Unemployment Reform

(Originally published in CLB issue #56, Sep-Oct 2000)

For political reasons, the government has traditionally regarded SOE workers as the "core membership" of the Chinese working class. These workers were the backbone of China's initial drive towards industrialisation during the 1950s and 1960s. The high rate of exploitation of this group of workers has often been underplayed by researchers, both in and outside China, who have talked up the so-called "iron rice bowl" or secure terms of employment that SOE workers were granted in return for very low wages.

Indeed, many neo-liberal economists have commented that one of the great achievements of the new socialist market economy has been to do away with life tenure in SOEs. It is perhaps worth noting that, long before the reforms, it was already possible for workers to be dismissed. For example, Article 17 of the draconian Model Outline of Intra-Enterprise Discipline Rules, introduced in the early 1950s, is unequivocal on this point: "[L]ate arrival or early departure without good reason, or playing around or sitting idle during working hours shall be subject to proper punishment or dismissal as the case may require". Needless to say, it fell to the ACFTU to enforce this "foreman's charter" (1).

An Old Problem

In fact, despite the myths of full urban employment, unemployment has been an intermittent problem for the current Chinese government ever since it took power in 1949. Whereas the State undoubtedly prioritised industrial development and this strategy created many millions of jobs, it was immediately clear to the authorities that nationalised enterprises or newly created SOEs could not provide work for all. A nascent unemployment insurance scheme was introduced in the form of Interim Rules for Relieving Unemployed Workers as early as 1950.

Yet by 1957 and the ascendancy of Maoist economic development strategies such as the Great Leap Forward (2) , unemployment was supposed to have disappeared in China, and the unemployment insurance system therefore abolished. For the next 20 years or so, the official extent of urban unemployment in China was more a yardstick of how efficiently the police were able to move unemployed people to the countryside rather than any real attempt to deal with the problem in a just manner.

The reforms, and in particular the introduction of employment contracts in 1986, meant that the government had to formally recognise the existence of unemployment, which as early as 1979 was recognised as running at 5.9%. Moreover the new economic strategy spearheaded by Deng Xiaoping required a loosening up of the household residential system in order to encourage labour mobility. This sparked off the rural-urban search for work that has constituted the largest labour migration in history.

This huge movement of workers, combined with the restructuring of SOEs could not avoid producing a substantial increase in urban unemployment which, if lay-offs are included, is estimated by some mainland researchers to be running at about 20% of the workforce. Approximately 12 million workers are expected to be laid off this year as China deepens the restructuring in preparation for the increased competition that will result from entry into the World Trade Organisation.

Old Divisions

With the official recognition of unemployment came the gradual and ongoing introduction of unemployment insurance. As with pensions, the pattern of reform has been pilot-based and selective and although the eventual aim is for universal coverage, results to date have fallen far short of this target.

Apparently optimistic researchers have quoted coverage at 43% of all urban employees, with the rate rising to 76% in the state and collective sectors and falling to 4% in the remaining, mainly private, enterprise categories. Yet only 28% of registered unemployed were receiving UI in 1998 (3).

However, an "internal" survey of household heads in 11 cities undertaken by a research institute attached to the State Planning Commission (SPC), found a less reassuring scenario (see below). The fact that to date there is no law governing unemployment insurance (UI) in China is also a factor behind the tardiness of the non-state sector to make UI provisions for its employees. Regulations do not carry legal status and are thus much easier to ignore in favour of more "pressing" factors such as keeping production costs down.

Reform Outlines

There have been three sets of regulations covering unemployment insurance (UI). The first was in 1986 and was restricted to SOE employees. In April 1993, the net was widened to include government organisations, state institutes, joint ventures and even some private companies. The most recent set is the "Regulations on Unemployment Insurance" issued by the State Council in January 1999.

These regulations are supposed to herald the arrival of universal UI including the much exploited and neglected rural workforce. Yet even this universality is open to question. For example, explanations given of UI by the Ministry of Labour and Social Security (MOLSS) point out that "[C]ontracted peasant workers employed by urban enterprises and institutions shall not contribute to insurance premiums "(4).

UI premiums are set at national standards with companies contributing 2% of their total wage bill and workers paying 1% of their total wage. The MOLSS has been at pains to emphasise that UI must always be set lower than the local minimum wage, usually at between 60-70% and higher than the basic livelihood allowance that is supposed to be reserved for the "absolute poor".

Workers who have been dismissed for misconduct receive only a proportion of the above rate and sometimes nothing at all. Pending reforms to medical benefits that will be reviewed in the next issue of CLB, UI is also meant to cover medical and funeral costs that occur during periods of unemployment. The maximum period of cover is two years, although this is subject to contributions made while in work: a minimum of one year and up to five years contributions buys a worker 12 months UI; five to ten years 18 months and 10 years contributions, two years UI. If a worker is still unemployed after two years he or she must apply for social welfare in the form of the minimum livelihood guarantee.

For those workers fortunate enough to receive their entitlements, UI is no guarantee against domestic poverty as the benefit is considered a basic individual allowance and does not take into account family size. As researchers have pointed out, it is not enough to prevent severe hardship in households with no earners (5). Article 14 of the 1999 regulations states that only those workers who have stopped work "involuntarily" and have registered as unemployed - a procedure that can cost Rmb 100 - may receive UI. Article 15 states that if a worker moves out of the district, he or she is no longer entitled to draw the benefit, a restriction that will severely limit labour mobility.

Surveying the Scene

MOLSS figures - based on surveys of enterprises, not individuals - claim that 97 million workers were paying UI premiums by the end of November 1998 (6). The same source estimates the UI fund accumulation to be at Rmb 9.7 billion and this money has provided too much of a temptation for some provincial governments. Both the Hong Kong and the mainland press have highlighted cases of misuse of UI funds often put down to fund "administration costs" despite central government rules outlawing such charges.

The aforementioned SPC "internal" survey on social insurance reforms found a very low participation rate in UI despite current levels of unemployment. The survey revealed that the majority of household heads in employment do not participate in the UI scheme: 73% of the employed workforce is not covered by UI, and only 18% are covered with 9% not answering the question. The not covered rate for small private enterprises and employees of small private enterprises is 96% and 94% respectively.

A previous questionnaire given to residents of Wuhan, Guangzhou, Harbin, and Beijing in early 1999 revealed just 11% participation in unemployment insurance, six percentage points down from a survey carried out at the beginning of the year. Coverage rate among unemployed rate is only 3%.


Xiagang or laid-off workers are not officially registered as unemployed as they remain contracted to their SOE employers. As such they are not entitled to UI but should receive a livelihood allowance from their employers. This allowance should be approximately 70% of their normal wage. However as many reports in past issues of CLB have made clear, workers often do not receive any living or medical allowance at all.

An obvious contradiction underlying this system is that the reason firms lay off workers in the first place is that they are trying to reduce unit costs in the face of increased market competition. However they are often unwilling or unable to pay the lay off wages that workers are entitled to, and this has led to a dramatic increase in protests by xiagang workers. This is despite the fact that local governments are supposed to make up any shortfall in the workers living allowance. The alternative for SOE companies, namely immediate mass sackings, is politically too sensitive to be an option at present.

Firms who lay workers off are also supposed to establish re-employment service centres that fall under the jurisdiction of the government's "Re-employment Project". A xiagang worker is supposed to remain attached to the centre for three years maximum during which time he or she is entitled to the livelihood wage. The centre is also responsible for paying contributions to the UI fund and at least a percentage of medical costs incurred while the worker is classified as laid-off.

If a worker is unable to find a job after three yeas then his or her relationship with the company is officially terminated and the individual should register as unemployed. If they are not entitled to UI - one reason may be that the company has failed in its responsibility to pay UI premiums during the laid-off period - then the worker is subject to the workfare arrangements of the minimum livelihood guarantee (MLG) (7).

Over the next three years the government is planning to abolish the status of xiagang and switch to a system where surplus workers are plunged directly into the open labour market, applying for UI benefits during the period of unemployment. In fact reports from Guangdong province declare that this change has already begun. In January 2000, the official Yangcheng Times reported that laid-off workers would not enter re-employment centres but go "directly to the labour market" and their welfare should be subject to UI, or failing that, MLG (8).


  1. See Nigel Harris Mandate of Heaven published by Quartet Books Ltd., 1978 for more details.

  2. An attempt to force the pace of industrialisation to an unprecedented level with disastrous results.

  3. Athar Hussain: Social Welfare in the Context of Three Transitions, Asia Research Center, London School of Economics, 2000.

  4. MOLSS Website www.molss.gov.cn

  5. See Hussain and many others.

  6. MOLSS Website op.cit.

  7. Recipients of MLG have to engage in "community work" to receive allowances.

  8. Yang Cheng Shi Bao 16/01/00.



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