Pollution Levies and the Demand for Industrial Labor: Panel Estimates for China's Provinces

Industrial growth in China since 1979 has been rapid but industrial employment has grown much more slowly and concerns exist with respect to the environmental impact of industry. This paper examines panel data on industrial employment in the thirty provinces of China between 1987 and 1993. These data indicate the expected wide range in relative importance of industrial employment across provinces though with no tendency toward greater concentration in employment. In contrast, real earnings of industrial workers not only differ widely across provinces but rose more quickly in the high wage provinces. To address concerns with respect to environmental impact China, rather remarkably, has implemented one of the few systems of pollution taxes among the developing countries. Each province is able to impose its own rate of taxation, provided this exceeds a specified minimum. In practice these rates have varied substantially across provinces and through time within some provinces. Several alternative estimators are applied to a labor demand equation fitted to the panel data. For reference, a labor demand specification similar to that commonly adopted in studies of the industrialized economies is adopted, though extended to allow for the consequences of the pollution tax on waste water emissions. The estimates prove quite robust across the alternative estimators. In particular, our data suggest that China's industrial enterprises not only responded to real product wage increases from 1987 to 1993 by limiting employment, but did so with an elasticity roughly in line with estimates for the industrialized economies, despite the obvious differences in industrial organizational forms. The estimates also indicate that the waste water emission levies cost a significant number of industrial jobs. The raw provincial data show total industrial employment actually fell from 1987 to 1993. This was apparently not because output growth slowed, nor did economies of scale play a major role, but rather the decline reflects rapid reductions in labor intensity. No clear evidence emerges that the rising role of private enterprise had any direct effect on reductions in labor demand through lower labor absorption. On the other hand, the observed increase in real product wage, averaged over all provinces, would have resulted in about a 25 percent decline in employment over this interval if nothing else had changed, according to our estimates. The increase in pollution levies also contributed. However, superimposed on these effects is a significant downward trend in labor demand, with a particularly sharp drop in 1993. Many contributing factors could underlie this negative trend. The consequence of economic reforms upon enterprise behavior is a viable candidate, though it seems more likely the political upheavals in the early 1990s had a more immediate impact on these years in particular. Thus, although wage responsiveness of Chinese industry may have come to resemble market economy performance, and decisions seem to have been sensitive to pollution tax signals, other factors continue to matter as one might expect in a transition setting. The transformation of the Chinese industrial sector since 1979 has resulted in very high rates of growth in output. From 1979 to 1991 the index of industrial production rose by almost 12.5 percent per year. In the process, at least two concerns arise. First, industrial employment grew at only 3.1 percent per year from 1979 to 1991, or about 1.6 percent per capita. The ability to generate employment is important in any transition, if only as a vehicle to disperse potential benefits. In China, before the transition, industrial employment was largely dictated by a central labor allocation process; jobs typically lasted a working lifetime; soft budgets meant that wages had little influence on enterprises; and tight administrative controls directed migration. But a number of elements in the industrial reforms since 1980 may have enhanced employment responsiveness to wage and price signals. Thus, the transformations include a declining relative role for state enterprises within industry, greater ability of managers to set wages, and enhanced managerial discretion over hiring and lay-offs. Jobs for life are no longer necessarily the norm. Labor supply has also become somewhat more flexible, as migration controls are at least attenuated, and there is a new freedom to quit jobs voluntarily. Yet, despite the critical role for job creation in industry in the transition, 1. Source: IMF International Financial Statistics Yearbook, 1995. The growth rate cited is based on end-point comparisons. 2. See Singh (1992) and Hussain and Zhuang (1994).