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China ILM Mar10 All

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Globalization without Compensation

:
Politics of China’s embedded liberalism


Qiang Zhou
Committee on International Relations
The University of Chicago





Abstract:

Embedded liberalism programs such as safety nets can redistribute wealth to the
disadvantaged during globalization. Existing literature has found that in advanced
industrial countries more safety net programs often come in tandem with more
globalization, but in China, safety net investment is lacking even as it has gone through a
rapid globalizing of its economy over the past three decades. In this paper, I analyze
China’s safety net programs and their relations to China’s interindustry labor mobility
(ILM). My explanation is that high ILM has enabled the Chinese government to neglect
safety net investment without much backlash in the past thirty years. This is because high
ILM enables workers to change lines of work in response to income differentials, and in
this process wealth will be distributed to workers in accord with their labor market skills,
hence high ILM can ensure wealth be distributed more equitably, and the collective
demand for more redistributive social policies will subside. I empirically test this
hypothesis and alternative explanations. The paper concludes with a caution: if China
could afford to ignore safety net due to its endowment of high ILM, such a lack of
compensation could be unsustainable if exogenous forces had lowered the ILM in China.

1. Introduction
Ever since China adopted a reform and open policy three decades ago, it has
undergone a rapid globalization of its economy and economic policies. Measured by the
usual indicator of trade openness, i.e., export plus import over GDP, China’s
globalization has increased from 9.4% in 1978 to 65.0% in 2003 (according to World
Development Indicator 2009), or from 13.8% in 1978 to 56.7% in 2003 (in constant
prices according to Penn World Table 6.3). Measured by another index, the KOF index
on economic globalization, China’s globalization increased from 22.2% in 1978 to 54.2%
in 2003. Along with more globalization, a large and established literature argues that the
size of public economy will also increase. Authors like Cameron have stressed that
globalization usually contribute to the increase of public sector so that there is a positive
relationship between globalization and public economy, and this is because governments
are pressured to increase the size of public economy in order to compensate the losers
from globalization (Cameron 1978). In addition, authors like Rodrik point out that the
growing public sector in tandem with increasing international trade may serve an
insurance function. Post WWII, many Western democracies have constructed elaborate
social safety net to support the embedded liberalism compromise where the citizens
acquiesce to their adjustment costs in return for government safety net programs and
internationalization of commerce. The safety net programs, which constitute a large part
of public economy, serve as an insurance against the dislocations due to globalization.
Deeper globalization brings higher demand for safety net insurance and consequently
bigger public economy (Hays et al. 2005; Rodrik 1997, 1998; Ruggie 1982).
1
But an expected rise of the size of public economy, for the purpose to compensate
the losers from globalization, seems not occurred in China. China’s public economy has
been small relative to the degree of its globalization involvement.
CHN
0
1
0
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o
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c
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%
G
D
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0 100 200 300
Trade openness
Pre reform
CHN
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%
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0 100 200 300 400
Trade openness
Post reform
CHN
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a
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%
G
D
P
0 100 200 300 400
Trade openness
All years
Fitted line is linear prediction
Figure 1.1: Correlation between Trade Openness and Compensation

In figure 1.1, I plot trade openness against government consumption as % of GDP,
which is my measure of the size of the public economy. I show three panels that
aggregate the data for each country over three different time period: Pre reform, meaning
the time before China’s adoption of more open economic reform in 1978; Post reform;
and All years, which run from 1960 to 2004 in my dataset. It shows that China’s size of
the public economy is below the fitted line, which denotes the typical size of a country’s
public economy given its level of openness; though this trend is clearer in Pre-reform and
All years panels than in Post-reform era. Figure 1.2 is similarly constructed, but instead
2
of using the government consumption share directly, I pare off the part of government
consumption that may be due to the “Wagner’s law”, that is, richer societies may simply
“consume” more government services. This is done by first run a simple cross sectional
regression on the aggregated government consumption, openness, and GDP per capita,
then subtract the portion of government consumption explained by GDP per capita.
Figure 1.2 again shows China’s public economy has always been below the predicted
level given its level of globalization and controlling for the “Wagner’s law”.
CHN
1
0
2
0
3
0
4
0
O
f
f
s
e
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g
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a
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%
G
D
P
0 100 200 300
Trade openness
Pre reform
CHN
0
2
0
4
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6
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O
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f
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e
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g
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a
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%
G
D
P
0 100 200 300 400
Trade openness
Post reform
CHN
0
2
0
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6
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O
f
f
s
e
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g
o
v
'
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c
o
n
s
u
m
p

a
s

%
G
D
P
0 100 200 300 400
Trade openness
All years
Fitted line is linear prediction
Figure 1.2: Correlation between Trade Openness and Offset Compensation

The puzzle is, given that China has become extensively involved in the global
economy, we should expect that such involvement brings with it adjustment cost for
ordinary workers. Based on the conventional view of compensation hypothesis or
embedded liberalism, we should observe either a growing clamor from workers
3
demanding more cushion and safety nets from the government, or more political
backlashes against globalization and open economic policies
1
. So far, however, no
systematic evidence shows that Chinese workers had engaged in or is fermenting against
the overall open economic program, nor do we observe a systematic demand for more
safety net program from Chinese workers. Why has social safety net not become a
pressing demand in China given its deep involvement in world economy? What may
explain the under-provision of safety net in China?
One possible explanation is the Stolper-Samuelson theorem and the factor
endowment in China. Because China has abundant labor forces, globalization of trade
will benefit the abundant labor factor, and it is possible that labor’s gains from trade may
compensate them against the adjustment costs, enough so that they demand less of the
compensation from government. However, this explanation lacks the empirical backup.
Scholars who argue for the compensation hypothesis or the embedded liberalism do not
rule out the factor endowment effects, rather, they find that even in a global sample of
both developed and developing countries, the pattern of positive relationship between
globalization and public economy still holds (Rodrik 1997, 1998).
Nita Rudra argues that the welfare states are declining in developing countries
during globalization, and she attributes the reason to the collective action problem among
the numerous labor owners in developing countries and the lack of strong labor-market
institutions there (Rudra 2002). Though this argument is potentially valid to explain the
lack of welfare state and public compensation in China, the lack of data on especially
China’s labor market institutions prevents me from evaluating this alternative.

1
In China’s context, this may take the form of strikes or other group incidences with the goal of stopping globalization.
4
Yet another explanation for the lack of social safety net in China is the regime
argument. It may be that because China has an authoritarian regime, it can repress its
population to fulfill the government’s goal. In order to push for its globalization agenda
more cheaply, Chinese government may have repressed the workers who have been
demanding more safety nets, so that the lack of safety nets may be explained by China’s
authoritarian regime. This paper will not engage in a detailed examination of the
observable implication of this argument in China, that is, if this explanation is correct,
can we observe widespread resistance among workers who are against the government
repression? Instead I will conduct a cross national empirical test of this explanation in
this paper.
I propose in this paper a different explanation for China’s lack of social safety net.
I argue a large part of the lack of investment is due to the socio-economic factor of
interindustry labor mobility (ILM). I show that ILM levels have important implications
on the income distribution among labor owners. High ILM levels allow more equitable
income distribution according to workers’ marketable labor skills; hence high ILM helps
distribute the gains from trade from the globalization winners to others who have similar
labor skills but would otherwise be the globalization losers. Because high ILM ensures a
more equitable income distribution, functionally it substitutes part of the government
compensation intended for the same purpose. In this paper, I present a theory on the
substitution effect between labor mobility and compensation, and empirically show that
China’s lack of safety nets may be due to relatively high ILM levels in China concurrent
with the Post-reform era.
5
The rest of this paper structures as follows. Section 2 lays out the theory about
the effect of ILM on labor income distribution and draws a general expectation. Section
3 measures interindustry labor mobility. Section 4 performs empirical analysis on both
the large-N sample and China. Section 5 conducts a brief case study on China. Section 6
concludes.
2. Theory and Expectation
In this section, I present a theory relating levels of interindustry labor mobility to
domestic income distribution among workers,
2
and discuss how this will affect the
demand for compensation during globalization. I will first show that levels of labor
mobility can have profound effect on the income distribution within an economy, high
ILM can lead to more equitable distribution of income among labor in accord with each
worker’s general labor market skills, conversely low ILM will lead to less equitable
income distribution. I then argue that this effect implies a negative relationship between
ILM levels and the size of compensation.
2.1. Labor mobility and income distribution
The relationship between labor owners’ income distribution and levels of
interindustry labor mobility can be derived from a general equilibrium model first
proposed by Ronald Jones and further developed by others (Hill and Mendez 1983;
Hiscox 2002; Jones 1965, 1971; Parai and Yu 1989).
3

4
I will not present the detailed
derivation of the model in this paper, though it can be available upon request.

2
Throughout this paper, I use distribution of income and distribution of labor income interchangeably to denote the
income distribution among workers (labor factor owners). I focus on labor owners because, first, they are usually the
most politically relevant forces in a country; and second, they are usually the intended recipients of compensation
package.
3
The model also reveals the relationship between labor mobility levels and relative income distribution of capital
owners, however, this paper only focuses on the model implications to labor.
6
Under competitive market condition, an individual worker’s wage is set primarily
by two things: the individual worker’s skill level (or productivity), and the price of goods
produced by the industry this worker is in. I define an equitable income distribution not
as one where every labor owner, regardless of his marketable labor skill (or productivity),
should earn similar income; rather, I define it as one where individual labor owner’s
income should be commensurate with his own productivity. The model shows that the
dynamics of income distribution, or specifically the dynamic change of relative wages
across industries, depends on ILM levels. Higher ILM levels will lead to a more
equitable income distribution, in the sense that workers’ income will be more
commensurate with their labor market skills. Conversely lower ILM will lead to
increasing mismatches between workers’ income and skills, therefore a less equitable
income distribution.
We can have a better understanding of this relationship if we can hypothetically
move labor mobility in two opposite directions and see the consequences. First if labor
mobility levels become lower, then despite having the required skills, workers in industry
one will find it harder to move to industry two to take advantage of higher wages there.
Mismatches will become increasing common in that one group of similarly skilled
workers will earn lower wages in industry one while another group of similarly skilled
workers will earn higher wages in industry two, even though wages are set competitively

4
The Jones model assumes market efficiency and no unemployment, just as in the Stolper-Samuel model. (Shapiro and
Stiglitz 1984) proposed that involuntary unemployment can be the equilibrium outcome in modern labor markets, when
the wages are set at efficiency-levels and unemployment used as a worker discipline device. Using the efficiency-wage
model framework, (Hoon 1991)and (Bretcher 1992)argued that in an open economy efficiency-wages can lead to
involuntary unemployment as the jobless workers cannot bid down the wages to the full-employment level. Besides
efficiency-wage argument, (Davidson et al. 1988, 1991, 1999) argued that unemployment could be the consequence of
costly search processes. (Walde and Weiss 2006) combined matching process with a Jonesian specific model in the
context of a small open economy. The bottom line is that unemployment can be incorporated into the above model
without altering the main conclusions. In future research I will consider models with unemployment.
7
within the respective industries. The income distribution among labor hence becomes
less equitable with lower ILM levels.
On the other hand, if labor mobility levels become higher, similarly skilled
workers in industry one will find it easier to move to industry two to earn higher wages
there. Higher labor mobility helps integrate the separate industries and as a result the
industrial location of workers within the economy tends to matter less since workers with
similar labor productivity will earn similar income everywhere in the economy. For
example, higher ILM can allow the booming export industries during trade
internationalization to more easily absorb workers with the required skills from other
industries while paying the market-clearing wages, thus making the economy-wide
income distribution to more closely follow the distribution of skills. In other words, with
higher ILM levels, income distribution becomes more equitable.
2.2. Substituting for compensation
In an open economy, the changing world prices and forces of competition will
impose adjustment costs on participating economies; not surprisingly, the bulk of such
adjustment will be born by labor owners due to their sheer numbers. Scholars have
discussed that when an economy becomes more integrated into the world economy, there
will be an ever increasing need to increase the size of public sectors, especially the part
that can increase the income for those who have been negatively affected by integration
with world economy. The direct or indirect programs to compensate temporary losers of
globalization can in effect provide a social safety net that cushions the (negative) impact
of globalization for all participants of globalization. Even those who are currently
winners of globalization may still support the safety net programs because of the
8
uncertainty associated with the identity of winners and losers. Scholars maintain that
such social safety net is critical to muster the support for the deepening of international
economic integration (Adsera and Boix 2002; Boix 2000; Cameron 1978; Fernandez and
Rodrik 1991; Rickard 2005; Rodrik 1997, 1998; Ruggie 1982).
In this literature on the desirability of compensation package, the relationship
between support for globalization and the size of compensation package is generally
treated as automatic and positive, i.e., more compensation will be associated with higher
social support for globalization (Adsera and Boix 2002).
Based on my previous discussion about the effect of ILM levels on the income
distribution among labor, I argue that the involvement in globalization may only be part
of the reason for the demand of compensation. In specific, because ILM has the
pronounced effect of making income distribution more equitable, higher ILM levels may
substitute much of the demand for compensation during the globalization process.
Compensation strategy works by maintaining the compensation recipient’s
income at similar level as before the adjustment occurred, so that the recipient will not
experience a sudden severe income drop and turn negative against globalization. High
levels of ILM make labor owners coherent in their economic interests. High ILM ensures
that labor income distribution is equitable so that income to each individual labor owner
will be commensurate with his productivity level, and will not depend on the identity of
his industry of employment. Economic interests of labor owners will be coherent in the
sense that any economic shocks on labor, be they exogenous or policy-induced, will exert
their impact not only on some specific groups of labor, but also on labor as a whole.
Under low ILM, workers cannot easily move to more lucrative employment in other
9
industries, and their economic interests are largely determined by the identity of
industries they happen to be in rather than the labor market skills they have accrued.
Income distribution will be far less equitable than under high ILM.
In an open economy, if the prevailing ILM level is high, equitable distribution of
income among workers will ensure that gains from trade can trickle down to the general
labor force quickly, so that loss of income to some groups of workers due to the
economic disruption of globalization will be minimal. Because compensation strategy
aims to achieve the similar result of a stable income stream to an average worker, high
ILM level can therefore substitute a substantial part of the function performed by
compensation. On the other hand, if the prevailing ILM level is low in the open economy,
income distribution tends to be inequitable and gains from trade will be clustered in
pockets of industries and difficult to reach the general labor force, income loss due to
globalization can be large to legions of workers. In this situation, the goal of the
compensation strategy to make up for the loss of income during globalization and to
guarantee workers a more stable income stream will become more appealing to the labor
force, consequently their demand for compensation will be amplified.
We can therefore have the following simple expectation; that levels of ILM tend
to be negatively related to the size of compensation package, i.e., higher ILM is
correlated with less compensation and vice versa.
In light of this general pattern, I propose the following explanation for China’s
relative lack of safety nets: There have been relatively high levels of labor mobility in
China over the past three decades, and such high ILM substitutes a substantial part of the
10
expected demand for compensation predicted by China’s global involvement. So that
high ILM contributes to the lack of safety net in China.
3. Measures of Interindustry Labor Mobility
3.1. The elasticity measure of ILM
Interindustry labor mobility is defined as the ability of labor owners to respond to
wage incentives by moving across industry lines. Such ability needs not to manifest itself
as actual labor flows; for example, with high labor mobility, the potential threat of labor
leaving low paying industries for high paying ones may be enough to convince the low
wage industries to raise wages, without actual employment changes. The measurement
of interindustry labor mobility therefore should stress the responsiveness of workers’
employment choices upon interindustry wage differentials.
I consider both labor movement and wage incentives simultaneously when
measuring interindustry labor mobility, this follows the theoretical frameworks of
Stolper-Samuelson and Jones models (Hill and Mendez 1983; Hiscox 2002; Jones 1965,
1971; Stolper and Samuelson 1941). Formally, I suppose a 2x2x2 framework (two sector,
two factor, two commodities), the two sectors in the economy are denoted 1 and 2; there
are a total number of
t
E workers in the labor market at time , with and in
sectors 1 and 2 respectively ( ). The average wages at time t for sectors 1
and 2 are and . Following Krueger and Summers I assume equally skilled
workers (Krueger and Summers 1988).
t
t
E
1
t
E
2
t t t
E E E = +
2 1
t
w
1
t
w
2
5


5
This may be a grossly simplified assumption, but it is useful to make comparison with the benchmark of competitive
labor market consisting of homogenous work forces. Unimpeded labor movement upon price incentives in such
markets would naturally lead to higher measure of elasticity (or ILM) than hampered labor movement upon the same
incentives.
11
In Stolper-Samuelson and Jones frameworks, the interindustry labor mobility is
defined as the elasticity of the ratio of labor supplies to the two sectors with respect to the
relative wage differentials. This elasticity definition specifically captures the labor
responsiveness to cross-industry wage differentials. Mathematically, the elasticity
measure of labor mobility across industries can be denoted
L
n , and economy-wide ILM
6

at time is: t
) / ln( / ) / ln(
1
2
1
1 2 1
÷ ÷
=
t t t t t
L
w w d E E d n
Notice here that to ensure that labor factor owners move their productive assets
only after they perceived the wage differentials, I lagged the wages by one period.
To operationalize the estimation of this elasticity measure of ILM at the country-
year level, I make the assumption that in competitive labor markets, differential between
the wage of industry i and the average wage of the whole economy should be the
primary motivator of labor movement into or out of industry i .
7
Specifically, change of
wage differential in time should explain the change of relative employment of
industry i at time . For every country-year, I estimate the following equation:
1 ÷ t
t
it t it t t t it
w w E E c | o + - + =
÷ ÷
) / ln( ) / ln(
1 1

Where is the employment in industry i at time , is total employment of
the economy at time , is the average wage in industry i at time , is the
economy-wide average wage at time
it
E t
t
E
t
1 ÷ it
w 1 ÷ t
1 ÷ t
w
1 ÷ t ,
it
c is the error term that is assumed to be

6
The theoretical framework does allow labor mobility to be defined at industry or sector level, for detail, see Hill and
Mendez 1983.
7
For the practical purpose of being able to use regression to estimate ILM, I set up a dichotomy between any one
industry vs. the whole economy, in place of the two-sector in the 2x2x2 frameworks.
12
independent and normally distributed,
t
o is the constant term, and
t
| is the estimated
elasticity measure of ILM in this country-year, so that:
) / ln(
) / ln(
1 1 ÷ ÷
=
t it
t it
t
w w d
E E d
|
Higher elasticity values denote higher ILM levels
I have taken steps to control the potential endogeneity this measure of ILM. The
concern here is that the observed wage levels may have already anticipated changes in
the industrial employment structure, so that relative changes of wage differentials last
period are not independent from relative changes of employment proportions in this
period. In order to control for these anticipation effects, I use a two stage least square
procedure. The key here is to find good instruments that can predict the changes of
interindustry wage differentials but are unrelated to the changes of relative employment,
i.e., unrelated with the disturbance term in the estimating equation. Once I derive the
unbiased predicted relative wages from the first stage, I can estimate the labor elasticity
just as before in the second stage.
I choose as instruments the following exogenous variables that are purported to be
unrelated to changes of employment structure: aggregate employment less industry ,
and aggregate output less industry i .
i
hly
8
Aggregate employment less industry i roug
indicates business cycle and the overall health of the economy, changes of this variable
may indicate fluctuations of the overall labor supply, thus affect relative changes of
wages, but it may have little to do with relative change of employment in a specific


8
I choose the aggregates less industry i for the following reason. Operationally, since the basic unit of my data here is
country-year-industry, and the aggregate employment and output variables are country-year aggregates, hence they will
not vary. To enable industry-level variability, for each of these variables I calculate their country-year-industry values
by calculating the country-year values without the value of the corresponding industry. All these variables are
expressed in their natural log forms.
13
industry. Aggregate output values less industry i show the size of the economy and its
changes may be the basis for relative wage changes; and it is not obvious how changes of
aggregate output can affect the changes of specific industrial employment.
However, the elasticity measure without endogeneity control is slightly preferred
over the instrumented version. This is so is because once I construct the instrumented
measure of ILM using the 2SLS approach, then construct the un-instrumented measure of
ILM using OLS, and then use Hausman Specification Test; the results show that 2SLS is
not an improvement over OLS in almost 98% of the cases using Hausman tests, which
inform me that it is safe to use the un-instrumented measure of ILM over the
instrumented version in empirical analysis.
Furthermore, when actual data were fed to the algorithm, this elasticity measure
of labor mobility reveals some discrepancy in the original theoretical frameworks. The
frameworks assume ILM is non-negative, yet in fact the estimation shows ILM can be
negative. The reason is that in conventional frameworks ILM is non-negative because for
example when outside wage is lower than in industry i , workers in industry i can at least
stay put and ILM will be zero. But this is not true in actual data for many reasons.
Workers may not be fully rational and they may make “mistakes” by moving to lower
paying industries; workers may still be rational but they “anticipate” the future wage rises
in presently lower paying industries; normal population increase may mean that even if
workers in industry i stay put but ILM will still not be zero; and another likely culprit
may be the existence of barriers to interindustry labor movement, such that qualified
workers employed in lower paid industries do not have the ability to move to take
advantage of higher wages elsewhere that commensurate with their skill or human capital.
14
In especially the last scenario, negative elasticity values reveal the extent of the existence
of interindustry labor movement barriers and indicate the lack of interindustry labor
mobility.
To estimate this measure, I use the United Nations Industrial Development
Organization (UNIDO) Industrial Statistics Database, which is at the 3-digit industry
level of ISIC code (rev.2) and covers 217 countries and 29 categories of manufacturing
sectors over the period from 1961 to 2003.
9

3.2. Alternative measures of ILM
I corroborate with two other measures of ILM used in the political economy
literature, namely, interindustry labor movement or interindustry wage differentials.
10

Hiscox and Rickard and Rickard in their studies have used an industry
reallocation index as their main measure of ILM (Hiscox and Rickard 2002; Rickard
2004, 2005), as in:
¯
¯ ¯ ¯
=
÷
=
÷
= =
÷
÷
+
÷ ÷ ÷
=
N
i
t
i
z t
i
N
i
z t
i
N
i
t
i
N
i
z t
i
t
i
z t
E E
E E E E
IR
1
1 1 1
) ( 5 . 0

Where and are employment in the i th industry at times t and t-z. In the
numerator, the term on the left represents the total number of employment changes (jobs
lost and gained) between t and t-z. The summation of absolute values counts each job
gained or lost as a change in the structure of employment. The term on the right is the
total number of jobs lost or gained and not offset by a gain or loss in other industries;
these are the total numbers of uncompensated changes in employment. Subtracting the
t
i
E
z t
i
E
÷

9
As of 2005.
10
There are other measures, such as the measures used in the Variety of Capitalism literature. (Hainmueller and
Hiscox 2007) gave review of many labor mobility measures.
15
uncompensated from the total changes in employment provides a measure of total job
reallocations between industries, or the compensated changes in the structure of
employment, meaning employment changes resulting from pure shifts of jobs across
sectors. The value is divided by total employment (the average across t and t-z) to obtain
a measure expressed as a rate.
Hiscox used Coefficient of Variation (COV) of wages across industries within the
domestic economy “as a crude, general indicator of interindustry labor
specificity”(Hiscox and Rickard 2002), as other measures of interindustry wage
differentials, the COV measure of ILM is based on the assumption of “law of one price”.
Under this assumption of factor price equalization, if there were return differentials for
different factors such as labor and capital, the differentials would be arbitraged away
through factor movements. The quickness of the adjustment process would be captured
by the range of variation in returns; a high variation showed low levels of interindustry
factor mobility, and a low variation showed high levels of factor mobility (Hiscox 2001,
2002).
The formula for wage differentials measure of interindustry labor mobility is:
N
W
N
W W
Cov
N
i
i
N
i
i
1
1
1
) (
1
1
2
|
.
|

\
|
÷
|
.
|

\
|
÷
=
¯
¯
=
=

Where is average wage per employee in the th industry, and
i
W i W the mean
wage of the whole economy.
16
Applied to the UNIDO data of 29 manufacturing sectors at the 3-digit industry
level (ISIC rev.2) that covers 217 countries from 1961 to 2003, I construct three measures
of interindustry labor mobility, and their correlation table is given below.
Table 3.0. Pairwise correlation of different measures of ILM
Elasticity COV of wages
Industry
reallocation


1.0000

Elasticity
3157
-0.0631 1.0000
0.0004
COV of wages
3157 3459
0.0536 0.2116 1.0000
0.0053 0.0000
Industry
reallocation
2704 2739 2741
4. Empirical Analysis
I present empirical evidence in this section. I first present large-N analysis to
establish the general pattern that ILM is negatively correlated with compensation. I then
comparatively show China’s ILM levels and size of compensation.
4.1. Large N analysis
The goal in this subsection is to establish the relationship that interindustry labor
mobility levels tend to be negatively correlated with a country’s size of compensation
package, because labor mobility substitutes part of the function of compensation. The
substitution mechanism describes a general pattern, so this subsection will be an
empirical analysis for a global sample. A pure cross-national analysis may not be a good
strategy for the purpose here, as doing so necessarily involves aggregating variations of
labor mobility and compensation over time. But that will throw out essential information
17
about the changes of labor mobility levels and the corresponding changes of
compensation package over time. In order to preserve as much information as possible
about the correlation between labor mobility and compensation, the empirical analysis in
this subsection will be time-series cross-sectional.
4.1.1 Data and method
My dependent variable is the size of the compensation package, and as a rough
indicator, I use the government consumption share of the GDP. This follows the
literature. For example, in analyzing the correlation between government size and
openness, Rodrik justifies the use of government consumption share of GDP by
concluding that “Governments appear to have sought to mitigate the exposure to risk by
increasing the share of domestic output they consume” (Rodrik 1998).
Other scholars disagree using this measure. In analyzing the welfare state in less
developed countries, Nita Rudra uses social security and welfare as a percentage of GDP
(Rudra 2002). In order to capture the nature of compensation package that insures against
the dislocations due to globalization, but at the same time to maximize the number of
observations, I take the government final consumption share of GDP but subtract from it
the military expenditure share of GDP; this gives me the non-military government
consumption share of GDP. The limitation of this particular measure is that it starts from
1988.
11
I use this non-military government consumption share as a corroborative
measure of the compensation package. These data come from World Development
Indicators.

11
A similar concern leads me to not use data on transfers and subsidies. In World Development Indicators, systematic
data on government transfers starts in 1995.
18
One key independent variable in this analysis is globalization. Following the
convention in the literature, I measure globalization using the trade flows as percentage
of GDP (Rodrik 1998). I choose this measure over the alternatives such as the KOF
globalization index
12
because I want the globalization measure to be an indicator of the
structural disruption that globalization process has brought to the economy. The import
plus export share of GDP better captures the structural aspect of a country’s globalization
involvement than the other indicators.
The other key independent variable is the level of interindustry labor mobility at
the country-year level. This measurement is performed in section 3.
To simultaneously test the alternative explanations, I first include an indicator of
regime type. It has been argued that non-democratic regime may resort to less
compensation for its citizens during globalization because it can simply use the readily
available repression (Adsera and Boix 2002). From a measure of polity score from Polity
IV project (Marshall et al. 2008), which ranges from -10 to 10, I derive a trichotomy of
regime type with 1 being democracy, 0 being anocracy, and -1 being autocracy.
13

Where possible, I also include an indicator of terms of trade volatility. According
to Rodrik (1998), globalization brings the associated risks, which manifest especially in
the form of terms of trade volatility. So terms of trade volatility can be a direct measure
of the economic disruption brought by globalization, and because it happens concurrently
with globalization, it should enter as an interaction term with globalization measure. I

12
KOF globalization index is composed of three sub-indexes: Economic globalization, Social globalization, and
Political globalization. Each sub-index is in turn derived using statistical method by aggregating key variables
identified in the literature. For detail, see (Dreher 2006, 2009).
13
This follows the suggestion by the Polity IV project to categorize polity value into trichotomy, with -10 to -6 being
“autocracy”, -5 to +5 being “anocracy”, and +6 to +10 being “democracy”.
19
measure terms of trade volatility as the standard deviation of terms of trade. The data for
terms of trade comes from World Development Indicators.
Alesina and Wacziarg argue that country size is an important determinant of the
government compensation package, and government consumption is smaller in larger
countries (Alesina and Wacziarg 1998). I therefore include a country size indicator in the
(log) total population of a country. The data comes from Penn World Table 6.3.
Finally, the well known Wagner’s law says that as people become wealthier, they
consume more government services hence the size of government is larger (Cameron
1978). Due to this concern, I include (logged) per capita GDP as a wealth indicator to
control for the “Wagner’s law” effect.
I include other control variables as well. I add a dummy for OECD countries. It
may be that because OECD countries as a whole are both relatively rich and more
democratic, they may be more likely to compensate their citizens due to these
characteristics. I add a dummy variable for European Union countries. It may be that EU
integration and the permeation of norms within EU helps EU countries to invest more on
safety nets. I include the time variable “Year” to control the possibility that
compensation moves upward or downward over time.
Because my goal in the empirical analysis is to show that labor mobility is
negatively associated with government compensation, hence it is critical that
compensation will not affect labor mobility. However, this requirement is less like to be
true if I use wage differential across industries to measure labor mobility, since the very
purpose of compensation may serve to smooth out the wage differentials, thus violating
20
the exogeneity requirement for independent variables. For this reason, I choose to not
use wage differentials measure of ILM in the following empirical analysis.
The benchmark specification of my empirical model is:
) _ ( ) ( ) _ (
1 3 1 2 1 1 ÷ ÷ ÷
+ + + =
it it it it
sd Tot Openness Mobi Labor on Compensati | | | o
) _ ( ) ( ) ( ) _ * (
1 7 1 6 1 5 1 1 4 ÷ ÷ ÷ ÷ ÷
+ + + +
it it it it it
pc GDP Pop regime sd Tot Open | | | |
it i
u EU OECD c | | + + + + ) ( ) (
9 8

4.1.2 Findings
Table 4.1 presents the first batch of regression results. In the table I divide the
full dataset from 1960 to 2004 into nine periods and calculate the averages for all the
variables for each period. I control country fixed effects for all the models in this table,
and for half the models I also control the period dummies. I lag the main independent
variables by one period to allow time for the expected effects of independent variables to
transmit to the dependent variable of compensation.
[Table 4.1 about here]
The first four columns use as dependent variable the total government
consumption share of GDP; the next four columns use the non-military government
consumption share as DV. Within each of these two categories, the first two models
include the full set of independent variables but not control the period dummies, while
the other two models include full set of independent variables as well as the period
dummies. Looking across all models in table 4.1, the expectations based on the literature
are largely confirmed. Country size tends to have a negative impact on the government
consumption, just as the literature predicts. Wagner’s law matters, as indicator of wealth
always have a positive influence on government consumption. The terms of trade
volatility brought by globalization tends to induce more government consumption, as its
21
interaction term with globalization always has a positive sign, though it is not
consistently significant across different model configurations. Regime type, however,
tends to evince an opposite effect on government compensation as the literature predicts.
More democratic countries tend to invest less on compensation. But this effect is not
statistically significant.
Most important from table 4.1 is the finding that labor mobility tends to
negatively correlated with government compensation, whether measured by elasticity or
interindustry labor movement, higher labor mobility will lead to less investment in
government compensation. And this relationship is more robust if we measure
government compensation using the non-military part of government consumption.
I next show that whether the results in table 4.1 are sensitive to the way I
aggregate the data for every five-year interval. So rather than using the five-year period,
table 4.2 uses annual data from 1960 to 2004. One difference from table 4.1 is that I
cannot calculate the terms of trade volatility for a country in a specific year, hence I can
only enter globalization without interacting with terms of trade volatility into the
regressions.
[Table 4.2 about here]
Table 4.2 is organized the same as table 4.1. Most of the independent variables
behave very similarly as before. Country size tends to decrease compensation, while
wealth tends to increase compensation. Regime type again tends to be negatively
associated with compensation, in that more democratic countries will compensate less
during globalization. And this association is statistically significant. Globalization as
22
measured by trade openness tends to be negatively associated with government
compensation, reminiscent of a “race to the bottom” argument.
Once again, from table 4.2 we find a negative and statistically significant
relationship between labor mobility level and government compensation package.
These time series cross national evidence gives a rather clear picture. During
globalization, a country’s level of labor mobility tends to be negatively correlated with
the country’s size of compensation package. Thus, high ILM level can substitute a
substantial part of the country’s compensation package.
4.2. China’s location comparatively
The contention in this paper is that China may have had low level of government
compensation during globalization because China has had relatively high level of
interindustry labor mobility, and the substitution effect of high ILM obviates part of the
demand for more safety net provision. In this subsection, I show that comparatively
China has relatively high ILM and relatively low safety net provision.
In the dataset that I use to run the time series cross sectional regressions, the
coverage of the various labor mobility measures for China is from 1977 to 1986, which
coincides with the early period of China’s opening to world economy. I have tried to find
other data sources that have time-series-cross-sectional data on wages and employment at
industry levels; unfortunately, besides the UNIDO database no such systematic data seem
available.
14


14
I looked at STAN (Structural Analysis Database), available from OECD. But STAN is available only for 28 OECD
countries from 1970-2008 (employment data) or 1989-2008 (wage data), thus it is not feasible for inference beyond
OECD. I also looked at International Labor Organization’s LABORSTA database of labor statistics. However, the data
from LABORSTA have different reporting rules for different countries, making comparable data very scarce. Further,
the data are mostly available since mid 1990s, making it impossible to infer about earlier period.
23
So I limit the main dataset to years between 1977 and 1986, and compare key
variables in aggregates across different country groupings with China. The following
table shows the comparison.
Table 4.3. Comparison of ILM levels, Compensation, and Globalization, 1977-1986
ILM=Elasticity ILM=IR Compensation Openness

China 2.15 0.99 14.07 19.91
Developing -0.32 4.35 16.55 69.77
Developed -0.22 2.14 18.3 95.22
OECD -0.07 1.46 18.7 63.62
EU -0.17 1.27 21.3 71.35
Socialist -0.2 2.77 14.46 45.08
World -0.28 3.35 17.1 76.97


The elasticity measure of ILM shows that between 1977 and 1986 China had ILM
levels much higher than any other country groupings or the world.
15
During the same
time, ILM measured by industry reallocation in China tended to be rather low compared
with others, this may be due to the strict barriers initially exist in China that limit
people’s movement across industries. China’s size of public economy was the lowest in
all country groupings, including other socialist countries. During this period, China’s
involvement in global economy was very low, less than averages of both the developing
and socialist countries.

15
For the socialist countries, I use the definition by Kornai that was also used by other authors (Kornai 1992; Rodrik
1998; Sachs and Warner 1995). As a practical matter, I code the post communist countries as being socialist before
1992, and non-socialist after 1992 (inclusive). For developed and developing countries, I classify a country as
developing if this country has gross national income per capita in 2008 less than $11,905, which makes the country fall
into one of the three categories: low income, lower-middle income, or upper-middle income. Countries with GNI per
capita in 2008 larger than $11,906 are classified as developed countries. This classification follows the one used by the
World Bank (World Bank list of economies 2009).
24
5. Why China Has High ILM? A Brief Case Study
There can be many reasons why China has had relatively high ILM levels at least
during the early stage of its opening up to the global economy. The existing theories
argue that labor mobility, or rather factor mobility in general, is exogenous to political
process, and the main source of factor mobility changes is the industrialization process
and the concurrent technological changes (Hiscox 2002). China’s opening to world
economy during the past three decades also coincided with industrialization and
urbanization of China, hence it is very likely that ILM levels stay high during this period.
Less discussed in the literature but that may also potently shape the levels of labor
mobility domestically is the role of government policies. Observers of China’s political
economy can identify many influential government policies that deeply influence
China’s labor market, and that can have far-reaching impact on labor mobility in China.
The most direct policy that regulates China’s labor market may be the hukou
registration. Created in the early 1950s, hukou registration system helped restricted the
mobility of labor forces; especially it confined farmers to where their land was. Ever
since the opening of China’s economy in 1978 however, the hukou registration has
undergone many evolutions in the direction of loosing control of labor forces so as to
facilitate the movement of labor to booming industries along the coast and around big
cities (Chan and Zhang 1999). In this process, the policy change of hukou registration
may have greatly contributed to increased labor mobility from one sector (agriculture) to
another (non-agriculture industries).
The effect of this policy change and the consequent surge of workers into
industries and services (and out of agriculture) can be seen from official statistical data
as presented in table 5.1.
25
Table 5.1. Composition of Labor Force by Three Strata of Industry
Number of People (unit=10,000) Percentage

Primary
Industry
Secondary
Industry
Tertiary
Industry
Primary
Industry
Secondary
Industry
Tertiary
Industry

1965 23396 2408 2866 81.6 8.4 10
1970 27811 3518 3103 80.8 10.2 9
1975 29456 5152 3560 77.2 13.5 9.3
1978 28318 6945 4890 70.5 17.3 12.2

1980 29122 7707 5532 68.7 18.2 13.1
1985 31130 10384 8359 62.4 20.8 16.8
1990 38914 13856 11979 60.1 21.4 18.5
1995 35530 15655 16880 52.2 23 24.8

2000 36043 16219 19823 50 22.5 27.5
2005 33970 18084 23771 44.8 23.8 31.4

Note: The primary industry refers to agricultural, forestry, animal husbandry and fishery.
Secondary industry includes mining and quarrying, manufacturing, production and supply of
electricity, gas and water, and construction. Tertiary industry includes transport, storage, postal
and telecommunication services, wholesale and retail and catering services, finance and
insurance, real estate, health care, education, entertainment and government services, etc.
("China Statistical Yearbook" 2008)

The most prominent trend from table 5.1 is the decline of primary industry in
terms of people working and the concurrent rise of both secondary and tertiary
industries. The absolute number of people working in agriculture or similar sectors in
2005 posted a modest increase over that number in 1978 when the opening of China’s
economy happened, but this increase was most likely due to the natural increase of
population. Relatively, the percentage of labor force working in primary industry
decline dramatically over the same time, from 70.5% to 44.8%. Meanwhile, the number
and percentage of people working in secondary and tertiary industries increase greatly,
in combination in 2005, they account for 55.2% of the total of more than 750 million
labor forces in China. Relaxation of the hukou registration must have played a
26
significant role in enabling the movement of people from primary industry to other
industries, increasing the labor mobility levels in the process.
The overall social security package in China may also help ease the transition
process for ordinary Chinese workers, either when it comes to migrating to different
regions within China or changing industries of employment. Within the social security
system there are many programs, at the core there are old-age insurance, unemployment
insurance, and medical insurance. As for old-age insurance, in the past Chinese
enterprises were responsible for both the pension of their own retirees and the
administration of it. Ever since the opening of China’s economy, the government has
been active to take over that function and created social service institutions to deliver
the basic pensions. At the end of 2003, the basic pensions of retirees from enterprises
were all delivered by social service institutions, and 84.5 percent of those retirees were
under the administration of such institutions ("China's Social Security and Its Policy"
2004). In December 2009, the latest policy on old-age pension stipulated that starting
January 1
st
, 2010, old-age pension shall become portable across provinces, and this
applies to not only workers with urban hukou, but also migrant workers, most of whom
with rural hukou (Xu 2009). In expectable ways, such policies may help workers to
change employment across industries more easily, thus boosting labor mobility.
In the area of medical insurance, Chinese government established a national basic
medical insurance system for urban employees in 1998. By the end of 2003, some
109.02 million people around China had participated in the basic medical insurance
program, including 79.75 million employees and 29.27 million retirees ("China's Social
Security and Its Policy" 2004). The global economic crisis since 2008 clearly spurred
27
Chinese government to move further in increasing the coverage of health care. In early
2009, China announced its plan to spend $123 billion by 2011 to establish universal
health care for all its 1.3 billion citizens (Wong 2009). While the main motivation of
this plan may be to encourage people to consume more when they are free from the
concerns to save for unforeseen medical expenses, universal health care may also
encourage workers to attempt employment in different industries now that the social
risks have been lowered.
To sum, the brief case study of China indicates that the reason why ILM levels
have been relatively high in China during the past three decades may be both exogenous
and endogenous. Exogenously, over the past three decades in China we have witnessed
rapid industrialization and technological progress, which most likely would increase
labor mobility. Endogenously, many of the government social policies may have
intervened to encourage workers to move across industries in pursuit of higher income,
thus increasing the economy-wide labor mobility.
6. Conclusion
Over the past three decades, China may have been in a peculiar situation during
its development in that it can reap the gains of globalization without spending too much
to compensate its citizens from adjustment. I have argued that an important explanation
is the relatively high level of interindustry labor mobility in China during the past three
decades. Through large-N statistical analysis, I show that even after we control for
possible alternative explanations, labor mobility still has a robust dampening effect on
compensation package. And I show that China has higher labor mobility relative to
28
other country groupings. I explore the reason why China has had relatively high labor
mobility through a brief case study.
However, I want to conclude with a cautionary note about China’s future
globalization. That is, we should not expect this peculiarly beneficial situation in China
to continue indefinitely. First, as industrialization deepens in China, the initial rise of
ILM may eventually come down, and such a trend has been documented by other
scholars in development experiences in other countries (Hiscox 2002). As China
gradually catches up with other industrial leaders in technologies and management
know-how, ILM levels in China may come down for the same exogenous reasons as
they had in other countries. Second, even allowing part of ILM to be endogenous to
government policy interventions, there may be limits to these policies. For example,
when enough of agricultural workers have already migrated out and into other industries,
further relaxing the hukou registration system may only help little in encouraging ILM.
The same applies to old-age pension, universal health care, and other social security
programs. When the policies have exhausted their potential in propping up labor
mobility, as they eventually will, labor mobility levels will come down despite policies,
and ILM can no longer substitute much of the need for compensation. And when that
happens, Chinese government will have to start serious investment into compensation
and social safety nets. In the case where the pace of the decline of labor mobility
exceed the pace of the increase of social safety nets, we may even see increased
backlashes against globalization in China. In a nutshell, the continued lack of
investment in safety net programs may not be sustainable in China.
29

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1. Introduction
Ever since China adopted a reform and open policy three decades ago, it has undergone a rapid globalization of its economy and economic policies. Measured by the usual indicator of trade openness, i.e., export plus import over GDP, China’s globalization has increased from 9.4% in 1978 to 65.0% in 2003 (according to World Development Indicator 2009), or from 13.8% in 1978 to 56.7% in 2003 (in constant prices according to Penn World Table 6.3). Measured by another index, the KOF index on economic globalization, China’s globalization increased from 22.2% in 1978 to 54.2% in 2003. Along with more globalization, a large and established literature argues that the size of public economy will also increase. Authors like Cameron have stressed that globalization usually contribute to the increase of public sector so that there is a positive relationship between globalization and public economy, and this is because governments are pressured to increase the size of public economy in order to compensate the losers from globalization (Cameron 1978). In addition, authors like Rodrik point out that the growing public sector in tandem with increasing international trade may serve an insurance function. Post WWII, many Western democracies have constructed elaborate social safety net to support the embedded liberalism compromise where the citizens acquiesce to their adjustment costs in return for government safety net programs and internationalization of commerce. The safety net programs, which constitute a large part of public economy, serve as an insurance against the dislocations due to globalization. Deeper globalization brings higher demand for safety net insurance and consequently bigger public economy (Hays et al. 2005; Rodrik 1997, 1998; Ruggie 1982).

1

But an expected rise of the size of public economy, for the purpose to compensate the losers from globalization, seems not occurred in China. China’s public economy has been small relative to the degree of its globalization involvement.
Figure 1.1: Correlation between Trade Openness and Compensation
Gov't consumption as %GDP 0 10 20 30 40 Gov't consumption as %GDP 0 20 40 60

Pre reform

Post reform

CHN

CHN

0

100 200 Trade openness

300

0

100

200 300 Trade openness

400

Gov't consumption as %GDP 0 20 40 60

All years

CHN

0

100

200 300 Trade openness

400

Fitted line is linear prediction

In figure 1.1, I plot trade openness against government consumption as % of GDP, which is my measure of the size of the public economy. I show three panels that aggregate the data for each country over three different time period: Pre reform, meaning the time before China’s adoption of more open economic reform in 1978; Post reform; and All years, which run from 1960 to 2004 in my dataset. It shows that China’s size of the public economy is below the fitted line, which denotes the typical size of a country’s public economy given its level of openness; though this trend is clearer in Pre-reform and All years panels than in Post-reform era. Figure 1.2 is similarly constructed, but instead

2

Based on the conventional view of compensation hypothesis or embedded liberalism. richer societies may simply “consume” more government services. we should observe either a growing clamor from workers 3 . and GDP per capita. Figure 1. This is done by first run a simple cross sectional regression on the aggregated government consumption. given that China has become extensively involved in the global economy. then subtract the portion of government consumption explained by GDP per capita. openness. I pare off the part of government consumption that may be due to the “Wagner’s law”.2: Correlation between Trade Openness and Offset Compensation Offset gov't consump as %GDP 10 20 30 40 Pre reform Offset gov't consump as %GDP 0 20 40 60 Post reform CHN CHN 0 100 200 Trade openness 300 0 100 200 300 Trade openness 400 Offset gov't consump as %GDP 0 20 40 60 All years CHN 0 100 200 300 Trade openness 400 Fitted line is linear prediction The puzzle is. we should expect that such involvement brings with it adjustment cost for ordinary workers.of using the government consumption share directly.2 again shows China’s public economy has always been below the predicted level given its level of globalization and controlling for the “Wagner’s law”. that is. Figure 1.

demanding more cushion and safety nets from the government. and she attributes the reason to the collective action problem among the numerous labor owners in developing countries and the lack of strong labor-market institutions there (Rudra 2002). globalization of trade will benefit the abundant labor factor. Scholars who argue for the compensation hypothesis or the embedded liberalism do not rule out the factor endowment effects. the pattern of positive relationship between globalization and public economy still holds (Rodrik 1997. Why has social safety net not become a pressing demand in China given its deep involvement in world economy? What may explain the under-provision of safety net in China? One possible explanation is the Stolper-Samuelson theorem and the factor endowment in China. nor do we observe a systematic demand for more safety net program from Chinese workers. Because China has abundant labor forces. the lack of data on especially China’s labor market institutions prevents me from evaluating this alternative. or more political backlashes against globalization and open economic policies 1 . however. and it is possible that labor’s gains from trade may compensate them against the adjustment costs. 1998). Though this argument is potentially valid to explain the lack of welfare state and public compensation in China. Nita Rudra argues that the welfare states are declining in developing countries during globalization. However. enough so that they demand less of the compensation from government. 4 . they find that even in a global sample of both developed and developing countries. 1 In China’s context. rather. So far. no systematic evidence shows that Chinese workers had engaged in or is fermenting against the overall open economic program. this may take the form of strikes or other group incidences with the goal of stopping globalization. this explanation lacks the empirical backup.

hence high ILM helps distribute the gains from trade from the globalization winners to others who have similar labor skills but would otherwise be the globalization losers. I present a theory on the substitution effect between labor mobility and compensation. Because high ILM ensures a more equitable income distribution. I show that ILM levels have important implications on the income distribution among labor owners. that is. I argue a large part of the lack of investment is due to the socio-economic factor of interindustry labor mobility (ILM). In order to push for its globalization agenda more cheaply. Chinese government may have repressed the workers who have been demanding more safety nets. functionally it substitutes part of the government compensation intended for the same purpose. and empirically show that China’s lack of safety nets may be due to relatively high ILM levels in China concurrent with the Post-reform era. 5 . This paper will not engage in a detailed examination of the observable implication of this argument in China. In this paper. I propose in this paper a different explanation for China’s lack of social safety net. so that the lack of safety nets may be explained by China’s authoritarian regime. can we observe widespread resistance among workers who are against the government repression? Instead I will conduct a cross national empirical test of this explanation in this paper. if this explanation is correct. it can repress its population to fulfill the government’s goal. It may be that because China has an authoritarian regime.Yet another explanation for the lack of social safety net in China is the regime argument. High ILM levels allow more equitable income distribution according to workers’ marketable labor skills.

they are usually the most politically relevant forces in a country. Section 5 conducts a brief case study on China. Section 4 performs empirical analysis on both the large-N sample and China. I then argue that this effect implies a negative relationship between ILM levels and the size of compensation. this paper only focuses on the model implications to labor. 2. Section 6 concludes. and second. however. they are usually the intended recipients of compensation package. Jones 1965. 2 and discuss how this will affect the demand for compensation during globalization. I use distribution of income and distribution of labor income interchangeably to denote the income distribution among workers (labor factor owners). 2. I focus on labor owners because. first. Throughout this paper. Section 3 measures interindustry labor mobility. 3 The model also reveals the relationship between labor mobility levels and relative income distribution of capital owners. I will first show that levels of labor mobility can have profound effect on the income distribution within an economy. Hiscox 2002. Labor mobility and income distribution The relationship between labor owners’ income distribution and levels of interindustry labor mobility can be derived from a general equilibrium model first proposed by Ronald Jones and further developed by others (Hill and Mendez 1983. 2 6 . 3 4 I will not present the detailed derivation of the model in this paper. though it can be available upon request.1. Parai and Yu 1989). Theory and Expectation In this section. high ILM can lead to more equitable distribution of income among labor in accord with each worker’s general labor market skills. 1971. I present a theory relating levels of interindustry labor mobility to domestic income distribution among workers. conversely low ILM will lead to less equitable income distribution. Section 2 lays out the theory about the effect of ILM on labor income distribution and draws a general expectation.The rest of this paper structures as follows.

Conversely lower ILM will lead to increasing mismatches between workers’ income and skills. Higher ILM levels will lead to a more equitable income distribution. Using the efficiency-wage model framework. In future research I will consider models with unemployment. when the wages are set at efficiency-levels and unemployment used as a worker discipline device. just as in the Stolper-Samuel model. rather. depends on ILM levels. (Walde and Weiss 2006) combined matching process with a Jonesian specific model in the context of a small open economy.Under competitive market condition. workers in industry one will find it harder to move to industry two to take advantage of higher wages there. even though wages are set competitively 4 The Jones model assumes market efficiency and no unemployment. We can have a better understanding of this relationship if we can hypothetically move labor mobility in two opposite directions and see the consequences. in the sense that workers’ income will be more commensurate with their labor market skills. then despite having the required skills. therefore a less equitable income distribution. 7 . I define an equitable income distribution not as one where every labor owner. 1999) argued that unemployment could be the consequence of costly search processes. Mismatches will become increasing common in that one group of similarly skilled workers will earn lower wages in industry one while another group of similarly skilled workers will earn higher wages in industry two. an individual worker’s wage is set primarily by two things: the individual worker’s skill level (or productivity). 1988. (Shapiro and Stiglitz 1984) proposed that involuntary unemployment can be the equilibrium outcome in modern labor markets. (Davidson et al. First if labor mobility levels become lower. The bottom line is that unemployment can be incorporated into the above model without altering the main conclusions. should earn similar income. and the price of goods produced by the industry this worker is in. or specifically the dynamic change of relative wages across industries. I define it as one where individual labor owner’s income should be commensurate with his own productivity. 1991. regardless of his marketable labor skill (or productivity). (Hoon 1991)and (Bretcher 1992)argued that in an open economy efficiency-wages can lead to involuntary unemployment as the jobless workers cannot bid down the wages to the full-employment level. The model shows that the dynamics of income distribution. Besides efficiency-wage argument.

Even those who are currently winners of globalization may still support the safety net programs because of the 8 . if labor mobility levels become higher. Substituting for compensation In an open economy. the changing world prices and forces of competition will impose adjustment costs on participating economies. there will be an ever increasing need to increase the size of public sectors. On the other hand. The income distribution among labor hence becomes less equitable with lower ILM levels. higher ILM can allow the booming export industries during trade internationalization to more easily absorb workers with the required skills from other industries while paying the market-clearing wages.2.within the respective industries. thus making the economy-wide income distribution to more closely follow the distribution of skills. not surprisingly. the bulk of such adjustment will be born by labor owners due to their sheer numbers. 2. In other words. especially the part that can increase the income for those who have been negatively affected by integration with world economy. For example. The direct or indirect programs to compensate temporary losers of globalization can in effect provide a social safety net that cushions the (negative) impact of globalization for all participants of globalization. Scholars have discussed that when an economy becomes more integrated into the world economy. with higher ILM levels. Higher labor mobility helps integrate the separate industries and as a result the industrial location of workers within the economy tends to matter less since workers with similar labor productivity will earn similar income everywhere in the economy. income distribution becomes more equitable. similarly skilled workers in industry one will find it easier to move to industry two to earn higher wages there.

Economic interests of labor owners will be coherent in the sense that any economic shocks on labor. 1998. I argue that the involvement in globalization may only be part of the reason for the demand of compensation. In specific. be they exogenous or policy-induced. In this literature on the desirability of compensation package. Ruggie 1982). Compensation strategy works by maintaining the compensation recipient’s income at similar level as before the adjustment occurred. because ILM has the pronounced effect of making income distribution more equitable. higher ILM levels may substitute much of the demand for compensation during the globalization process. Scholars maintain that such social safety net is critical to muster the support for the deepening of international economic integration (Adsera and Boix 2002. Fernandez and Rodrik 1991. the relationship between support for globalization and the size of compensation package is generally treated as automatic and positive. i. so that the recipient will not experience a sudden severe income drop and turn negative against globalization.. Cameron 1978. Based on my previous discussion about the effect of ILM levels on the income distribution among labor. but also on labor as a whole. workers cannot easily move to more lucrative employment in other 9 .uncertainty associated with the identity of winners and losers. High levels of ILM make labor owners coherent in their economic interests. will exert their impact not only on some specific groups of labor. High ILM ensures that labor income distribution is equitable so that income to each individual labor owner will be commensurate with his productivity level. Boix 2000. and will not depend on the identity of his industry of employment. Rickard 2005.e. Under low ILM. more compensation will be associated with higher social support for globalization (Adsera and Boix 2002). Rodrik 1997.

Because compensation strategy aims to achieve the similar result of a stable income stream to an average worker. the goal of the compensation strategy to make up for the loss of income during globalization and to guarantee workers a more stable income stream will become more appealing to the labor force. I propose the following explanation for China’s relative lack of safety nets: There have been relatively high levels of labor mobility in China over the past three decades. On the other hand. and their economic interests are largely determined by the identity of industries they happen to be in rather than the labor market skills they have accrued. income distribution tends to be inequitable and gains from trade will be clustered in pockets of industries and difficult to reach the general labor force. higher ILM is correlated with less compensation and vice versa.e. In an open economy.industries. income loss due to globalization can be large to legions of workers. In this situation. We can therefore have the following simple expectation. Income distribution will be far less equitable than under high ILM. equitable distribution of income among workers will ensure that gains from trade can trickle down to the general labor force quickly. so that loss of income to some groups of workers due to the economic disruption of globalization will be minimal. that levels of ILM tend to be negatively related to the size of compensation package. if the prevailing ILM level is low in the open economy. consequently their demand for compensation will be amplified. i. and such high ILM substitutes a substantial part of the 10 . In light of this general pattern. if the prevailing ILM level is high.. high ILM level can therefore substitute a substantial part of the function performed by compensation.

The elasticity measure of ILM Interindustry labor mobility is defined as the ability of labor owners to respond to wage incentives by moving across industry lines. Measures of Interindustry Labor Mobility 3. without actual employment changes. So that high ILM contributes to the lack of safety net in China. with high labor mobility. The average wages at time t for sectors 1 t t t t and 2 are w1 and w2 . but it is useful to make comparison with the benchmark of competitive labor market consisting of homogenous work forces. with E1 and E 2 in sectors 1 and 2 respectively ( E1  E 2  E t ). Formally. Unimpeded labor movement upon price incentives in such markets would naturally lead to higher measure of elasticity (or ILM) than hampered labor movement upon the same incentives. I suppose a 2x2x2 framework (two sector. this follows the theoretical frameworks of Stolper-Samuelson and Jones models (Hill and Mendez 1983. Stolper and Samuelson 1941). 5 t t 5 This may be a grossly simplified assumption. Such ability needs not to manifest itself as actual labor flows. The measurement of interindustry labor mobility therefore should stress the responsiveness of workers’ employment choices upon interindustry wage differentials. 3. 1971. 11 . the two sectors in the economy are denoted 1 and 2. I consider both labor movement and wage incentives simultaneously when measuring interindustry labor mobility. Following Krueger and Summers I assume equally skilled workers (Krueger and Summers 1988). there are a total number of E t workers in the labor market at time t . Hiscox 2002. two factor. the potential threat of labor leaving low paying industries for high paying ones may be enough to convince the low wage industries to raise wages. for example. Jones 1965.1.expected demand for compensation predicted by China’s global involvement. two commodities).

change of wage differential in time t  1 should explain the change of relative employment of industry i at time t . Et is total employment of the economy at time t .In Stolper-Samuelson and Jones frameworks. differential between the wage of industry i and the average wage of the whole economy should be the primary motivator of labor movement into or out of industry i . I lagged the wages by one period. the whole economy. I estimate the following equation: ln( Eit / Et )   t   t  ln(wit 1 / wt 1 )   it Where Eit is the employment in industry i at time t . wit 1 is the average wage in industry i at time t  1 . the elasticity measure of labor mobility across industries can be denoted  L . This elasticity definition specifically captures the labor responsiveness to cross-industry wage differentials. wt 1 is the economy-wide average wage at time t  1 .  it is the error term that is assumed to be 6 The theoretical framework does allow labor mobility to be defined at industry or sector level. in place of the two-sector in the 2x2x2 frameworks. 7 For the practical purpose of being able to use regression to estimate ILM. To operationalize the estimation of this elasticity measure of ILM at the countryyear level. For every country-year. the interindustry labor mobility is defined as the elasticity of the ratio of labor supplies to the two sectors with respect to the relative wage differentials. I set up a dichotomy between any one industry vs. I make the assumption that in competitive labor markets. Mathematically. 7 Specifically. and economy-wide ILM 6 at time t is:  L t  d ln( E1t / E 2 t ) / d ln(w1t 1 / w2 t 1 ) Notice here that to ensure that labor factor owners move their productive assets only after they perceived the wage differentials. for detail. see Hill and Mendez 1983. 12 .

Once I derive the unbiased predicted relative wages from the first stage. i. and aggregate output less industry i . 8 13 . thus affect relative changes of wages. The concern here is that the observed wage levels may have already anticipated changes in the industrial employment structure. and the aggregate employment and output variables are country-year aggregates. but it may have little to do with relative change of employment in a specific I choose the aggregates less industry i for the following reason. and  t is the estimated elasticity measure of ILM in this country-year. hence they will not vary. I use a two stage least square procedure. All these variables are expressed in their natural log forms. To enable industry-level variability. since the basic unit of my data here is country-year-industry.e. so that: t  d ln( Eit / Et ) d ln(wit 1 / wt 1 ) Higher elasticity values denote higher ILM levels I have taken steps to control the potential endogeneity this measure of ILM. so that relative changes of wage differentials last period are not independent from relative changes of employment proportions in this period. I choose as instruments the following exogenous variables that are purported to be unrelated to changes of employment structure: aggregate employment less industry i . for each of these variables I calculate their country-year-industry values by calculating the country-year values without the value of the corresponding industry. In order to control for these anticipation effects.. I can estimate the labor elasticity just as before in the second stage. 8 Aggregate employment less industry i roughly indicates business cycle and the overall health of the economy.independent and normally distributed. The key here is to find good instruments that can predict the changes of interindustry wage differentials but are unrelated to the changes of relative employment. changes of this variable may indicate fluctuations of the overall labor supply. Operationally. unrelated with the disturbance term in the estimating equation.  t is the constant term.

when actual data were fed to the algorithm. But this is not true in actual data for many reasons. yet in fact the estimation shows ILM can be negative. this elasticity measure of labor mobility reveals some discrepancy in the original theoretical frameworks. However. such that qualified workers employed in lower paid industries do not have the ability to move to take advantage of higher wages elsewhere that commensurate with their skill or human capital. then construct the un-instrumented measure of ILM using OLS. Workers may not be fully rational and they may make “mistakes” by moving to lower paying industries. The reason is that in conventional frameworks ILM is non-negative because for example when outside wage is lower than in industry i . and another likely culprit may be the existence of barriers to interindustry labor movement. Furthermore. workers in industry i can at least stay put and ILM will be zero. and it is not obvious how changes of aggregate output can affect the changes of specific industrial employment.industry. This is so is because once I construct the instrumented measure of ILM using the 2SLS approach. The frameworks assume ILM is non-negative. the elasticity measure without endogeneity control is slightly preferred over the instrumented version. which inform me that it is safe to use the un-instrumented measure of ILM over the instrumented version in empirical analysis. Aggregate output values less industry i show the size of the economy and its changes may be the basis for relative wage changes. the results show that 2SLS is not an improvement over OLS in almost 98% of the cases using Hausman tests. normal population increase may mean that even if workers in industry i stay put but ILM will still not be zero. and then use Hausman Specification Test. 14 . workers may still be rational but they “anticipate” the future wage rises in presently lower paying industries.

the term on the left represents the total number of employment changes (jobs lost and gained) between t and t-z.5 ( Ei i 1 t tz N  Ei ) t Where Ei and Ei are employment in the i th industry at times t and t-z. Alternative measures of ILM I corroborate with two other measures of ILM used in the political economy literature. interindustry labor movement or interindustry wage differentials. 2005). Subtracting the As of 2005. 10 Hiscox and Rickard and Rickard in their studies have used an industry reallocation index as their main measure of ILM (Hiscox and Rickard 2002. 10 9 15 .In especially the last scenario. negative elasticity values reveal the extent of the existence of interindustry labor movement barriers and indicate the lack of interindustry labor mobility. In the numerator. The term on the right is the total number of jobs lost or gained and not offset by a gain or loss in other industries. 9 3. Rickard 2004. The summation of absolute values counts each job gained or lost as a change in the structure of employment. which is at the 3-digit industry level of ISIC code (rev. as in: IRt  z   i 1 N Ei  Ei t tz   Ei   Ei t i 1 i 1 tz N N tz 0. I use the United Nations Industrial Development Organization (UNIDO) Industrial Statistics Database. There are other measures. To estimate this measure. such as the measures used in the Variety of Capitalism literature.2. these are the total numbers of uncompensated changes in employment. namely. (Hainmueller and Hiscox 2007) gave review of many labor mobility measures.2) and covers 217 countries and 29 categories of manufacturing sectors over the period from 1961 to 2003.

if there were return differentials for different factors such as labor and capital. or the compensated changes in the structure of employment. and a low variation showed high levels of factor mobility (Hiscox 2001. Under this assumption of factor price equalization. meaning employment changes resulting from pure shifts of jobs across sectors. The value is divided by total employment (the average across t and t-z) to obtain a measure expressed as a rate. the differentials would be arbitraged away through factor movements. 2002). and W the mean wage of the whole economy. the COV measure of ILM is based on the assumption of “law of one price”. Hiscox used Coefficient of Variation (COV) of wages across industries within the domestic economy “as a crude. The formula for wage differentials measure of interindustry labor mobility is:  N  1   (Wi  W ) 2   i 1  N 1 Cov   N 1   Wi   i 1  N Where Wi is average wage per employee in the i th industry. general indicator of interindustry labor specificity”(Hiscox and Rickard 2002). as other measures of interindustry wage differentials. a high variation showed low levels of interindustry factor mobility.uncompensated from the total changes in employment provides a measure of total job reallocations between industries. 16 . The quickness of the adjustment process would be captured by the range of variation in returns.

0004 3157 3459 0.0000 2739 2741 1. I then comparatively show China’s ILM levels and size of compensation. and their correlation table is given below.0000 COV of wages 0.0000 Industry reallocation 0.1. I construct three measures of interindustry labor mobility. Empirical Analysis I present empirical evidence in this section. A pure cross-national analysis may not be a good strategy for the purpose here. The substitution mechanism describes a general pattern. Table 3.0000 Elasticity 3157 -0. Large N analysis The goal in this subsection is to establish the relationship that interindustry labor mobility levels tend to be negatively correlated with a country’s size of compensation package.2) that covers 217 countries from 1961 to 2003. so this subsection will be an empirical analysis for a global sample. 4. because labor mobility substitutes part of the function of compensation. I first present large-N analysis to establish the general pattern that ILM is negatively correlated with compensation. Pairwise correlation of different measures of ILM Elasticity COV of wages Industry reallocation 1.0631 1.2116 0. as doing so necessarily involves aggregating variations of labor mobility and compensation over time.0.Applied to the UNIDO data of 29 manufacturing sectors at the 3-digit industry level (ISIC rev.0053 2704 4.0536 0. But that will throw out essential information 17 .

The limitation of this particular measure is that it starts from 1988.1 Data and method My dependent variable is the size of the compensation package. this gives me the non-military government consumption share of GDP. 18 . Nita Rudra uses social security and welfare as a percentage of GDP (Rudra 2002). This follows the literature. For example. in analyzing the correlation between government size and openness. These data come from World Development Indicators.1. In analyzing the welfare state in less developed countries.about the changes of labor mobility levels and the corresponding changes of compensation package over time. but at the same time to maximize the number of observations. In order to capture the nature of compensation package that insures against the dislocations due to globalization. Rodrik justifies the use of government consumption share of GDP by concluding that “Governments appear to have sought to mitigate the exposure to risk by increasing the share of domestic output they consume” (Rodrik 1998). the empirical analysis in this subsection will be time-series cross-sectional. 11 I use this non-military government consumption share as a corroborative measure of the compensation package. Other scholars disagree using this measure. I use the government consumption share of the GDP. 4. 11 A similar concern leads me to not use data on transfers and subsidies. I take the government final consumption share of GDP but subtract from it the military expenditure share of GDP. In World Development Indicators. In order to preserve as much information as possible about the correlation between labor mobility and compensation. systematic data on government transfers starts in 1995. and as a rough indicator.

The import plus export share of GDP better captures the structural aspect of a country’s globalization involvement than the other indicators. For detail. and -1 being autocracy. which ranges from -10 to 10. The other key independent variable is the level of interindustry labor mobility at the country-year level. Each sub-index is in turn derived using statistical method by aggregating key variables identified in the literature. 13 This follows the suggestion by the Polity IV project to categorize polity value into trichotomy. 2008). and because it happens concurrently with globalization. Following the convention in the literature. I choose this measure over the alternatives such as the KOF globalization index 12 because I want the globalization measure to be an indicator of the structural disruption that globalization process has brought to the economy. According to Rodrik (1998). I derive a trichotomy of regime type with 1 being democracy. This measurement is performed in section 3. 0 being anocracy. and +6 to +10 being “democracy”. which manifest especially in the form of terms of trade volatility. 2009).One key independent variable in this analysis is globalization. From a measure of polity score from Polity IV project (Marshall et al. I also include an indicator of terms of trade volatility. I 12 KOF globalization index is composed of three sub-indexes: Economic globalization. To simultaneously test the alternative explanations. 19 . 13 Where possible. and Political globalization. I measure globalization using the trade flows as percentage of GDP (Rodrik 1998). it should enter as an interaction term with globalization measure. -5 to +5 being “anocracy”. It has been argued that non-democratic regime may resort to less compensation for its citizens during globalization because it can simply use the readily available repression (Adsera and Boix 2002). So terms of trade volatility can be a direct measure of the economic disruption brought by globalization. see (Dreher 2006. globalization brings the associated risks. I first include an indicator of regime type. with -10 to -6 being “autocracy”. Social globalization.

I include the time variable “Year” to control the possibility that compensation moves upward or downward over time. I add a dummy for OECD countries. I therefore include a country size indicator in the (log) total population of a country. hence it is critical that compensation will not affect labor mobility. Finally. The data comes from Penn World Table 6. Due to this concern. they consume more government services hence the size of government is larger (Cameron 1978). Because my goal in the empirical analysis is to show that labor mobility is negatively associated with government compensation. I include other control variables as well. The data for terms of trade comes from World Development Indicators. this requirement is less like to be true if I use wage differential across industries to measure labor mobility. It may be that because OECD countries as a whole are both relatively rich and more democratic. thus violating 20 . It may be that EU integration and the permeation of norms within EU helps EU countries to invest more on safety nets. since the very purpose of compensation may serve to smooth out the wage differentials. they may be more likely to compensate their citizens due to these characteristics. the well known Wagner’s law says that as people become wealthier. However. I add a dummy variable for European Union countries.3.measure terms of trade volatility as the standard deviation of terms of trade. and government consumption is smaller in larger countries (Alesina and Wacziarg 1998). Alesina and Wacziarg argue that country size is an important determinant of the government compensation package. I include (logged) per capita GDP as a wealth indicator to control for the “Wagner’s law” effect.

2 Findings Table 4. I control country fixed effects for all the models in this table. The benchmark specification of my empirical model is: Compensationit     1 ( Labor _ Mobiit 1 )   2 (Opennessit 1 )   3 (Tot _ sd it 1 )   4 (Openit 1 * Tot _ sd it 1 )   5 (regimeit 1 )   6 ( Popit 1 )   7 (GDP _ pcit 1 )   8 (OECD)   9 ( EU )  u i   it 4. [Table 4. the expectations based on the literature are largely confirmed.the exogeneity requirement for independent variables.1. The terms of trade volatility brought by globalization tends to induce more government consumption.1.1 presents the first batch of regression results. Within each of these two categories. the next four columns use the non-military government consumption share as DV. the first two models include the full set of independent variables but not control the period dummies. For this reason. and for half the models I also control the period dummies. just as the literature predicts.1 about here] The first four columns use as dependent variable the total government consumption share of GDP. as indicator of wealth always have a positive influence on government consumption. I lag the main independent variables by one period to allow time for the expected effects of independent variables to transmit to the dependent variable of compensation. In the table I divide the full dataset from 1960 to 2004 into nine periods and calculate the averages for all the variables for each period. Looking across all models in table 4. Country size tends to have a negative impact on the government consumption. as its 21 . Wagner’s law matters. while the other two models include full set of independent variables as well as the period dummies. I choose to not use wage differentials measure of ILM in the following empirical analysis.

table 4. Globalization as 22 . in that more democratic countries will compensate less during globalization.2 uses annual data from 1960 to 2004. Regime type again tends to be negatively associated with compensation. while wealth tends to increase compensation. Regime type. though it is not consistently significant across different model configurations. tends to evince an opposite effect on government compensation as the literature predicts.2 about here] Table 4. More democratic countries tend to invest less on compensation. Country size tends to decrease compensation.1 is that I cannot calculate the terms of trade volatility for a country in a specific year. So rather than using the five-year period. And this relationship is more robust if we measure government compensation using the non-military part of government consumption. higher labor mobility will lead to less investment in government compensation. Most of the independent variables behave very similarly as before. hence I can only enter globalization without interacting with terms of trade volatility into the regressions.1 is the finding that labor mobility tends to negatively correlated with government compensation.1. whether measured by elasticity or interindustry labor movement.2 is organized the same as table 4. I next show that whether the results in table 4. One difference from table 4.1 are sensitive to the way I aggregate the data for every five-year interval. [Table 4. however.interaction term with globalization always has a positive sign. But this effect is not statistically significant. Most important from table 4. And this association is statistically significant.

high ILM level can substitute a substantial part of the country’s compensation package. These time series cross national evidence gives a rather clear picture. Once again. making comparable data very scarce. thus it is not feasible for inference beyond OECD. Further. reminiscent of a “race to the bottom” argument. and the substitution effect of high ILM obviates part of the demand for more safety net provision. available from OECD. During globalization. unfortunately. a country’s level of labor mobility tends to be negatively correlated with the country’s size of compensation package. China’s location comparatively The contention in this paper is that China may have had low level of government compensation during globalization because China has had relatively high level of interindustry labor mobility. But STAN is available only for 28 OECD countries from 1970-2008 (employment data) or 1989-2008 (wage data). making it impossible to infer about earlier period. However. 23 . the data are mostly available since mid 1990s. I have tried to find other data sources that have time-series-cross-sectional data on wages and employment at industry levels.2 we find a negative and statistically significant relationship between labor mobility level and government compensation package. which coincides with the early period of China’s opening to world economy. In the dataset that I use to run the time series cross sectional regressions. In this subsection. 4.measured by trade openness tends to be negatively associated with government compensation. Thus. I also looked at International Labor Organization’s LABORSTA database of labor statistics. from table 4.2. the coverage of the various labor mobility measures for China is from 1977 to 1986. besides the UNIDO database no such systematic data seem available. I show that comparatively China has relatively high ILM and relatively low safety net provision. 14 14 I looked at STAN (Structural Analysis Database). the data from LABORSTA have different reporting rules for different countries.

08 76. I code the post communist countries as being socialist before 1992. lower-middle income.77 3. 1977-1986 ILM=Elasticity ILM=IR Compensation Openness China Developing Developed OECD EU Socialist World 2.28 0.3.55 18.32 -0.07 -0. 24 . Countries with GNI per capita in 2008 larger than $11.15 -0. I use the definition by Kornai that was also used by other authors (Kornai 1992. or upper-middle income. The following table shows the comparison.So I limit the main dataset to years between 1977 and 1986. During this period. For developed and developing countries. Sachs and Warner 1995).77 95.97 The elasticity measure of ILM shows that between 1977 and 1986 China had ILM levels much higher than any other country groupings or the world. ILM measured by industry reallocation in China tended to be rather low compared with others. Compensation. As a practical matter. I classify a country as developing if this country has gross national income per capita in 2008 less than $11. less than averages of both the developing and socialist countries.3 18.27 2.46 17.99 4. China’s size of public economy was the lowest in all country groupings. and Globalization.7 21.62 71.35 2. which makes the country fall into one of the three categories: low income. Comparison of ILM levels.46 1.3 14.14 1.17 -0. this may be due to the strict barriers initially exist in China that limit people’s movement across industries. This classification follows the one used by the World Bank (World Bank list of economies 2009). and compare key variables in aggregates across different country groupings with China. Table 4.91 69.35 14. 15 For the socialist countries.905. Rodrik 1998.07 16. including other socialist countries.2 -0. China’s involvement in global economy was very low.35 45.22 63.906 are classified as developed countries. 15 During the same time.22 -0.1 19. and non-socialist after 1992 (inclusive).

In this process. China’s opening to world economy during the past three decades also coincided with industrialization and urbanization of China. The existing theories argue that labor mobility. Ever since the opening of China’s economy in 1978 however. 25 . Created in the early 1950s. The most direct policy that regulates China’s labor market may be the hukou registration. Observers of China’s political economy can identify many influential government policies that deeply influence China’s labor market. is exogenous to political process. Why China Has High ILM? A Brief Case Study There can be many reasons why China has had relatively high ILM levels at least during the early stage of its opening up to the global economy. hence it is very likely that ILM levels stay high during this period. Less discussed in the literature but that may also potently shape the levels of labor mobility domestically is the role of government policies. the policy change of hukou registration may have greatly contributed to increased labor mobility from one sector (agriculture) to another (non-agriculture industries). and the main source of factor mobility changes is the industrialization process and the concurrent technological changes (Hiscox 2002). the hukou registration has undergone many evolutions in the direction of loosing control of labor forces so as to facilitate the movement of labor to booming industries along the coast and around big cities (Chan and Zhang 1999). hukou registration system helped restricted the mobility of labor forces. The effect of this policy change and the consequent surge of workers into industries and services (and out of agriculture) can be seen from official statistical data as presented in table 5.1. especially it confined farmers to where their land was. or rather factor mobility in general.5. and that can have far-reaching impact on labor mobility in China.

4 Note: The primary industry refers to agricultural.Table 5. postal and telecommunication services. Secondary industry includes mining and quarrying. Meanwhile. finance and insurance.5 23. forestry.2 13.2% of the total of more than 750 million labor forces in China.2 50 44.1 52. real estate.000) Percentage Primary Secondary Tertiary Primary Secondary Industry Industry Industry Industry Industry 1965 1970 1975 1978 1980 1985 1990 1995 2000 2005 23396 27811 29456 28318 29122 31130 38914 35530 36043 33970 2408 3518 5152 6945 7707 10384 13856 15655 16219 18084 2866 3103 3560 4890 5532 8359 11979 16880 19823 23771 81.8%.4 60. ("China Statistical Yearbook" 2008) The most prominent trend from table 5. production and supply of electricity. gas and water.4 23 22.8 27. Tertiary industry includes transport.1. Relaxation of the hukou registration must have played a 26 . entertainment and government services. but this increase was most likely due to the natural increase of population. from 70.8 Tertiary Industry 10 9 9. education. The absolute number of people working in agriculture or similar sectors in 2005 posted a modest increase over that number in 1978 when the opening of China’s economy happened. storage. Relatively.3 18.1 is the decline of primary industry in terms of people working and the concurrent rise of both secondary and tertiary industries.3 12. the number and percentage of people working in secondary and tertiary industries increase greatly.8 8.2 70.2 13.8 18. in combination in 2005.2 20. health care.1 16. manufacturing.6 80.5 24. Composition of Labor Force by Three Strata of Industry Number of People (unit=10. and construction. wholesale and retail and catering services.5 31. animal husbandry and fishery. etc. the percentage of labor force working in primary industry decline dramatically over the same time.8 77.7 62.5 68.5% to 44. they account for 55.8 21.5 17.4 10.

02 million people around China had participated in the basic medical insurance program. thus boosting labor mobility. most of whom with rural hukou (Xu 2009). unemployment insurance. Ever since the opening of China’s economy. increasing the labor mobility levels in the process.significant role in enabling the movement of people from primary industry to other industries. in the past Chinese enterprises were responsible for both the pension of their own retirees and the administration of it. and medical insurance. including 79. the basic pensions of retirees from enterprises were all delivered by social service institutions. Chinese government established a national basic medical insurance system for urban employees in 1998. In expectable ways. The global economic crisis since 2008 clearly spurred 27 . By the end of 2003. In the area of medical insurance. Within the social security system there are many programs. and this applies to not only workers with urban hukou. The overall social security package in China may also help ease the transition process for ordinary Chinese workers. In December 2009. the latest policy on old-age pension stipulated that starting January 1st. such policies may help workers to change employment across industries more easily. 2010. As for old-age insurance. at the core there are old-age insurance. At the end of 2003.75 million employees and 29. but also migrant workers.5 percent of those retirees were under the administration of such institutions ("China's Social Security and Its Policy" 2004).27 million retirees ("China's Social Security and Its Policy" 2004). and 84. old-age pension shall become portable across provinces. either when it comes to migrating to different regions within China or changing industries of employment. some 109. the government has been active to take over that function and created social service institutions to deliver the basic pensions.

many of the government social policies may have intervened to encourage workers to move across industries in pursuit of higher income. Conclusion Over the past three decades.3 billion citizens (Wong 2009). thus increasing the economy-wide labor mobility. And I show that China has higher labor mobility relative to 28 . In early 2009. I show that even after we control for possible alternative explanations. To sum. China announced its plan to spend $123 billion by 2011 to establish universal health care for all its 1. the brief case study of China indicates that the reason why ILM levels have been relatively high in China during the past three decades may be both exogenous and endogenous. labor mobility still has a robust dampening effect on compensation package. Exogenously. Endogenously. While the main motivation of this plan may be to encourage people to consume more when they are free from the concerns to save for unforeseen medical expenses. I have argued that an important explanation is the relatively high level of interindustry labor mobility in China during the past three decades. China may have been in a peculiar situation during its development in that it can reap the gains of globalization without spending too much to compensate its citizens from adjustment. 6. over the past three decades in China we have witnessed rapid industrialization and technological progress. which most likely would increase labor mobility. Through large-N statistical analysis. universal health care may also encourage workers to attempt employment in different industries now that the social risks have been lowered.Chinese government to move further in increasing the coverage of health care.

and such a trend has been documented by other scholars in development experiences in other countries (Hiscox 2002). That is.other country groupings. I explore the reason why China has had relatively high labor mobility through a brief case study. Second. universal health care. ILM levels in China may come down for the same exogenous reasons as they had in other countries. further relaxing the hukou registration system may only help little in encouraging ILM. and other social security programs. In the case where the pace of the decline of labor mobility exceed the pace of the increase of social safety nets. The same applies to old-age pension. as they eventually will. When the policies have exhausted their potential in propping up labor mobility. when enough of agricultural workers have already migrated out and into other industries. And when that happens. 29 . even allowing part of ILM to be endogenous to government policy interventions. Chinese government will have to start serious investment into compensation and social safety nets. However. as industrialization deepens in China. labor mobility levels will come down despite policies. In a nutshell. I want to conclude with a cautionary note about China’s future globalization. and ILM can no longer substitute much of the need for compensation. the initial rise of ILM may eventually come down. As China gradually catches up with other industrial leaders in technologies and management know-how. the continued lack of investment in safety net programs may not be sustainable in China. we may even see increased backlashes against globalization in China. we should not expect this peculiarly beneficial situation in China to continue indefinitely. First. there may be limits to these policies. For example.

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1.712 (1.084) 136.080) -5.065 (0.01 .040 (0.405) -3.015) -0.040 (0. 1975-79.261 (1.014) -0.10.001) -0.016) -0.352 (0.086) 134.139* (1.377) -3.060 (0.315) 2.016 (0.010 (0.317) ILM=IR -0.000 (0.188 (0.218* (2.080* (0.079) -39.127 0.005 (0.040) 0.014) -0.136) 0.137) 0.141 (1.05.084) 174.019 (0.293 (0.579** (0.038 (0.006 (0. Effects on Government Compensation.026 (0.217 (0.249) ILM=IR -0.244) -0. five year intervals.129 0.981) -0.080) -62.135) -0.001 (0.049 (0.066 (0.109) -0.121** (0.290) 0.001) -0.039) 0.001) -0.001) -0.523) 2.029 (0.816) DV=Non Military Gov Consumption share of GDP ILM=Elas -0. 1980-84.109 (1.739) 0.398 (1.723) ILM=Elas -0.175 (1.482) 2.206) -0.041) 0.011 (0.193) -0.285) 0.119 0.397 (1.850 (146.975) -0. Standard errors in parentheses * p<.259) 0.982** (2.735 (2. 1985-89.279) 1.507) 2.745) 0.108 0.453** (1.158) 0.606 (1.137) 0.378) -3.001) -0.072* (0.568** (0.030 (0.194) 1.238 (0.468) 1.783* (2.048 (0.185) -0.260) 0.099 (0.108 0.041) 0.735) 0.015) -0.796* (2.079) -90.001) -0.134* (1.060) -0.767 (1.072 (0.350 (145.288 (0.135 (1.053 (0.157) 0.253 (1.364) -3. ** p<.Table 4.015) -0.244) -0.059) -0. 1995-99.089 (1.000 (0.237 (2.001) -0.983) ILM=IR -0.001 (0.709 (142.000 (0. DV=Total Gov Consumption share of GDP ILM (lag1) Globalization (lag1) Terms of trade volatility (lag1) Glob*TOT volatility (lag1) Regime Type (lag1) Log Population (lag1) Log GDP pc (lag1) OECD EU Year Constant ILM=Elas -0.403) -4.268) 0.040) 0.280) 0.028 (1.041) 0.924) -0.361) -4.030* (1.001 (0.939) -0. 2000-04.001 (0.219) 1.046 (0. Estimated using OLS with fixed effects.778 (1.105 0.001* (0.032 (0.742) 0.011 (0.146 (134.112) 0. *** p<.290 (0.038) 0.007 (0.014) -0.410 (143.059) -0.234 (135.040) 0.388 (1. 1970-74.660) Period dummies No No Yes Yes No No Yes Yes R-squared 0.133 0.232 (1.715 (1.518 (136.120) ILM=Elas -0. 1990-94.121** (0.377 (0.838* (2.001 (0.141 (1.297* (2.003 (0.595 (137.086) 104.215 (1.179) -0.392 (1.060) 0.402) -4.407) -4.016) -0.061) ILM=IR -0.001) -0. 1965-69.121 # of Countries 85 85 85 85 81 79 81 79 Observations 271 260 271 260 253 242 253 242 Note: Data are period averages for 1960-64.

858) 0.005) -0.10.222) ILM=IR -0.586* (0.809*** (0.005) -0.036) -415.270 (0.667) 1.027*** (0.770** (0.532 (0.051) No 0.781*** (86.923** (0.062** (0.042** (0.065) -75.733) 0.916 (85. annual data DV=Total Gov Consumption share of GDP ILM (lag1) Globalization (lag1) Regime Type (lag1) Log Population (lag1) Log GDP pc (lag1) OECD EU Year Constant ILM=Elas -0.259) 0.735*** (0.639 (0. *** p<.142) -3.770*** (0.024 (0.013 (0.644) 0.005) 0.021 (0.519) 1.138) -5.007) -0.013*** (0.665*** (1.005) 0.448) 0.728) 0.Table 4.744*** (0.070 95 783 DV=Non Military Gov Consumption share of GDP Year dummies No No Yes Yes R-squared 0.175 (0. Standard errors in parentheses * p<.553) Yes 0.082 95 783 .512) 2.124) -0.376*** (65.622) 0.664) -0.018) -0.031*** (0.01 ILM=Elas -0.137) -6.045 98 945 ILM=IR -0.026) -74.340*** (0.567) -0.665*** (0.839 (0.021 (0.043** (0.223) No 0.635) 0.205* (0.884) 0.048*** (0.050) -254.05.274* (0.019 (45.884*** (0.221* (0.228*** (0.538) 2.846) -0.461 (0.029*** (0.016** (0.661) -1.007) -0.103 0.095*** (0.598) -0.465*** (0.296) 0.767 (1.357) 0.615*** (0.074 0.254* (0.088) -0.575) -0.433) 0.255) -6.031*** (0.602) -0.401) 0.820) 1.670) 1.048) ILM=Elas -0.023) -0.323*** (0.007) -0.007) -0.008 (0.017) -0.928 (0.357** (120.179 (1.141) -4.166 0.255) -6.497) 1.865) -0.050) -49.697*** (0.018 (0.247*** (0.038 (0.024) -0.663) ILM=IR -0.717 (0.064 98 945 ILM=IR -0.023 (0.348) 0.821*** (0. ** p<.085) -0.299) 0.178*** (0.571*** (0. Effects on Government Compensation.133*** (0.517 (0.123) -0.2.892 (118.486* (45.932* (0.016** (0.035) -551.011** (0.164*** (0.671*** (0.257) 0.635) 0.414*** (1.850) ILM=Elas -0.066) -278.857* (0.025) 13.378) Yes 0.834 (0.770) 1.203*** (65.559 (0.415) 0.195 # of Countries 117 115 117 115 Observations 2428 2104 2428 2104 Estimated using OLS with fixed effects.

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