By Cai Fang, Du Yang and Gao Wenshu

In the last two decades, China's economic growth has been unprecedented. In the same period, however, the same cannot be said of employment rates.

There is more and more unemployment in towns and cities despite the GDP growth rate. In towns and cities, 6.1 percent of people stayed idle in 2002, while the figure was 4 percent in 1995.

The increase has happened against a background of state-owned enterprise reform and industrial restructure since China joined the World Trade Organization.

From the perspective of a macro economy, it is clear that the employment situation runs in tandem with the ups and downs of the economy.

Checking this rise in unemployment has become one of the most important policy targets of the government.

Analyzing the cycle of the labor market and finding the key causes for unemployment in this country are essential for working out how to stop it.

There are three kinds of unemployment: frictional, structural and cyclical unemployment.

Frictional unemployment is caused by people taking time out of work between jobs or looking for a job.

Structural unemployment refers to a mismatch of job vacancies with the supply of labour available, caused by shifts in the structure of the economy.

Since these two kinds of unemployment would always happen regardless of the situation of the economy itself, they are also called "natural unemployment."

Cyclical unemployment is caused by the ups and downs of the economy. When the economy is in a boom, aggregate demand increases, and unemployment falls.

Natural unemployment, though always in place in an economy, could be influenced by a variety of factors, including the speed of technological innovation, the maturity of the labor market and the social security system.

The authorities could take numerous measures to change the natural unemployment situation while they boost or check aggregate demand to influence cyclical unemployment.

The proportion of natural unemployment and cyclical unemployment to each other is the most decisive element for the direction and effects of policies to create jobs.

Since the economic reforms were initiated two decades ago, especially after State-owned enterprises saw a dramatic reform in the mid-1990s, many workers were laid-off or dismissed, either by company bankruptcy or cost-cutting.

At the same time, the labor market has not been fully developed. Information disclosure, professional training and services are far from adequate to allocate human resources in an effective way.

Natural unemployment therefore increases and maintains itself at a high level for quite some time.

Given the accelerating industrial restructuring and reforms to the labor market in recent years, the already-high natural unemployment is likely to increase further.

The high percentage of natural unemployment in China bears a policy indication: The macro policy aimed at boosting demand and eliminating unemployment will not ease the pressure. Instead, a comprehensive set of policies should be implemented to boost employment.

The central government began to take pro-active monetary and fiscal policies in 1998. These policies were meant to stimulate demand in consumption as well as in investment, to promote economic growth.

But these policies did not succeed in cutting the jobless rate.

Under its proactive fiscal policy, the government issued a huge sum of treasury bonds. With the money pooled, it invested heavily in infrastructure facilities.

Since the monetary policy was also proactive, the banks were encouraged to put their loans into building infrastructure.

Between 1998 and 2002, the period when the proactive fiscal policy was in place, 3,280 billion yuan (US$395.2 billion) of projects were started, 660 billion (US$79.6 billion) of which came from treasury bond capital, the rest from bank loans.

Under the guidance of the government, the investment has mainly been put in the transport, communications, environment protection, agricultural irrigation, grain warehouse and other public sectors in cities and rural areas.

None of these sectors is labor intensive, so in fact the investment had a negative impact on employment.

In 2002, cash was ploughed mainly into agriculture, animal husbandry and fisheries, the transport sector, production and supply of electricity and water, manufacturing and construction.

In fact the sectors that were given the most are the least likely to create jobs.

During the same period, the interest rate, the cost of capital, was lowered time and again to stimulate consumption and investment. Salaries, or the cost of labor, rose quickly in State-owned enterprises.

In other words, to State-owned enterprises able to score bank credit easily, capital is cheaper than labor.

They chose to borrow from banks instead of hiring more people when they had the chance to upgrade their technology or boost production.

The tendency to replace labor with capital is enhanced by the situation in the labor market. Farmer-turned-migrant workers have difficulty getting hired by urban businesses, not to say the State-owned enterprises in monopolized sectors.

These enterprises, in need of labor, have easy access to low-cost capital. They would of course replace labor with capital in their investment of resources.

Since the 1990s, new jobs have been created mainly by small and medium-sized businesses and private enterprises. But the macro policy does not offer substantial support to the sectors which create new jobs. As a result, employment does not increase when the economy grows at a faster rate.

To change the situation, the authorities should work out policies aimed at creating jobs instead of generating economic growth.

They should also set a priority for the sectors which get State investment according to the capability of absorbing labor.

The banks should also grant equal opportunities for small and medium-sized businesses to get the capital they need.

Note: the authors are researchers with the Institute of Population and Labor Economics under the Chinese Academy of Social Sciences.

(China Daily December 10, 2004)