A Dynamic Analysis of Overstaff in China's State-Owned Enterprises

In early 1998, the new Chinese Premier Zhu Rongji proposed an ambitious new reform plan, which aims to solve the problems of state-owned enterprises (SOEs) within three years. Among these problems, overstaff in SOEs is a key and difficult issue attracting wide concern. This paper establishes a simple macro model to illustrate the possible transition process that overstaff is gradually absorbed by private enterprises and the economy grows along with inactive SOE workers converting into active labour force. It investigates the characteristics of the steady equilibrium where all overstaff has been completely absorbed. The optimal government strategies maximizing household utility and minimizing the period of transition are also discussed.