When the bureaucrats move out of business : a cost-benefit assessment of labor retrenchment in China

The author estimate the costs and benefits of labor retrenchment in state-owned industrial enterprises in China. Their results indicate the prevalence of low and stagnant labor productivity, low capital productivity, and excessively high wages in the state sector for the period reviewed (1994-97). The private sector exhibited consistently greater productivity. The authors'most striking finding: A greater gain could be realized from capital transfer than is being gained from labor retrenchment. Their simulation results for 1996 estimate that 43 percent of the workers in state enterprises and 70 percent of the capital are redundant. By itself, a transfer of labor from the public to the private sector at the current magnitude (20 percent of the labor force) would secure only two percent gains in output. A transfer of ten percent of both capital and labor would achieve a greater efficiency gain than transferring the full 43 percent of redundant workers. This is partly because the private sector uses capital more efficiently than the public sector and partly because it needs capital to hire workers transferred from the public sector. Their results suggest that reform in state enterprises should concentrate more on the efficiency of capital allocation, not just on labor retrenchment. More efficient capital allocation would reduce the pressure on labor and would bring larger gains at a lower social cost.