The Labor Contract Law, Macro Conditions, Self‐Selection, and Labor Market Outcomes for Migrants in China

• DOI: http://doi.org/10.1111/aepr.12157
• Published date: 01 January 2017
• Date: 01 January 2017
• Author: Xin Meng

The Labor Contract Law, Macro Conditions,

Self-Selection, and Labor Market Outcomes for

Migrants in China

Xin MENG†

Research School of Economics, College of Business and Economics, Th eAu stralian National University

China introduced a new Labor Co ntract Law (LCL, 2008) to protect employees’working conditions

and welfare. Early evaluations of labour market outcomes suggest positive effects for workers. In the

same period, however, China facedlabor market tightening, whichfacilitated the LCL’s introduction

and enforcement. Existing evaluations of the LCL treat the introduction of the LCL as being

exogenous. We show that labor market tightening and individuals’self-selection into jobs

whichcomply with the Law have affected migrant labor market outcomes. Taking these factors

separately into account suggests that, the LCL has had varying effects on labor market outcomes: a

negativeeffect on wages and hours; an uncleareffect on having a written contract,and a positive effect

on social insurance participation. Data inadequacies prevent us from considering these factors

simultaneously.

Key words: China, Labor contract law, migrant workers

JEL codes: J30, J41

1. Introduction

In June 2007, China’s Tenth National People’s Congress Standing Committ ee of the

twenty-eighth session passed a new Labor Contract Law (LCL). The main thrust of the

law, formally enacted in January 2008, is to require any employer-employee relationship

to be formalised in a labor contract, which specifies the wages, working hours, holidays,

welfare and benefits,and work protection and working conditions.

Around the same period, China faced labor market tightening. Due to institutional

restrictions, the dramatic increase in the demand for cheap labor in cities, brought

forward by the increase in foreign direct investment as a result of China enteringthe

World Trade Organization (WTO), was not met by a sufficient number of rural

workers willing to move to cities under existing conditions. Those who moved only

stayed for a short period. The short duration of migration (the leakage), together with

a lack of willingness to migrate (the inflow), significantly limited the increase in the

stock of migrant labor supply in cities, resulting in city labor shortages. Low wages,

the frequent occurrence of wage arrears, long working hours, harsh working conditions

plus a lack of access to social services and social insurance are major deterrences to

the rural workforce’s willingness to migrate and once they have migrated, their

†Correspondence: Xin Meng,Research School of Economics,College of Business and Economics,The

Australian National University,Canberra, Australia. Email:xin.meng@anu.edu.au

doi: 10.1111/aepr.12157 Asian EconomicPolicy Review (2017) 12, 45–65

©2017 JapanCenter for EconomicResearch 45

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willingness to stay longer (Li, 2008). To address these issues, in particular, to allow

migrant workers legal channels to a more balance industrial relations,

1

the new LCL

was introduced.

To date, the LCLhas been in place for eight years,and there are some recent attemptsto

examine the impact of the law (see, for example, (Cheng et al., 2015; Cui et al., 2013;

Gallagher et al., 2014; Li & Freeman, 2015)). All these studies use either cross-sectional or

repeated cross-sectional household or firm level survey data. Outcomes evaluated include

changes in the share of workers with written contracts, wages, working hours, other work

related benefits, and participation in social insurance. Most studies have found that the

new Labor Contract Law has had a positive effect on employees’labor market outcomes.

In the past couple of years, as macro economic conditions have deteriorated economists

have also started to reassess the new LCL, suggestingthat it reduced labor market flexibility

and pushed up wages and labor costs (Luo, 2015).

Evaluating theimpact of the LCL may not be an easy task. Theintroduction of the LCL

and labor market tightening were interdependent. In addition, individuals may self-select

into jobs or firms which comply with the new LCL. These all make the identification of

the LCL’s impact difficult.

In this paper, I try to gauge the LCL’s impact on the labor marketoutcomes of migrant

workers taking into account the interdependency of the LCL’s enactment and macro labor

market conditions, as well as thepotential self-selectionbias. The data used are fromvarious

sources. None of them are ideal. Nevertheless, I try my best to address the potential

problems and to indicate the possible direction and size of biases associated with the

estimated effects.

The paper is structuredas follows. The next section describes background information

on the introductionof the new LCL. Section 3 presents the data and descriptive statisticsto

examine the general trend in migrant labor market outcomes before andafter the LCL’s

introduction. Section 4 discusses the methods used to investigate the impact of the LCL

and presents our empirical results. Conclusions are given in section 8.

2. Background

In the past 30years, China’s economic growth has been associated with an increasing

number of workers moving from the agricultural sector to the urban modern sector. To

date, more than 166 million rural workers have moved to the cities to work. Studies have

recognised the significant contribution of large scale rural to urban migration on China’s

fast economic growth during this period (see, for example, (Bosworth & Collins, 2008)).

Despite this,migrant workers in urban China havebeen subjectto discriminatorytreatment.

During the planned economy era, internal migration was largely forbidden.

Individuals born in rural areas would receive a rural household registration (hukou in

Chinese) and would live and work in their birth place for life. In this era, the government

provided cradle-to-grave social welfare to their urban hukou population, the rural hukou

population were left to provide most of their own welfare and social (or community)

services (Meng, 2000).

Labour ContractLaws and Migrant LabourMarket Performance Xin Meng

46 ©2017 JapanCenter for EconomicResearch