Self‐employment in Rural China: Its Development, Chara cteristics, and Relation to Income

• Published date: 01 January 2022
• Author: Björn Gustafsson,Yudan Zhang
• Date: 01 January 2022
• DOI: http://doi.org/10.1111/cwe.12404

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 136–165, Vol. 30, No. 1, 2022

136

*Björn Gustafsson (corresponding author), Professor Emeritus, Department of Social Work, University of

Gothenburg, Sweden, and Research Fellow, Institute for Labor Economics (IZA), Germany. Email: bjorn.

gustafsson@socwork.gu.se; Yudan Zhang (joint corresponding author), PhD Candidate, Business School,

Beijing Normal University, China. Email: zhyudan_2017@163.com. The authors thank Xinxin Ma and

anonymous referees for useful suggestions.

Self-employment in Rural China: Its Development,

Chara cteristics, and Relation to Income

Björn Gustafsson, Yudan Zhang*

Abstract

Changes in the employment structure in rural China were studied with a focus on off-farm

self-employment. Data from the Chinese Household Income Project surveys were used,

covering the same 14 provinces from 1988 to 2018. We found that the proportion of

adults in rural China with self-employment as their primary form of off-farm employment

increased from only 2 percent in 1988 to 11 percent in 2013, with no further increases

through 2018. In 1988 and 1995, the rate of self-employment was highest in the eastern

region but this regional pattern subsequently disappeared. The probability of being

self-employed in rural China was higher among married males than among unmarried

persons. Having a migration experience increased the likelihood of being self-employed.

Since 1995, self-employed households have had a higher average income than other

categories of household. Based on estimates of income functions, we conclude that the

income premium from being self-employed increased rapidly from 1988 to 1995 to become

remarkably large when only a few adults were self-employed. However, as a larger fraction

of the rural population entered self-employment, the payoff from being self-employed has

rapidly diminished, although it was still substantial in 2018.

Keywords: income, off-farm, self-employment, wage-employment

JEL codes: L26, M13, O12, P32

I. Introduction

After 30 years of economic reforms and rural–urban migration, the structure of

employment in rural China has changed fundamentally and household income has

increased rapidly. From a situation in which a substantial proportion of rural households

and their members were predominately involved in self-subsistence agriculture, a

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Self-employment in Rural China 137

majority have moved into off-farm activities. Some have become self-employed and an

even larger number have become wage earners.

In this paper, we take a fresh look at developments in the employment situation in

rural China, focusing on off-farm self-employment (referred to as “self-employment”).

How has the rate of self-employment in rural China changed from 1988 to 2018? How

do various characteristics relate to the probability of a person being self-employed?

How high are the incomes of the self-employed households and does it pay to be self-

employed? Related to the last question, we are interested in whether and how the payoff

from being self-employed has changed.

In this study, we used household data collected in a similar manner across 14 rural

provinces for the years 1988, 1995, 2002, 2013, and 2018. We calculated the proportion

of self-employed individuals, wage earners, and farmers in the adult population for each

of these years. The resulting information provides a picture of the changes that occurred

during a period of 3 decades. We also estimated multivariate models for the years 1995

and 2018 in which the probability of being self-employed, a wage earner, or alternatively,

a farmer was related to many factors. We investigated the average income among self-

employed households and placed it with the average income of other categories of

households. Finally, we estimated income functions to examine the size of the payoff

from being self-employed and whether this benefi t had changed from 1988 and 2018.

To the best of our knowledge, this work makes several contributions to the literature

on self-employment in rural China. First, no other study of which we are aware has

covered self-employment and wage employment in the entirety of rural China over such

a long period. Our latest year of study, 2018, is more recent than the latest year covered

in the studies of which we are aware. Second, we specify probability models to explain

the determinants of three alternative employment states: self-employment, being a wage

earner, and farming. Our third contribution relates to knowledge about income among the

self-employed. We document how much income self-employed households on average

receive relative to other categories of households and we also estimate income functions.

These estimates allow for an understanding of how the payoff from being self-employed

has changed over a period when, as we shall see, self-employment expanded rapidly.

The findings of the study are as follows: the proportion of adults with self-

employment as their primary off-farm job in rural China increased from no more

than 2 percent in 1988 to as high as 12 percent in 2013. This rapid growth in self-

employment took place in the shadow of a rapid expansion of wage employment and a

decline in farm employment. However, between 2013 and 2018, no further increase in

the proportion of self-employed individuals took place . We discuss the factors behind

the (perhaps temporary) halt in the increase in self-employment in rural China. One