Kyoto University
Graduate School of Economics
Research Project Center Discussion Paper Series

Flexibility and Security Changes in the Labor Market and Consumption-led
Growth in China

Chengnan Yan

Discussion Paper No. E-09-005

Research Project Center
Graduate School of Economics
Kyoto University
Yoshida-Hommachi, Sakyo-ku
Kyoto City 606-8501, Japan

March 2010

Flexibility and Security Changes in the Labor Market and Consumption-led
Growth in China

Chengnan Yan†
March 31, 2010

Abstract
The purpose of this paper is to determine the conditions necessary for Chinese
economic growth regime change, that is, the change from export-led to consumption-led
growth. Although there are different approaches to this difficult transformation, in thispaper, we consider the problem in terms of the interrelationship between institutional
reform and flexibility and security changes in the labor market. Given that one-sided
growth in flexibility without a parallel increase in security support in the labor market
has restricted domestic consumption demand growth, we analyze these changes andinteractions using the flexicurity framework, in which flexibility and security in thelabor market are increased simultaneously. We compare the success of the flexicurity
strategies in Denmark and the Netherlands and find three key differences between
them and the Chinese labor market flexibility and security changes. First, the mainchange is that, in China, numerical and functional flexibility were increased andemployment security was decreased to a large extent. Second, the changes depend moreon institutional reform and policy decisions by the government than on labor/industrial
negotiations. Third, the role of social security systems (mainly unemployment
insurance) is limited, and thus, income security decreases.
Keywords: Export-led growth; Consumption-led growth; Flexicurity strategy;
Employment system; social security system†

Ph.D. at the Graduate School of Economics, Kyoto University.
E-mail: chn20028@hotmail.com
11. Introduction
While the world economy keeps falling into the abyss of simultaneous depression due tothe worldwide financial crisis, the Chinese GDP growth rate in 2009 was 8.7%,
supported by a large amount of fiscal expenditure and an extended financial policy.
Expectations have continued to grow regarding the likelihood of the Chinese economy
helping in the recovery of the world economy. For the Chinese economy to play this kindof a major role, however, it is necessary to convert to domestic demand-led growth, inplace of the export-led growth system that depends on the development oflabor-intensive type export industry based in the southeast coastal area, rather than
the adjustment of bank loans and increases in temporary public finance investment.
In contrast to the Chinese economic growth, this worldwide simultaneousdepression seems to have become a major opportunity to convert to a continuous andstable growth system. So far, exports have been rising by an annual rate of 20% or more,
but if this rate suddenly reduces because of a decrease in global demand, the recovery
might take time. The Chinese economy must find a new growth engine to substitute forexports. However, in terms of the growth of domestic consumption to make up for thedecrease in this rate of export, if we exclude the influence of temporary increases suchas “household electronics and automobiles to the countryside,” which depend onlarge-scale consumption promotion, we find that the rise in consumption demand of thecountry as a whole is not large.
The objective of this paper is to determine the conditions necessary to bring about
the change from an export-led to a consumption-led growth regime. Export-led growth
has experienced many setbacks in China since the 1990s. In particular, we focused on
the reasons that put restraint on domestic consumption demand despite rising
employment and wages, influenced by labor market institutional changes, with theresult that Chinese economic growth has to depend on fiscal investment and thecontinual growth of exports. We examined the framework of “flexicurity strategy,”which has simultaneously brought about labor market flexibility and security and has
shown remarkable social and economic performance in Denmark and the Netherlands
since the mid-1990s. To make a comparison with the success of the flexicurity strategy,
the difficulties regarding labor market reform in China are extracted and newlyinterpreted in the context of the recent institutional changes in the labor market.
The rest of this paper is organized as follows. In section 2, we summarize the actual
conditions of export-led growth since the 1990s, and point out that the biggest
restrictions on growth regime change in China are decreases in the security of
employment and wages. In section 3, we explain the flexicurity strategy that2simultaneously actualizes labor market flexibility and security, and we makesuggestions for the reform of the Chinese labor market system. In section 4, we analyze
the changes in the Chinese labor market since the 1990s and show some new trends inflexibility and security based on the flexicurity framework. In section 5, we present
some final comments.
2. The Chinese export-led growth regime since the 1990s
Figure 1 shows the contributions of consumption, investment, and exports to the growthof GDP in China since the 1990s. In the latter half of the 1990s, consumption demand
contributed to GDP growth by an annual increase of 2%; since 2000, it showed a major
decrease (18%). The investment contribution decreased in the latter half of the 1990s,
but rose somewhat after 2000 (2 percentage points). The contribution of exports,
however, expanded from 21% to 46% in the1990s and reached 74% in the 2000s.
Furthermore, the rapid growth in exports not only brought about growth in total
demand, but also promoted investment demand and technological upgrading

resulting from the import of capital loans and intermediate goods. Therefore, thedegree to which the growth of exports has played a role in macroeconomic growth inChina as a whole should be emphasized, not just the contribution shown in Figure 1.
However, this growth regime, based on a depreciated exchange rate, low income
comparative advantage, and foreign direct investment (FDI), is not sustainable (Uniet al.[17], Chengnan Yan, [4], [5], [6]).
The Central Economic Work Conference of 2008 emphasized the need to transformthe export-led growth regime to domestic consumption-led growth, to prevent theserious consequences resulting from the decrease in export demand. A series of policies
and measures was decided upon to achieve this. Making such changes to the growth
regime is not unprecedented; the Chinese government attempted this kind of growth
regime change for consumption-led growth. Consumption-led growth was mentioned,
for instance, at the Second and Third Annual Meetings of the Tenth National People’s
Congress (March, 2004), and the Eleventh 5-year Plan (started in 2006) announced abreaking away from export and investment dependency, to facilitate conversion to
consumption-led growth.
The objective has not been achieved, however. As shown in figure 2, the growth rateof consumption demand is considerably lower than the investment and export demand
growth rates, and the export dependency of economic growth is rising. In particular,
with the implementation of the structural reconstruction of the Chinese economic
system after the mid 1990s, the considerable increase of flexibility, which caused
3insecurity in the labor market, reduced the growth rate of domestic consumption
demand, despite the increase in employment and wages. As a result, as shown in figure
3, the growth rate of real wages exceeds the growth rate of actual consumption demand.
Meanwhile the increase of total income still does not translate to an increase in
consumption demand.
The Chinese labor market reforms since the 1990s have changed the former
Chinese employment system, relaxing its rigidity and moving towards the contract
terminal employment system away from the lifetime employment system. This has
greatly expanded the fluidity of the labor force. Stability in the labor market, however,decreased, as a result of delays to other reforms such as the social security system andeducation and occupational training schemes, which were intended to go hand-in-handwith the growth of labor maket flexibility.
As a result of insecurity, income was deposited in the bank as a reserve fund, andthe Chinese household saving rate rose rapidly in the 1990s, maintaining its high level
since 2000. The high rate of saving not only produced a negative effect on macro
economic growth by decreasing domestic consumption demand, but in addition, as the
cash that accumulated in the banking section was invested in low efficiency sectors, it
has not brought about an accompanying increase in consumption, and nervousness has
still further increased the instability of the macro economy.
In other words, increases in employment and wages are promoted via macro
economic growth, and in order for this to give rise to an increase in domestic
consumption demand, greater flexibility and security in the labor market must be
achieved simultaneously; the flexicurity strategy is a good example of where this has
been carried out.
3. The flexicurity strategy“Flexicurity” is a new word connecting flexibility and security; it can be understood as
an integrated policy strategy. It simultaneously increases the labor market’s flexibility
and security, which normally are opposed (Auer [2], Madsen [10], Wilthagan and Tros[20]).
Flexibility in this context means changes in the labor market environment anddemand, bringing adjustments regarding employment, work hours, wages and functions
such as reforms of the work unit. Security includes four elements: same job,
employment, income, and the combined security that can be explained as the life/workbalance. As table 1 shows, the above elements of flexibility and security produce 16
possible combinations of flexibility and security, so that for any labor market condition4

or reform strategy, it is possible to aim for the optimum combination, according totradition (route dependency), social situation, macro economic conditions, etc.
Of course, the interaction of flexibility and security is very complicated. There are
not only complementary elements of these combinations but also some trade-off
relationships, such as if the same job security becomes high, the external and internal
numerical flexibility will be decreased. As a result, there can be positive and also
negative circulation. The negative circulation via the elements trade-off relations take
into account that the combination is not just individual elements of flexibility andsecurity, but it emphasizes the necessity of support from other elements of flexibility
and security, which can be complementary.
In fact the Danish model, seen as a successful example of the flexicurity strategy,
although designating the combination of external numerical flexibility and income
security as core, requires support from functional flexibility. The Dutch flexicurity
model also, while designating the combination of internal numerical flexibility andemployment security as core, requires the support of combination security. In this sense,
we can say that flexicurity is not only a matter of labor market system, but also of social
security system, education and occupational training schemes, and how the worker
thinks about the life/work balance, etc.
3.1 The different flexicurity model
Argument about flexicurity is very popular in the EU, and it is not a case of there being
one standard model. However, the Danish is the basic model, known as “The Golden
Triangle,” constructed from the flexible labor market, generous welfare schemes, andactive labor market policy including life-long learning.
The arrow shown in figure 4 is proportionate to the flow of the labor force. The
manager in Denmark can lay off workers easily, based on the low level protection, in
response to changes in the business environment. The workers, who have been laid offfrom an enterprise receive the protection of the generous welfare schemes, and theincome is maintained. However, income security is combined with the active labormarket policy, encouraging the workers to attend occupational training, and to engage
positively in job-hunting with the will to work. Simultaneously, occupational training
and life-long education with the joint participation of the government, labor andmanagement, led to the various functional improvement programs that flow back to theworker, who has a higher employability on the labor market. In other words, cases
where unemployment benefit recipients move directly to new employment are few, and5

the majority improves their ability via education and training, and then move back to
the labor market.
This kind of combination of social security, active labor market policy and flexible
labor market causes little decrease in income security (depending on unemployment
benefits, conditions and period), but the functional flexibility and employment security
are raised, and the flexicurity model is praised for satisfactory performance,
economically and socially.
The Dutch flexicurity model, which has also shown satisfactory performance, issomewhat different from the Danish mode. In particular, the combinations of flexibility
and security of the Dutch labor market were formed by deliberate government
legislation, unlike Denmark’s flexicurity, which depended much more on historicalinstitutional changes. This has arisen from the differences in historical, social, andeconomic conditions and especially the structure of the labor market. In the Dutch labormarket, the ratio of short-term employees such as part-time workers and flex-workers
in temporary jobs, dispatch jobs, family workers, etc., is traditionally high (the ratio is
46% of the total work force; for women workers only, it was 75% in 2004; for only
part-time workers, the ratio was 36% in 2006, and it is four times the level of that
Denmark).
However, the protections of the short-term employment are fragility with thelabour lows and social protect systems, and it have advanced the labour-market
dividing conversion. Protection for this non regular employment is an urgent topic, andDutch flexicurity shows how to provide regular employment protection and confronts
the problems of non regular employment by reforming the relative labor law and policy.
In this regard, we can say that the Dutch numerical flexibility has put emphasis on
increasing internal numerical flexibility by strengthening the protection of non regular
employment (at employment and training opportunities, discrimination compared withregular employment in terms of wage increases, etc.), and the whole labor market
flexibility has expanded with the differential between the employment types, whereas
Denmark increased external numerical flexibility by easing the layoff regulation of theregular employment. Just as the approaches for achieving numerical flexibility differ,the combination of flexibility and security forms also differed in the two flexicurity
models, as shown in figure 5.
3.2 Suggestions for labor market reform in other countries using flexicurity strategy
As can be seen in figure 5, even though there are different approaches to flexicurity, thegoal of expanding flexibility and security simultaneously in the labor market has been
6

achieved. In the Netherlands, we cannot draw the structure of the golden triangle, as in
Denmark, but the traditions such as high level social protection and continuous
occupational training schemes are important conditions that enable the Netherlands toachieve the goal of simultaneous flexibility and security. Like the countries that belong
to the welfare state model in Esping-Andersen[7], and also are classified in the social
democracy model in the variety of capitalism analysis, such as Amable[1] and Boyer[3]etc., they have completed social security systems and a tradition of cooperation between
labor and management.
It is true that these conditions are important for flexicurity strategy to succeed, but
it must be emphasized they are not the only conditions. Population, scale of economy,
economic structures, and the political system, etc., all have positive roles to play in the
success of flexicurity. However, the difference in labor market structure and different
approaches and combinations of flexicurity, as explained above, lead us to believe thatflexicurity strategy is also possible in other countries. As mentioned in the previous
paragraph, the various combination possibilities of the fundamental primary factors offlexibility and security point to the variety and openness of the flexicurity strategy, andfavor its introduction in the EU and other many countries and areas; it has begun to bestudied in the EU.
In the EU, the flexicurity strategy has been the central concept of the labor market
reform and employment strategy, and attention has been focused on how it could be
implemented as a labor market policy for each member. In Korea, since the
Roh-Moohyun administration examined the possibility of the Danish model for othercountries in 2006, comparison analysis of flexicurity and studies on the possibility of its
introduction have been actively pursued around the KEI, KLE (Sungjoon-Park,
Yanggyu-Byun and Hyunyong-Jung,[14], Heejeong-Jung[8], etc.). In Japan, the Danish
flexicurity model has been introduced (Wakamori[19], JRI,[13], PRI,[12],[13], Tsuru[16]etc), but there is little research concerning the possibility of introducing it into Japaneselabor market reform. In particular, the main characteristics of the Japaneseemployment system, such as long-term steady employment, seniority-based wages andpromotion, in-house on-the-job training, union classified by type of work, division ofsocial security according to change of employment, and the difficulty of obtaining
national agreement on high taxes where the social welfare model is supported, etc.,
mean that the flexicurity strategy is not particularly popular in Japan.
But, when the problems in the labor market in Korea and Japan are considered,such as the income disparity that accompanies the increase in non regular employment,
increase in the number of working poor, aging society with fewer children, and growth7

in the number of women and older workers in temporary employment, flexicurity
becomes an attractive strategy to bring about a balance in flexibility/ security andwork/life. Furthermore, the macro economies of the two countries are very
export-dependent as a result of the limited domestic consumption demand growth. They
are vulnerable to the influence of fluctuations in the outside economy, decreasing
growth stability.
In addition, with the increasing in competitive pressure from neighboring
developing countries such as China, the hollowing out of industry is advancing and thenecessity for innovation and flexibility management is expanding in Korea and Japan.
Along with the industry upgrades and management flexibility, the necessity for labormarket flexibility will rise, and occupational training and lifetime education arenecessary. In other words, in the same way that the active labor market policy has
promoted the labor skills to support numerical flexibility in Denmark’s flexicurity model,
and the life/work balance security has supported numerical flexibility in the Dutch
flexicurity model, flexicurity strategy has many constructive suggestions for theupcoming labor market reforms in Japan and Korea.
Moreover, the suggestions of flexicurity strategy are not just limited to advanced
economies, but also to labor market reform in developing economies, such as China,
whose growth has been remarkable. The Chinese labor market has undergone greatchange and has continued to expand the flexibility of its labor market since the 1990s,
with changes of economic growth strategy and industrial upgrading and with the
expansion of the role of the market system in China’s social economy. However, because
the expansion of the social security system, which has to keep pace with the expanding
flexibility, is not yet completed, security of employment and income gains havedecreased considerably. Furthermore, supply of a labor force that matches market
needs, and reform of the education and training systems, have not yet been completed.
As a result, while on the one hand there is a high unemployment rate with many people
held back from the labor force, on the other hand some industries and areas have theproblem of insufficient labor.
These kinds of decrease in security in the labor market and increase of future
insecurity with the still incomplete social security system have brought about
stagnation of domestic consumption, and export-led growth has strengthened. In otherwords, economic growth of developing countries needs the flexibility of labor market,
but it also cannot do without the compensations of security of employment and income.
Of course, there will be many kind combinations of flexibility and security, dependingon the characteristics of the country’s social economic system, such as the historical8dependency of the labor market system, economic environment, education system, andsocial security system.
4. Rethinking the Chinese labor market reform from a flexicurity approach
In the previous section, we explained the differing successes of the Danish and Dutch
flexicurity models, and gave suggestions for the labor market reform of other countries
including China. In this section, we review the Chinese labor market reforms andrelated institutional changes since the 1990s, from the perspective of flexicurity.
Basically, we explain the changes in flexibility and security in the labor market, whichchanges according to the reforms in the employment system, education and training
schemes, and the social security system.
4.1 Economic development and the structural changes in the labor market
It is well known that the Chinese economy continues to show a growth rate of 10% of
the annual GDP since the economic system shifted to the socialist market economy
system; its share in the global economy is gradually expanding, and its contribution toworld economic growth has become large. Simultaneously, the domestic industrial
structure has advanced continuously, the ratio of primary industry in the total GDP has
greatly decreased, and the secondary and service industries have grown. The ratios of
employment by industry have also changed, as shown in table 2.
According to the Petty-Clark’s Low, the changes of employment structure with the
GDP structural changes in China can be seen as industrial structure advancement. In
addition, the advancement of the Chinese export product structure reflects the Chinese
export-led growth since the 1990s, and it has enabled the Chinese industrial structure
to advance significantly. In particular, Chinese export-led growth depended largely on
foreign direct investment for the industries where the ratio of foreign capital is large,such as the electrical machinery sector, and this has encouraged the advancement ofexport product structure.
Added to this industrial structure advancement, there has been another big
structural change to promote increased fluidity of the labor force, that is, the changes inownership structure which have accompanied the move towards a socialist market
system.
With the decrease in state-owned sectors run by the national standard plan, andthe expansion of private sectors based on the market mechanism, the former lifelong
employment system was destroyed. The enterprises have to soften the employment
relationship, adjusting the demand of labor force flexibly to correspond quickly with9

changes in the business environment. The workers have to move between enterprises
and between industries. Consequently, a strong necessity develops for construction of afluxional labor market and flexible employment relationship based on the supply anddemand in the labor market.
In particular, after the big lay-off of 1997, which laid off about 30 million from thepublic enterprise labor force over the following three years, the Chinese employment
system has changed dramatically. Workers and management have changed their views
about employment; flexible employment contracts have become popular, and the fluidlabor market has been established.
4.2 The changes in flexibility and security in the Chinese labor market
The increase of flexibility with the economic development, structural changes and theownership structural changes, result from the establishment of the contract
employment system and the expanding of flexible employment relationships in thelabor market.
In China, the movement to the contract employment system from the life-longemployment system began in the mid 1980s. With the achieving of reform ofstate-owned enterprises, the necessity of constructing a labor market increased, and thereforms of employment relationship began in 1986. State management of the labor force
was reformed, and the non life-long contract system was been adapted to the new
entries to the labor market. By the end of the 1990s, about 98% of urban workers(meaning the regular employment, which in Chinese is zhigong) had work contracts.
However, if we look at the total employees in urban areas, 63.5% have a work contract;thus, more than one-third of the employees are working without any employment
contract, indicating that the flexibility of the Chinese labor market has greatly
expanded.
The changes in flexibility can be seen from the classifications of urban employees,
in the 15 years to 2005, the ratio of workers to total employees has been decreased
continuously and the ratio in recent years has become 15%. In addition, the ratio of
public sectors have decreased significantly (from 94% to 37%), and the ratio of private
operated enterprises (from less than 1% to 23%) and individual proprietors (from lessthan 5% to 17%) have greatly increased [Chinese Statistics Yearbook].
All of these changes in the Chinese labor market show how the rigid employment
relationship has been relaxed and the flexible employment relationship has grown; thisflexibility has really expanded since the 1990s.

10In Denmark and the Netherlands, we have seen how the increase in numericalflexibility has combined with income security and employment security, through thegenerous security system and active labor market policy and many policy measures
regarding work/life balance, and flexibility and security have expanded simultaneously.
Now, looking back at the Chinese labor market, is the growth in Chinese flexibility
somehow connected with certain elements of flexibility and security?
Referring to the flexicurity model in Denmark, we have tried to show theinterrelationship between flexibility and security in the Chinese labor market, as infigure 7, including the flexible labor market, active labor market policy, and social
security system. Likewise, figure 4 shows the flow of people, and we can see that theflow here is more complicated than in the Denmark model, and the axis of flexibility andsecurity relationship is different. The approach to Chinese labor market reform issimilar to flexicurity, even though there are many defects, especially in the social
security system. However, the goal of labor market reform, compatibility of flexibility
and security, is no different from the goal of the flexicurity strategy, and some progresshas been made towards achievement of that goal.
As shown in figure 6, in the Chinese labor market, the biggest flow is fromflexibility labor market to active labor market policy, which includes a life-long
education system, and people who upgrade their skills or get the help from theoccupational mediation service return to the labor market. This is very different fromthe Danish model, where people flow from the labor market to the social security system,
then to the active labor market, and workers with upgraded skills re-enter the labormarket. In the Chinese model, the social security system has only a limited role; theflow of the people involved with the flexible labor market and social security are mainly
retirees, including voluntary retirees, and a certain proportion of those will return tothe market as individual proprietors.
In addition, in theory it is possible for an unemployed person to receive
unemployment benefits, in the flow, from social security to active labor market policy.
However, considering to coverage of unemployment insurance and the replacement ofbenefits under the Chinese social security system, we cannot consider it to have samerole as the social security in Denmark or the Netherlands. As a result, the ratio of thisflow compared to the whole should be considered to be small.
The unemployed who are part of the numerical flexibility of the labor market, inlarge part, flow to the active labor market policy, which includes a life-long education
system and expanding occupational training. The measures included in the active labormarket policy at a re-employment training center are typical, expanding the11

occupational training and mediation institute (table 3), and expanding the general
education (learning general knowledge and getting the general skills to change job
easily, table 4), promoting adults to a life-long education system, and removing thevarious obstacles of labor force movement, etc.
Putting all of this together, we can conclude that the increase in numericalflexibility in the Chinese labor market has been supported by the active labor market
policy. In other words, the interrelationship between a flexible labor market andgovernment-led active labor market policy brings about changes in same job security
and employment security. This is the first feature of the interrelationship between
flexibility and security in the Chinese labor market.
Unlike the Danish or Dutch flexicurity, as a result of the joint participation of state,labor unions and management, based on the tradition of labor–industrial co-operation,
the Chinese strongly depend on government initiatives, such as reforms, policy
measures and regulations; this is the second feature. Although the ratio occupied by thestate-owned sectors in the macro economy as a whole has continually decreased, labormarket reform is still carried out under state leadership. This feature comes from theunique character of the Chinese labor union; as a subsystem of the Chinese Communist
Party, this specialized role and activities were assigned to the government.
Furthermore, the biggest difference between China and the Danish and Dutch
models is the decrease of income security in the process of increasing flexibility, and thisis the third feature in the changes to Chinese labor market flexibility and security. In
Denmark and the Netherlands, the social security system, which is generally complete,guarantees income security to the unemployed person. This kind of generous social
security system has promoted the numerical and functional flexibility and security of
employment, and combination security (work/life balance in the Netherlands). However,in China, the role of the social security system is very limited, and causes the one sided
flexibility increase without a corresponding increase in security. Consequently, theinsecurity for the future is increased and the domestic consumption demand isrestricted even when employment and wages rise.
4.3 Some new trends to correct the relationship between flexibility and security
These three features of Chinese flexibility and security changes, can also be said to be
the limitations of Chinese labor-market reform; they have brought serious economic andsocial problems, and there are several measures aimed at correcting the problems.
With regard to the employment contract, a new contract law was started in 2008,
and it is over 10 years since the state-owned enterprise reforms. Some foreign media
12such as The Nikkei (June 29th 2007) have criticized China as turning back to life-longtime employment contract, but we know this is not a revival of the old employment
system. As background to the new law, the ratio of those who have employment
contracts out of the total in employment is low, and workers who were at a disadvantage
in terms of the normal state could change. In particular, under a labor market condition
where supply greatly exceeds demand, contracts would be advantageous to
management, because stability of employment is considerably reduced. Added that, as
mentioned in the previous paragraph, one-third of employees do not have a contract.
The new employment contract law tries to protect this weak labor force and expand
labor market stability.
During labor/industrial bargaining, employment condition bargaining, andespecially in wage negotiations, there is a tendency towards increase, and the collective
wage bargaining rules are being changed. This kind of institutional regulation started
in 1996, and has been promoted and expanded with the statement of 2000:(shehuibaozhangbuling: gongzijitixieshangshixingbanfa), and 2005 (laodongbuling:guanyujinyibutuijingongzijitixieshanggongzuodetongzhi). Initially, the main collective
bargaining scheme was the negotiation at the enterprise unit and was supported by theregional government agency, but since the 2005 statement, some new schemes such as
regional bargaining and industry bargaining have been promoted in the areas where
small-scale enterprise or same industry have accumulated.
If the labor force supply–demand condition in the Chinese labor market is tocontinue, constructing the collective wage bargaining scheme as an institutional
regulation system, and promoting regional and industry bargaining schemes in the
coastal area where foreign owned enterprise and the export industry have been
concentrated, can change the Chinese comparative advantage structure, which isexcessively dependent on low income cost, and can increase the domestic productivity
growth distributed to the worker. Consequently, this will promote domestic demand
growth and the growth regime changes in China.
From the other point of view, the transformation to a social security system fromthe former enterprise-led security system has been promoted gradually with the reformof the pension scheme, the medical system and the unemployment insurance system, forexample. In particular, with the increase of flexibility in the employment system, theflow of the labor force increased suddenly in latter 1990s; various measures were taken
to reform (or for completion) of the unemployment insurance system. The major featureof the Chinese unemployment insurance system is that it is too much concerned withre-employment promotion (about 60%) and too little concerned with unemployment
13

income security. This is the historical heritage from the former socialist unemployment
insurance system, and the low income security with the low income replacement rate(about 40%) also resulted from the former Chinese socialist wage system.
But with the reforms of 1999, all employees of urban enterprises and business units
are covered, and changes have been made to the collection system of insurance fees
(three parts burden) and presentation standards (higher than lowest life guarantee
level and lower than regional legal minimum wage level), to bring the modern
unemployment insurance system closer to the international standard.
In this regard, to achieve the one-sided increase in flexibility in the labor market,
various policies and measures to increase security were introduced. However, manymeasures are not yet completed and there have been many obstacles. It was not possible
to survey all of the institutional changes and their influence in this paper owing to
restriction in length of paper. However, pensions, medical and social assistance systems,
and life/work balance systems all have an influence on the flow of labor force. Added tothese, the interrelationship of education and re-employment training schemes with theflexibility the labor market must also be considered. This will correct the flow of labor
force (Figure 7) from the labor market, where numerical and functional flexibility are
expanded, to the social security system (especially the unemployment insurance
system) and the active labor market policy (which includes a life-long education system)with income security provided by the social security system and facilitate there-entrance to the labor-market with new employability.
5. Summaries
This study is intended to analyze the interrelationship between institutional changes in
the labor market and growth regime change in China and to provide some advice basedon the successes of the flexicurity strategy.
Because of the economic growth and changes in the industrial structure since the1990s, labor market systems such as the employment system, wage determination
system, employment promotion system, and unemployment system were greatlychanged. As a result of these changes, however, the one-sided increase of flexibility
without increasing security support, has reduced employment and income stability andrestricted domestic consumption demand growth. Consequently, the Chinese economic
growth has had to become increasingly dependent on exports.
In this paper, we have emphasized that the main obstacle to consumption-led
growth within China is the increase of flexibility without a corresponding increase in
security of employment and income gains. We should emphasize that the relationship of14

flexibility to security in the labor market is not just a trade-off; these can becomplementary, and the Danish and Dutch flexicurity models are good examples.
Compared with the successful flexicurity model where flexibility and security are
increased simultaneously, Chinese flexibility and security changes in the labor market
since the 1990s feature three elements that, must be considerably improved by future
institutional reforms.
First, with the series of labor market institutional reforms, numerical andfunctional flexibility have increased greatly; but the rise in employment security, basedon the state-led active labor market policy, cannot make up for the drop in job security,and total employment stability has decreased considerably.
Second, unlike Denmark and the Netherlands, the labor union of China has alimited role in terms of flexibility and security changes, and changes such as reforms,
decisions, policies and statements strongly depend on government initiatives.
Lastly, the biggest difference between the Chinese and the Danish and Dutch
systems is that in China, there is an incomplete social security system and limited
opportunities for increasing income and combination (life-work balance) security,especially as regards the unemployment system.

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and Transformations of Asian Capitalisms, Routledge (forthcoming)[7] Esping-Andersen(1990), The Three Worlds of Welfare Capitalism, Cambridge, UK,
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Thinking Disparity, NIKKEI Press (in Japanese)[10] Madsen,P.K.(2006), How Can It Possibly Fly? The Paradox of a Dynamic LabourMarket in a Scandinavian Welfare State, in John A.Campbell, John A.Hall and Ove
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Experience, McGill-Queen’s University Press, Montreal, pp.321-355.
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Figure and Tables

Figure1. The contribution calculation of demand origin GDP growth rate (real value andperiod average, unit: %)
80%
60%
40%
20%
0%
-20%

1990－1995

1995－2000

2000－2005-40%

householdconsumption
gorvernment
consumption
Gross capitalformationchanges ininventories
exports
imports-60%

Source: The World Bank Database
Figure2. The changes in consumption, investment, and exports (real value, 3 years
average, unit: %)30%

consumption

investment

exports

25%
20%
15%
10%
5%
0%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: The World Bank Database17

Figure 3. The comparison between wage and consumption growth rates (real value,
unit: %)
wage

consumption

16%
12%
8%
4%
0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: The World Bank Database, Chinese Statistics Yearbook 2007
Figure 4. The Golden Triangle in Denmark
The main axis of theFlexible

flexicurity modelLabor

Qualification effectMarket
Life-longlearning
Generous

ActiveWelfareLabor-

SchemesMarketMotivations effectSource: based on Madsen(2006)18

policyFigure 5. The differences between the two models

Exter
nal-numericalflexibility

Functi

Employonal

ment

flexibil

SecuritityyInternal-numericalflexibilitySecurityal-numIncomeericalSecurit

flexibilyExternal-numericalFlexibility

ity

Denmark

C-S

ExternIncomeIncomeal-numSecuritSecuritericalyFlexibi

ExternIncome

E-S

y

lity

Netherland

Source: Sungjoon-Park, Yanggyu- Byun and Hyunyong- Jung (2008)
Figure 6. The relationship between Flexibility and Security in China
Main axis

Numerical, functional
Flexibility

Flexible
Labor

Combination security

MarketAnd
Individual proprietor

Life-longlearning
ActiveReformation

Laborof socialMarketpolicySecurity
Auxiliary support

SystemSource: Based on figure 4
Table 1. The deference combinations of flexibility and security
Job security

Employment
security

External-numericalInternal-numerical
Functional
Wage

19

Income security

Combination
security

Table 2. The changes in Nominal GDP and employment (unit: 100 million RMB, 10
thousand people)
GDP
Primary

employment

Secondary

ServicePrimary

Secondary

Service

1990

5017

27%

7717

41%

5933

32%

34044

60%

12142

21%

10554

19%

1995

12020

20%

28679

47%

20094

33%

33003

53%

14349

23%

15036

24%

2000

14716

15%

45556

46%

38924

39%

35575

50%

16009

23%

19566

27%

2005

23070

13%

87047

48%

72968

40%

33970

45%

18084

24%

23771

31%

Source: Chinese Statistics Yearbook
Table 3. The development of the Chinese labor market
Occupation
mediation

place

Number recruited

Number of job

Number of(10 thousand)seekers

employed(10 thousand)(10 thousand)(unit: 100)
1995

299

1107

1940

1259

2000

290

1509

1991

975

2002

262

2250

2684

1354

2004

339

3565

3582

1838

2006

375

4951

4736

2493

Source: Chinese Statistics Yearbook
Table 4. The changes in Chinese general education and occupational education
Number of school

Number of student(10 thousand)General education

Occupational

General education

education

Occupational
education

University

High

MiddleHigh

University

High

MiddleHighandschoolschool&middleandschoolschool&middleschoolcollegecollegeschool

1985

1016

17318

75903

8070

170

741

3965

230

1990

1075

15678

71953

9164

206

717

3869

295

1995

1054

13991

67029

10147

291

713

4658

448

2000

1041

14564

62704

8849

556

1201

6168

503

2005

1792

16092

61885

6423

1562

2409

6172

626

Source: Chinese Statistics Yearbook, 200820