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

Overstaff in state-owned enterprises (SOEs) is a key and difficult issue in the Chinese economic reform. This paper models the transition process in the reform that SOE overstaff is gradually absorbed by private enterprises and the economy grows through converting redundant SOE workers into active labor force. It characterizes the steady equilibrium, where all overstaff has been completely absorbed, and the dynamic path from current state to the steady equilibrium. The optimal government strategy maximizing household utility in the transition is also discussed