Looking to the east for lessons on labour

China used the <em>hukou</em> system to manage its domestic labour, the urban and the rural, to drive its growth. While it's held to be discriminatory, it does provide some lessons to a similarly populated nation like India.

Updated - November 01, 2016 06:28 pm IST

Published - September 14, 2016 04:28 pm IST

This is a blog post from

Labour is the backbone of any ‘manufacturing’ economy, even in an automation driven world like ours. It isn’t uncommon to see protests of unhappy workers in India asking for more than the state is providing them — be it in the form of wages, legislations or protection from cronies.

The only country catering to a larger population than India is China and it has done fairly well to manage its workers for the past two decades or so. Of course, it is still disputed whether China’s model is the one to follow in this regard. Yet, India could learn from the way China evolved and catered to the changing dynamics in order to find a niche balance for its workforce. The dexterity it displayed in changing laws and policies in order to replace outdated institutions is worth applauding.

In China, the workers are registered under a system called ‘hukou’. The urban hukou is comprised of workers permanently living in cities while rural hukou has migrants who typically leave their jobs in urban areas during the holiday season and return home only to look for new jobs post the holiday season.

Transitioning from Public to Private sector

The 1980s saw a great boom in the rural economy of China, which left the urban workers largely unemployed. To counter this, the government promoted self-employment in Urban China but still had to absorb most workers in state-run enterprises. By the 1990s, the protectionist culture in China saw a decline and the smaller state-run firms went bankrupt, leading to massive unemployment and availability of labour once again. Within 3-4 years of such state-driven restructuring, tens of millions of urban workers were made available to the private sector, which the state then started promoting. The general pattern was to let off state workers that were younger, less educated and females, making them available to the private sector.

China’s Public-to-Private transition saved millions of workers who would have otherwise been out of jobs. In 1991, more than 97% of urban hukou workers were state employees. This later fell, by 2009, to below 50% owing to government policies that were implemented in the intervening period.

When the global financial crisis hit China, the rural migrant workers moved back to their villages — their only fall-back option. This worked in China’s favour as it mitigated the rising unemployment rate in its cities.

Balancing the Urban and Rural Workers

During this transition, more than 100 million rural hukou workers moved to urban areas for employment. This large-scale movement of workers is one of the main forces driving China’s unprecedented Economic growth. However, there were/are massive restrictions on rural workers migrating to urban areas.

China followed a ‘guest-worker system’, which did not provide unemployment benefits, retirement pensions or healthcare support to migrant workers. The urban hukou workers are insured under the Unemployment Insurance Act. Institutional restrictions discouraged migrants from staying in cities if unemployed, thus increasing the employment rate of urban hukou . The only fall-back option rural migrants have in the face of a calamity is their villages. As a result, when the global financial crisis hit China, the rural migrant workers moved back to their villages. This worked in China’s favour as it mitigated the rising unemployment rate in Chinese cities.

Post the crisis; the government introduced a law that mandated all employers to pay health, unemployment, work-injury/pension insurances to migrant workers as well. China realised that 70% of Chinese labour is rural hukou and that the migrants would constitute a large chunk of the labour force in the coming decades. This happened due to the design of the one-child policy enacted way back in 1979. In urban areas, the policy was strictly implemented. But in rural areas, the government allowed 2 or 3 children if the previous children were girls — which are now a part of the workforce. Thus, keeping the rural worker at the helm of Chinese economic growth led to the change in the insurance provided to the workers.

Wage gap and Education

The wage gap between rural and urban workers in China is immense. By 2009, the hourly earnings gap increased to 60%. One reason for this is the availability/supply of rural workers. And another, their education.

70% of the population of China has rural hukou and this supply suppresses the wage growth of migrant workers. But, only 22% of the rural hukou workers are employed in urban areas due to the institutional restrictions, thus keeping jobs afloat for urban hukou workers. The urban hukou take most jobs in skill-heavy technological enterprises, as they are better-educated. This further protects urban hukou workers from migrant ones, thus increasing their demand and, in effect, increasing their wages.

The direct impact of economic reform can be seen on education and, thus, the labour demographic of China. In the 1990s, as rural co-operatives were abolished, most rural services including schools were shut down. But, in the mid-2000s, the government introduced a policy of expanding university enrollment. As a result, the previous 108-million-enrollment capacity of all the universities in 1998 increased to 585 million by 2007.

China has worked around its migration, its economic and its education policy pretty efficiently. The job positions and availability of labour was very balanced until very recently. It was in 2012 that the position/seeker ratio exceeded 1 for the first time. India can’t do exactly what China did, as the two cultures work very differently. Yet, there is so much to learn with regard to how policies evolve, and help maintain a nation’s stature as a world power, like China did (and continues to) for many years.

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