of exports in employment creation is not likely to modify our overall conclusion that FDI has not generated as much employment as other activities. When combined with the analysis of its impact on investment in the next section, though,the overall employment generating effect of FDI is placed in further doubt.