still generally only moved sideways (within or between enterprises) instead of being really bound by contract terms.65 An empirical study of thirty food enterprises in China’s Guangdong Province also found that flexibility in the use of temporary or contract workers (those who do not have job tenure in their enterprises) could produce a positive effect on enterprise productivity. This finding supports the need for more flexibility in employment policies.66 In order to address all these issues, carefully gauged but effective measures need to be taken to enhance the labor flexibility, including further relaxing the _hukou_ system. At initial stage, the _hukou_ system can be partially dismantled, i.e., keeping some of its benefits attached to geography (such as education or retraining), but allowing others, including the ability to be employed and health care, to move with the population. Better labor mobility across enterprises, sectors and geographical areas, would facilitate further restructuring and mitigate its economic and social cost, including frictional and structural unemployment, underemployment, and income inequality. For the vast rural surplus labors and “floating population”, migration, under a flexible and healthy labor market framework, provides a mechanism for ensuring them not to be adversely affected by the trade reforms after the WTO entry, but actually sharing its benefits. The reform of the _hukou_ system and land use rights, more flexible employment policies, establishing of social safety net and development of affordable housing market, would effectively facilitate the labor mobility and enterprise efficiency.

Modeling results by Zhai, et al. (using the computable general equilibrium model), show that the net benefit from WTO membership will be maximized if China adopts a policy gradually to relax its rural-urban migration control in conjunction with a labor market reform, including the relaxation of the _hukou_ system and land reform. Doing so not only prevents a dramatic worsening of the urban unemployment problem, but also permits enough labor market flexibility to create more employment opportunities for rural unskilled migrant labors. Furthermore, the combined impact of WTO accession and labor market reforms reduces rural-urban income inequality quite significantly (the urban/rural income gap would reduce by 46.5%, and the national Gini coefficient would fall about 3.5% by 2007). 67 Ianchovichina and Martin also estimated that the removal of the _hukou_ system would raise farm wages and allow 28 million people to migrate to non-farm jobs in search of a better life. A combination of removal of the _hukou_ system and an increase in skill levels is the most favorable scenario for unskilled farm labor leading to the largest increase in real farm wages (19.4% from 2001 to 2007). 68 In addition, the various existing employment service centers should be strengthened so that they can provide job search assistance, retraining, and certain guidance and

> 65 Sheehan, Jackie, J. Morris and J. Hassard, “Redundancies in Chinese State Enterprises: A Research Report”, _Industrial Relations_ , V39, No. 3, July 2000.

> 66 Mok, Vincent Wai-kwong, “Industrial Productivity in China: the Case of the Food Industry in Guangdong Province”, Journal of Economic Studies, V29, No.6, 2002.

> 67 Zhai, Fan, et al., “WTO Accession, Rural Labor Migration and Urban Unemployment in China”, _Urban Studies_ , V39, No. 12, 2002; Zhai, Fan, T. Hertel and Z. Wang, “Labor Market Distortions, Rural-Urban Inequality and the Opening of China’s Economy”, GTAP working paper, No. 27, May 2003. 68 Ianchovichina, Elena and W. Martin, “Economic Impacts of China’s Accession to the World Trade Organization”, World Bank policy research working paper, the World Bank, May 2003.

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