shinichi Post author13/01/2023 at 6:23 am

Informal Employment in Urban China: Measurement and Implications

Albert Park, Yaowu Wu, and Yang Du
World Bank
July 2012

Abstract

https://documents1.worldbank.org/curated/zh/383331468220789675/777370WP0Infor00Box377299B00PUBLIC0.doc

1. Background

Because of China’s socialist legacy, until recently little attention has been paid to the rise of informal employment. Under planning, urban workers enjoyed guaranteed employment, housing, pensions, and health care. However, during the reform period, the rise of a dynamic but relatively unregulated private sector, the aggressive restructuring of state-owned enterprises which led to layoffs of millions of state-sector workers, and a surge in rural to urban migration all have led to an increasingly large number of workers in urban areas who are self-employed or who lack formal labor contracts or coverage by social insurance programs (Park and Cai, 2010). The prevalence of informal employment has important implications for public policies, because informality is often associated with poverty and social vulnerability, and it affects tax collection, the enforcement of labor regulations, and the provision of adequate social protection to workers and their families.

Many view informal jobs as undesirable because they lack stability and put workers in a vulnerable position; adherents of this view believe that priority should be placed on reducing informal work as much as possible. There is a positive correlation between poverty and informality across countries, and developed countries tend to have smaller informal sectors than developing countries (Charmes, 2009; Schneider, 2002; Schneider and Enste, 2000). However, others recognize that informal employment can also be voluntary, for example when there are high economic returns to self-employment, or when the perceived costs of participating in public social insurance programs are greater than the perceived benefits (Friedman et al., 2000; Maloney, 2004). Informality thus can be characterized by dualism, including both those who engage in informal work of their own volition and those who do so involuntarily because they are systematically excluded from formal employment opportunities (World Bank, 2007; Fields, 1990). Despite the positive cross-country association between GDP per capita and formal employment shares, it remains the case that most workers in the developing world remain informally employed. In many parts of the developing world informal employment has even increased in prevalence despite economic growth (Charmes, 2009), and panel studies find that there is no systematic relationship between changes in the strictness of labor regulations and changes in the prevalence of informal jobs (Heckman and Page, 2004; Heckman and Pages-Serra, 2000). These different findings suggest that the nature of informal employment and its relationship to labor regulations and policies is complex and depends on the specific historical and institutional context of individual countries.

Despites these varying perspectives on the causes and consequences of informal employment, all sides probably can agree that it is important to accurately measure the size of the informal work force, in order to better understand the extent and nature of informal employment and to assess how it will impact different public policy goals. Unfortunately, unlike in India where the vast majority of urban workers are informal and the Government has set up a Commission to study the problem of informality and even directed the State Statistical Office to measure the extent of informality, in China there is no history or tradition of discussing or measuring labor market informality.

The goal of this paper is to provide for the first time an accurate measurement of informal employment in China by analyzing data from recent household surveys collected in six large Chinese cities in 2010. The surveys were designed by the authors with questions included to enable measurement of informality using accepted international standards set by the ILO as well as by considering factors relevant in the Chinese context. In doing so, we provide a number of insights into the extent and nature of informal employment and labor market development in China.

In considering the institutional context in urban China, it is important to start with China’s legacy as a former socialist system under which all urban workers had lifetime job security and government-provided pensions, health insurance, and housing. This system established formal employment relationships for nearly all workers at the outset of market reforms, and for most new workers employed by government units or state and collective enterprises well into the reform period. Other transition economies such as Russia, Romania, and Moldova also have experienced relatively low rates of informal employment (Charmes, 2009).

In the 17th International Conference of Labor Statisticians (ICLS), informal wage jobs were described as those in which the employment relationship “is not subject to national labour legislation, income taxation, social protection or entitlement to certain employment benefits (advance notice of dismissal, severance pay, paid annual or sick leave, etc.).” As noted earlier, multiple forces led to a rapid rise in informal employment in the late 1990s and early 2000s. In 2002 and 2003, 39 percent of urban workers were “missing”, meaning that they were not reported by their employers (Park and Cai, 2010). Cai and Wu (2006) analyzed survey data collected by the Ministry of Labor in 66 cities nationwide at the end of 2002 and estimated that 45 percent of urban employment was informal. It has been argued that flexibility in employing migrant workers with little regulation helped fuel China’s rapid export-led, labor-intensive industrialization (Hu, 2004).

China implemented a Labor Law in 1993 and a Labor Contract Law in 2008 to provide more stable, secure employment relationships to workers nationwide. The 2008 Law is highly protective of workers when viewed in international comparative perspective. It increases punishments for not signing labor contracts, increasing severance pay, and making open-ended contracts mandatory after two fixed-term contracts. Significant effort was made to enforce the 2008 Law, which led to a sharp increase in the percentage of urban workers with labor contracts, especially for migrant workers (Li, 2011; Gallagher et al., 2012).

China has made efforts to build a more complete social insurance system by undertaking a variety of reforms to establish modern pension, unemployment, and health insurance systems, and expand coverage among both workers and dependents. However, it has not enacted a law governing social insurance programs. According to the 2008 Labor Contract Law, employees have the right to end the labor relationship if their employers do not provide them with social insurance benefits, in practice the regulation is not mandatory and workers often elect to forgo benefits in favor of higher wage compensation. The lack of a social insurance law means that many regulations governing social insurance programs lack the force of law and are perceived to have flexibility in how they are implemented.

Lack of participation in social insurance programs may reflect unattractive features of the design and implementation of such programs, especially from the perspective of rural migrant workers. At the beginning of reforms, migrant workers were not even included in urban social insurance programs. Later, reforms expanded eligibility for social insurance programs to all enterprise employees. However, the programs are usually run by city governments and until recently, the benefits were not portable so that contributions (and claims to future benefits) to a scheme in one city could not be transferred to other cities or regions, a fatal flaw for making the programs attractive to highly mobile rural migrant workers who often do not expect to settle permanently in the cities in which they are working. China’s residential permit (or hukou) system creates barriers to permanent migration, for instance by not providing equal access to children of migrants to attend urban schools.

The large payroll charges for social insurance programs create a disincentive for both employers and employees to participate. Employers must pay contributions for pensions, medical insurance, and unemployment insurance of 20%, 6%, and 2% of wages, while workers must contribute 8%, 2%, and 1%. A worker who withdraws from the pension system only receives back his own contributions (8%) (Giles et al., 2012).

2. Defining Informal Employment

Informal employment is very heterogeneous, including different groups of workers with distinct characteristics. To make our measurements as internationally comparable as possible, we follow closely the criteria endorsed at the Seventeenth International Conference of Labour Statisticians (ICLS) in 2003 and supported by the ILO. These criteria build upon those approved at earlier ICLS meetings, but still require that specific choices be made to adapt the ICLS definitions to China’s unique institutional environment.

In this paper, we define both informal versus formal sectors, and informal versus formal employment (or jobs) and focus attention on the prevalence of informal employment. We define formal versus informal sector based on the employer type and employer size. The formal sector includes all government or public administrative agencies as well as businesses with more than seven employees. In China, businesses with more than seven employees are required to register with the government as enterprises. Businesses with fewer than seven employees are defined as being part of the informal sector. In China, such businesses are viewed as petty entrepreneurs (getihu) subject to much less regulation than registered enterprises although they too in principle are expected to register with local industrial and commercial bureaus (gongshangju).

Which types of jobs are considered to be informal? Figure 1 provides a breakdown of categories of informal work, distinguishing between jobs in the formal and informal sectors. Following the ICLS guidelines, family workers, the self-employed, and casual workers are categorized as informal workers. Employers with seven or fewer workers are also considered to be informal, while employers of larger enterprises (eight or more workers) are categorized as formal in recognition of the fact that they run large officially registered organizations.

To determine whether wage employees have informal jobs, we define two alternative criteria. These criteria apply equally to those working in formal or informal sectors. The first definition is based on whether or not the employer fails to provide all of the three most important types of social insurance that employers are expected to provide in China: pensions, health insurance, and unemployment insurance. If any of these benefits are provided to the worker, then the worker is categorized as a formal worker. By focusing on social insurance coverage, this definition emphasizes the vulnerability of informal workers, and is consistent with definitions of informality frequently used in other countries.

The second definition of informal wage employment is based on whether workers have a labor contract. Those without a labor contract are considered to have informal jobs. In China, all workers have the right to sign a labor contract with their employer. Having a contract entitles workers to a number of important protections, which were strengthened by the 2008 Labor Contract Law, and strengthens workers claims if they wish to pursue dispute resolution mechanisms such as arbitration or lawsuits. Thus, in the Chinese context, labor contracts play an important role in reducing the vulnerability of workers.

Workers in government or public administrative agencies that fill government-approved positions (or bianzhi) are considered to be formal workers using either definition of informal wage employment, regardless of how they answer questions about social insurance status or labor contracts. Such workers generally are permanent employees who normally do not actually sign written labor contracts, and often automatically qualify for free or subsidized health services or pension payments that are not always part of city-run social insurance programs. The informal or formal status of hired workers in government or public administrative agencies that do not hold government-approved positions is determined by the questions about social insurance and labor contracts described above.

In addition to the two definitions for informal employment just described, we also define informality based on the union and intersection of informal workers based on the first and second definitions. Thus, the third definition of informality is those workers who are informal based on either definition 1 or definition 2 (union), and the fourth definition of informality is those workers defined as informal based on both definition 1 and definition 2 (intersection).

3. Data

The third wave of the China Urban Labor Survey (CULS3), was conducted by the Institute of Population and Labor Economics (IPLE) of the Chinese Academy of Social Sciences (CASS) in six large Chinese cities in different parts of the country in early 2010. It included questions for both local resident and migrant households specifically designed to measure informal employment based on the ICLS categories. The survey questionnaire contains detailed information on work status, employer type (government, administrative units, state-owned enterprises, private or foreign enterprises), employer size measured by the number of workers, industry, occupation, work location, work status, labor contract type, social insurance coverage, earnings, and hours worked. The six surveyed cities are located in different regions of the country. Three are in coastal China; Guangzhou is in the Pearl River Delta, Shanghai is in the Yangtze River Delta, and Fuzhou is in the coastal area nearest to Taiwan. The other three cities are in the interior; Wuhan is in Hubei Province in central China, Shenyang is in Liaoning Province in the northeast; and Xian is in Shaanxi Province in the northwest.

In each city, representative samples of local residents and migrants were independently selected in a two-stage procedure. Using previous year data on the local resident population of each neighborhood, a fixed number of neighborhoods were selected in each city using probability proportionate to size (PPS) sampling. As the cities had limited information on the number of migrants living in each neighborhood, neighborhoods were first selected based on local resident populations, and weights are used to correct for differences in the relative sizes of migrant and local resident populations based on population estimates by neighborhood office staff. These staff helped to construct an updated list of households to serve as a sampling frame. Neighborhood office staff assisted with documenting unregistered migrants living in the neighborhood, especially those operating small businesses, and including them in the sampling frame. Then a fixed number of households were randomly sampled in each neighborhood, with 500 local resident and 500 migrant households sampled in each city in 2010. One disadvantage is that migrants were sampled through neighborhood committees, so that unregistered migrants and those living in collective forms of housing may be underrepresented. These include workers living on construction sites or in dormitories of factories or in other large work units that do not belong to an urban community. Thus, those working in the construction and manufacturing sectors are likely to be under-sampled.

4. Informal Employment in Urban China

In this section, we present our empirical estimates of the prevalence of informal employment in China. In Table 1, we present the share of urban jobs that are informal in different cities using the four definitions described earlier. Using the first definition based on social insurance access, the informal employment share is 16.2% for local residents, 60.6% for migrants, and 25.5% overall. Migrants are defined as those whose official residence permit (hukou) is not in the city in which they reside. The large gap in informality between local residents and migrants is striking. In none of the six cities does the share of informal jobs reach 27%, while in four of the cities, the share of migrants who are employed informally approaches 70% or more. There are also substantial differences across cities, for local residents ranging from 4.0% in Shanghai to 26.2% in Xian, and for migrants ranging from 46.3% in Guangzhou to 86.8% in Wuhan.

Using the second definition based mainly on labor contract status, the share of informal employment is 26.3% for local resident workers, 49.0% for migrant workers, and 31.0% overall. There is still an obvious discrepancy between the two groups, but the difference is smaller than when using the first definition. However, the total informality rate is higher using the second definition, mainly due to the higher informality share for local residents using the second definition. An interesting contrast arises in informality rates using the two definitions for migrants versus local residents. For local residents, informality using the second definition is higher but for migrants it is the opposite. This probably reflects the fact that migrants are much less likely to join social insurance programs compared to urban residents. Migrants question the benefits of such coverage, while urban local residents expect to reside locally indefinitely and have grown up expecting such benefits.

The third definition provides the strictest criteria for formal employment. Using this definition, the informal employment share reaches 37.2% overall, including 29.5% for local resident workers and 65.7% for migrant workers. Finally, using the fourth definition (informal using both definitions 1 and 2), the share of informal jobs falls to just 19.9% overall–13.2% for local residents and 45.4% for migrants. Thus the range of informality estimates using the strictest and loosest definitions are 19.9% to 37.2% for all workers, 13.2% to 29.5% for local residents and 45.4% to 65.7% for migrants. Although most local residents have formal jobs, most migrants are employed informally. These rates of informal employment are lower than estimates for the early 2000s (Park and Cai, 2010; Wu and Cai, 2006).

Although the differences across cities can vary using different measures, and for migrants and local residents, in general it appears that informality prevalence is less in more developed, coastal cities (Guangzhou, Shanghai, and Fuzhou) compared to interior cities. There are multiple possible explanations for this difference. In coastal cities, labor demand is very robust and competition to hire the best workers is keen, which could lead to better treatment of workers. Richer cities also have more resources to spend on enforcement and greater capacity to implement new Laws such as the 2008 Labor Contract Law. Coastal cities also have booming manufacturing sectors where labor regulations are more easily enforced than in the service sector where self-employment and small enterprises are more common. On the other hand, coastal cities have a very high percentage of migrants and vibrant, relatively unregulated private sectors, which could make it harder to maintain high levels of formal employment.

Table 2 examines the correlation in informal job status using the two definitions. For local resident workers, 84.0% of formal employment based on the first definition is also formal using the second definition, and 80.7% of those employed informally using the first definition are also employed formally using the second definition. For migrants, the analogous percentages are 88.1% and 74.4%. Thus, for migrants a larger share of workers who are informally employed based on social insurance coverage are not informally employed using the second definition based on labor contracts. This likely reflects the significant share of migrant workers with labor contracts who do not desire to participate in social insurance schemes or who are excluded from such schemes by their employers. Nonetheless, overall there is considerable overlap in who is working informally using the two definitions.

We can further break down the different types of informal employment based on the categories described in Figure 1. As seen in Table 3, using the first definition of informality the share of workers with different types of informal jobs include the following: 9.3% are informal employees in the informal sector (24.1% for migrants and 5.4% for local residents), 6.6% are informal employees in the formal sector (12.1% for migrants and 5.2% for local residents), 7.9% are self-employed (20.3% for migrants and 4.6% for local residents), and less than 1.4% are unpaid family workers or employers in the informal sector.

Hussmanns (2002, 2005) suggests that both “employment in the informal sector” and “informal employment” are measures that are useful for analytical and policy-making purposes. Table 4 presents cross-tabulations for workers with informal versus formal jobs working in the formal versus informal sectors. We find that 84.1% of local residents are employed in the formal sector, but only 54.4% of migrants work in the formal sector. The household sector provides very few jobs for either local residents or migrants. An interesting finding from Table 4 is that a large share of informal jobs are found in the formal sector, 54.1% for local residents and 37.3% for migrants. Most formal jobs are in the formal sector (94.8% for local residents and 71.0% for migrants).

Next, we examine how the prevalence of informal jobs varies across economic sectors. We report informal job shares for five broad economic sectors: manufacturing, other industry (including mining, construction, and electricity, gas and water supply), public services (including government agencies, healthcare, education, finance and insurance, etc), and services (including communications and transportation, information transfer and computer software, wholesale and retail, lodging and catering). There is a consistent ranking of the share of informal jobs across sectors. Using the first definition of informality, the share of informal employment by sector is as follows (in rising order): public services 8.6%, manufacturing 14.3%, other industry 17.9%, other 28.3%, and services 33.6%. Except for public services, the differences across sectors are more attenuated for migrants. There is a sharp discrepancy in the share of migrants who are informally employed in manufacturing using definitions 1 and 2; 52.8% are informal using definition 1 and 23.5% are informal using definition 2. This suggests that in manufacturing there are a lot of migrant workers who have labor contracts but who do not participate in social insurance programs.

We next break down informal employment rates by demographic groups defined with respect to gender and age (Tables 6-1 and 6-2). Using the first definition of informality, we find evidence that for both local residents and migrants, women are more likely to be informally employed than men, and younger workers are more likely to hold informal jobs compared to older workers. For local residents 19.7% of women are employed informally compared to 13.5% for men; for migrants the difference is 64.0% compared to 57.7%. The greater propensity of younger workers to be employed informally is much more pronounced for local resident workers (31.6% for those aged 16-24 compared to 11.5% for those aged 55-64, the comparable figures are 72.9% and 65.8% for the same age groups for migrants). For both local residents and migrants, gender differences are more pronounced for older workers. Using the second definition of informality, differences across gender and especially age groups are much less pronounced, although women continue to be more likely to be informally employed.

Compensation of formal versus informal workers. Next we compare monthly wages and hours worked per week for formal and informal jobs held by local residents and migrants. Mean wages for the different groups are reported in Table 7 and mean work hours in Table 8. In general, we find that those working in the informal sector are worse off. They earn lower wages but work longer hours, and this is true in nearly every city and for both local residents and migrants. Using the first definition of informality, the wages of informal workers is about 66% of that of formal workers for local residents and 52% for migrants. Local residents employed informally work nearly 9 hours longer than those who work formally; migrants who work informally work nearly 5 hours longer than those who work formally. Migrants work longer hours than local residents on average, regardless of whether their work is formal or informal. The pattern of results using the second definition of informality are similar.

Despite these clear differences in the wages and working hours of formal and informal workers, this does not necessarily translate into higher poverty rates for the families of formal and informal workers. Other research has found that poverty rates of migrant workers in China are not much higher than that of local resident families because migrant workers work longer hours, support fewer dependents, and can leave urban areas and return home if they cannot find a job in the cities (Park and Wang, 2010).

In Table 9, we describe the working hours and years of schooling for formal workers and different types of informal workers. Whether local residents or migrants, those with formal employment have higher years of schooling on average. Formal workers also work the fewest hours on average, although this is not true for migrants. Informal wage employees work similar hours and have similar levels of education whether they work in the formal or informal sectors; if anything working hours are slightly less and mean education years slightly higher when working in the informal sector and not the formal sector. This suggests that many formal work units in China (e.g., government, enterprises) actually treat informal employees worse than small scale enterprises in the informal sector. Finally, those who are self-employed, employers of seven or fewer workers, or unpaid family workers work the longest hours and have the lowest levels of educational attainment.

To get a better sense of working conditions for informal employees, we asked questions about the place of work, with results presented in Table 10. For those who are informally employed, the distribution of informal working places is very similar for local residents and migrants. The vast majority of workers (70.3%) work in conventional work environments (workshop, office, shop, etc.), and this percentage is nearly identical for local residents and migrants. About 14% of workers work in an outdoor place or street. Although our survey is likely to under-sample those working in construction sites or factory dorms, based on these results, there does not appear to exist strong evidence of systematic poor working conditions for informal workers.

Social insurance coverage. Being provided access to social insurance programs by one’s employer is the main criterion used in the first definition of informal employment. However, workers can also obtain pension, health insurance, or unemployment insurance coverage from sources other than their current employer. This can include coverage from public schemes that do not require employment for eligibility or from voluntary purchases of commercial insurance products. The availability of alternative sources of social insurance, especially from other public schemes, may reduce the perceived benefits of formal versus informal employment and increase the likelihood that workers voluntarily work in informal jobs. But such alternative coverage can play an important role in expanding coverage rates to achieve higher rates of total social insurance coverage.

Table 11 summarizes coverage rates for pensions and health insurance, reporting for each type of social insurance the total coverage rate for workers, the share covered by employers, and the share covered from other sources (commercial, other public schemes). These estimates do not include dependents who do not work. We can see that 10.4% of employees obtain pension coverage and 21.6% obtain health insurance from sources other than their employer. Some of these persons also receive benefits from employers, but the difference in total coverage rates and those covered by employers is 5.8% for pensions and 16.1% for health insurance. These compare to 64.1% and 60.6% of workers who receive pension and health insurance benefits directly from their employers. Migrant workers are as likely to obtain pension benefits from other sources as they are to obtain them from their employer, and more likely to receive health insurance benefits from other sources. Most strikingly, 53.9% of rural migrants obtain health insurance from other sources, presumably mainly the New Cooperative Medical Scheme (NCMS) that has been scaled up to reach nearly all of rural China, while only 13.3% obtain health insurance coverage from their employers. Overall, depending on the quality of alternative programs, especially NCMS, China’s efforts to expand social insurance coverage more broadly, and in particular to dependents and the self-employed, may be undermining incentives for workers, especially rural migrants, to take formal versus informal jobs. There remain large gaps in social insurance coverage between local residents and migrants, and between formal and informal employment.

One might expect that migrants who have lived for a long time in cities would be more integrated into the local economy and be more likely to plan to stay in the city permanently. If this is the case, they should enjoy better social insurance coverage rates than more recent migrants. We test this proposition in Table 12 by comparing coverage rates of migrants who have lived in the local city for greater than 10 years with those who have lived there for less than 10 years. We can also compare both sets of coverage rates with that of local urban residents (Table 11). We find that rates of informal employment and social insurance coverage rates for long-term migrants look much more like short-term migrant than local residents, suggesting that even for longer term migrants integration into the local economy has been slow.

5. Conclusions

In this paper, we have estimated the extent of informal employment in China’s urban labor markets using recent household survey data (in 2010) that enables application of definitions of informality consistent with international standards set by the ILO. Estimates of the share of urban workers employed informally ranged from 19.9% to 37.2% depending on the definition used. Despite these relatively low rates of informal employment, there remains a striking difference in the propensity for local residents and migrants to be employed informally, reflecting historically unequal treatment of the two groups and design features of current social insurance programs that make them unattractive to mobile, migrant workers. This suggests that policies should focus on incentives to increases the formal employment of migrants. Higher informality rates in the rapidly growing service and private sectors also merits policy attention.

China has been more successful in mandating that employers sign formal labor contracts with migrant employees than they have in getting migrants to participate in social insurance programs. Some of the reasons for this include: skepticism over likely realized benefits of the programs, lack of portability of benefits, high payroll contribution rates, lack of a legal mandate for participation, and availability of social insurance coverage from sources other than the employer. These patterns suggest that lack of social insurance coverage is likely to reflect voluntary rather than involuntary informal employment.

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shinichi Post author13/01/2023 at 6:23 am

Informal Employment in Urban China: Measurement and Implications

Albert Park, Yaowu Wu, and Yang Du
World Bank
July 2012

Abstract

https://documents1.worldbank.org/curated/zh/383331468220789675/777370WP0Infor00Box377299B00PUBLIC0.doc

1. Background

Because of China’s socialist legacy, until recently little attention has been paid to the rise of informal employment. Under planning, urban workers enjoyed guaranteed employment, housing, pensions, and health care. However, during the reform period, the rise of a dynamic but relatively unregulated private sector, the aggressive restructuring of state-owned enterprises which led to layoffs of millions of state-sector workers, and a surge in rural to urban migration all have led to an increasingly large number of workers in urban areas who are self-employed or who lack formal labor contracts or coverage by social insurance programs (Park and Cai, 2010). The prevalence of informal employment has important implications for public policies, because informality is often associated with poverty and social vulnerability, and it affects tax collection, the enforcement of labor regulations, and the provision of adequate social protection to workers and their families.

Many view informal jobs as undesirable because they lack stability and put workers in a vulnerable position; adherents of this view believe that priority should be placed on reducing informal work as much as possible. There is a positive correlation between poverty and informality across countries, and developed countries tend to have smaller informal sectors than developing countries (Charmes, 2009; Schneider, 2002; Schneider and Enste, 2000). However, others recognize that informal employment can also be voluntary, for example when there are high economic returns to self-employment, or when the perceived costs of participating in public social insurance programs are greater than the perceived benefits (Friedman et al., 2000; Maloney, 2004). Informality thus can be characterized by dualism, including both those who engage in informal work of their own volition and those who do so involuntarily because they are systematically excluded from formal employment opportunities (World Bank, 2007; Fields, 1990). Despite the positive cross-country association between GDP per capita and formal employment shares, it remains the case that most workers in the developing world remain informally employed. In many parts of the developing world informal employment has even increased in prevalence despite economic growth (Charmes, 2009), and panel studies find that there is no systematic relationship between changes in the strictness of labor regulations and changes in the prevalence of informal jobs (Heckman and Page, 2004; Heckman and Pages-Serra, 2000). These different findings suggest that the nature of informal employment and its relationship to labor regulations and policies is complex and depends on the specific historical and institutional context of individual countries.

Despites these varying perspectives on the causes and consequences of informal employment, all sides probably can agree that it is important to accurately measure the size of the informal work force, in order to better understand the extent and nature of informal employment and to assess how it will impact different public policy goals. Unfortunately, unlike in India where the vast majority of urban workers are informal and the Government has set up a Commission to study the problem of informality and even directed the State Statistical Office to measure the extent of informality, in China there is no history or tradition of discussing or measuring labor market informality.

The goal of this paper is to provide for the first time an accurate measurement of informal employment in China by analyzing data from recent household surveys collected in six large Chinese cities in 2010. The surveys were designed by the authors with questions included to enable measurement of informality using accepted international standards set by the ILO as well as by considering factors relevant in the Chinese context. In doing so, we provide a number of insights into the extent and nature of informal employment and labor market development in China.

In considering the institutional context in urban China, it is important to start with China’s legacy as a former socialist system under which all urban workers had lifetime job security and government-provided pensions, health insurance, and housing. This system established formal employment relationships for nearly all workers at the outset of market reforms, and for most new workers employed by government units or state and collective enterprises well into the reform period. Other transition economies such as Russia, Romania, and Moldova also have experienced relatively low rates of informal employment (Charmes, 2009).

In the 17th International Conference of Labor Statisticians (ICLS), informal wage jobs were described as those in which the employment relationship “is not subject to national labour legislation, income taxation, social protection or entitlement to certain employment benefits (advance notice of dismissal, severance pay, paid annual or sick leave, etc.).” As noted earlier, multiple forces led to a rapid rise in informal employment in the late 1990s and early 2000s. In 2002 and 2003, 39 percent of urban workers were “missing”, meaning that they were not reported by their employers (Park and Cai, 2010). Cai and Wu (2006) analyzed survey data collected by the Ministry of Labor in 66 cities nationwide at the end of 2002 and estimated that 45 percent of urban employment was informal. It has been argued that flexibility in employing migrant workers with little regulation helped fuel China’s rapid export-led, labor-intensive industrialization (Hu, 2004).

China implemented a Labor Law in 1993 and a Labor Contract Law in 2008 to provide more stable, secure employment relationships to workers nationwide. The 2008 Law is highly protective of workers when viewed in international comparative perspective. It increases punishments for not signing labor contracts, increasing severance pay, and making open-ended contracts mandatory after two fixed-term contracts. Significant effort was made to enforce the 2008 Law, which led to a sharp increase in the percentage of urban workers with labor contracts, especially for migrant workers (Li, 2011; Gallagher et al., 2012).

China has made efforts to build a more complete social insurance system by undertaking a variety of reforms to establish modern pension, unemployment, and health insurance systems, and expand coverage among both workers and dependents. However, it has not enacted a law governing social insurance programs. According to the 2008 Labor Contract Law, employees have the right to end the labor relationship if their employers do not provide them with social insurance benefits, in practice the regulation is not mandatory and workers often elect to forgo benefits in favor of higher wage compensation. The lack of a social insurance law means that many regulations governing social insurance programs lack the force of law and are perceived to have flexibility in how they are implemented.

Lack of participation in social insurance programs may reflect unattractive features of the design and implementation of such programs, especially from the perspective of rural migrant workers. At the beginning of reforms, migrant workers were not even included in urban social insurance programs. Later, reforms expanded eligibility for social insurance programs to all enterprise employees. However, the programs are usually run by city governments and until recently, the benefits were not portable so that contributions (and claims to future benefits) to a scheme in one city could not be transferred to other cities or regions, a fatal flaw for making the programs attractive to highly mobile rural migrant workers who often do not expect to settle permanently in the cities in which they are working. China’s residential permit (or hukou) system creates barriers to permanent migration, for instance by not providing equal access to children of migrants to attend urban schools.

The large payroll charges for social insurance programs create a disincentive for both employers and employees to participate. Employers must pay contributions for pensions, medical insurance, and unemployment insurance of 20%, 6%, and 2% of wages, while workers must contribute 8%, 2%, and 1%. A worker who withdraws from the pension system only receives back his own contributions (8%) (Giles et al., 2012).

2. Defining Informal Employment

Informal employment is very heterogeneous, including different groups of workers with distinct characteristics. To make our measurements as internationally comparable as possible, we follow closely the criteria endorsed at the Seventeenth International Conference of Labour Statisticians (ICLS) in 2003 and supported by the ILO. These criteria build upon those approved at earlier ICLS meetings, but still require that specific choices be made to adapt the ICLS definitions to China’s unique institutional environment.

In this paper, we define both informal versus formal sectors, and informal versus formal employment (or jobs) and focus attention on the prevalence of informal employment. We define formal versus informal sector based on the employer type and employer size. The formal sector includes all government or public administrative agencies as well as businesses with more than seven employees. In China, businesses with more than seven employees are required to register with the government as enterprises. Businesses with fewer than seven employees are defined as being part of the informal sector. In China, such businesses are viewed as petty entrepreneurs (getihu) subject to much less regulation than registered enterprises although they too in principle are expected to register with local industrial and commercial bureaus (gongshangju).

Which types of jobs are considered to be informal? Figure 1 provides a breakdown of categories of informal work, distinguishing between jobs in the formal and informal sectors. Following the ICLS guidelines, family workers, the self-employed, and casual workers are categorized as informal workers. Employers with seven or fewer workers are also considered to be informal, while employers of larger enterprises (eight or more workers) are categorized as formal in recognition of the fact that they run large officially registered organizations.

To determine whether wage employees have informal jobs, we define two alternative criteria. These criteria apply equally to those working in formal or informal sectors. The first definition is based on whether or not the employer fails to provide all of the three most important types of social insurance that employers are expected to provide in China: pensions, health insurance, and unemployment insurance. If any of these benefits are provided to the worker, then the worker is categorized as a formal worker. By focusing on social insurance coverage, this definition emphasizes the vulnerability of informal workers, and is consistent with definitions of informality frequently used in other countries.

The second definition of informal wage employment is based on whether workers have a labor contract. Those without a labor contract are considered to have informal jobs. In China, all workers have the right to sign a labor contract with their employer. Having a contract entitles workers to a number of important protections, which were strengthened by the 2008 Labor Contract Law, and strengthens workers claims if they wish to pursue dispute resolution mechanisms such as arbitration or lawsuits. Thus, in the Chinese context, labor contracts play an important role in reducing the vulnerability of workers.

Workers in government or public administrative agencies that fill government-approved positions (or bianzhi) are considered to be formal workers using either definition of informal wage employment, regardless of how they answer questions about social insurance status or labor contracts. Such workers generally are permanent employees who normally do not actually sign written labor contracts, and often automatically qualify for free or subsidized health services or pension payments that are not always part of city-run social insurance programs. The informal or formal status of hired workers in government or public administrative agencies that do not hold government-approved positions is determined by the questions about social insurance and labor contracts described above.

In addition to the two definitions for informal employment just described, we also define informality based on the union and intersection of informal workers based on the first and second definitions. Thus, the third definition of informality is those workers who are informal based on either definition 1 or definition 2 (union), and the fourth definition of informality is those workers defined as informal based on both definition 1 and definition 2 (intersection).

3. Data

The third wave of the China Urban Labor Survey (CULS3), was conducted by the Institute of Population and Labor Economics (IPLE) of the Chinese Academy of Social Sciences (CASS) in six large Chinese cities in different parts of the country in early 2010. It included questions for both local resident and migrant households specifically designed to measure informal employment based on the ICLS categories. The survey questionnaire contains detailed information on work status, employer type (government, administrative units, state-owned enterprises, private or foreign enterprises), employer size measured by the number of workers, industry, occupation, work location, work status, labor contract type, social insurance coverage, earnings, and hours worked. The six surveyed cities are located in different regions of the country. Three are in coastal China; Guangzhou is in the Pearl River Delta, Shanghai is in the Yangtze River Delta, and Fuzhou is in the coastal area nearest to Taiwan. The other three cities are in the interior; Wuhan is in Hubei Province in central China, Shenyang is in Liaoning Province in the northeast; and Xian is in Shaanxi Province in the northwest.

In each city, representative samples of local residents and migrants were independently selected in a two-stage procedure. Using previous year data on the local resident population of each neighborhood, a fixed number of neighborhoods were selected in each city using probability proportionate to size (PPS) sampling. As the cities had limited information on the number of migrants living in each neighborhood, neighborhoods were first selected based on local resident populations, and weights are used to correct for differences in the relative sizes of migrant and local resident populations based on population estimates by neighborhood office staff. These staff helped to construct an updated list of households to serve as a sampling frame. Neighborhood office staff assisted with documenting unregistered migrants living in the neighborhood, especially those operating small businesses, and including them in the sampling frame. Then a fixed number of households were randomly sampled in each neighborhood, with 500 local resident and 500 migrant households sampled in each city in 2010. One disadvantage is that migrants were sampled through neighborhood committees, so that unregistered migrants and those living in collective forms of housing may be underrepresented. These include workers living on construction sites or in dormitories of factories or in other large work units that do not belong to an urban community. Thus, those working in the construction and manufacturing sectors are likely to be under-sampled.

4. Informal Employment in Urban China

In this section, we present our empirical estimates of the prevalence of informal employment in China. In Table 1, we present the share of urban jobs that are informal in different cities using the four definitions described earlier. Using the first definition based on social insurance access, the informal employment share is 16.2% for local residents, 60.6% for migrants, and 25.5% overall. Migrants are defined as those whose official residence permit (hukou) is not in the city in which they reside. The large gap in informality between local residents and migrants is striking. In none of the six cities does the share of informal jobs reach 27%, while in four of the cities, the share of migrants who are employed informally approaches 70% or more. There are also substantial differences across cities, for local residents ranging from 4.0% in Shanghai to 26.2% in Xian, and for migrants ranging from 46.3% in Guangzhou to 86.8% in Wuhan.

Using the second definition based mainly on labor contract status, the share of informal employment is 26.3% for local resident workers, 49.0% for migrant workers, and 31.0% overall. There is still an obvious discrepancy between the two groups, but the difference is smaller than when using the first definition. However, the total informality rate is higher using the second definition, mainly due to the higher informality share for local residents using the second definition. An interesting contrast arises in informality rates using the two definitions for migrants versus local residents. For local residents, informality using the second definition is higher but for migrants it is the opposite. This probably reflects the fact that migrants are much less likely to join social insurance programs compared to urban residents. Migrants question the benefits of such coverage, while urban local residents expect to reside locally indefinitely and have grown up expecting such benefits.

The third definition provides the strictest criteria for formal employment. Using this definition, the informal employment share reaches 37.2% overall, including 29.5% for local resident workers and 65.7% for migrant workers. Finally, using the fourth definition (informal using both definitions 1 and 2), the share of informal jobs falls to just 19.9% overall–13.2% for local residents and 45.4% for migrants. Thus the range of informality estimates using the strictest and loosest definitions are 19.9% to 37.2% for all workers, 13.2% to 29.5% for local residents and 45.4% to 65.7% for migrants. Although most local residents have formal jobs, most migrants are employed informally. These rates of informal employment are lower than estimates for the early 2000s (Park and Cai, 2010; Wu and Cai, 2006).

Although the differences across cities can vary using different measures, and for migrants and local residents, in general it appears that informality prevalence is less in more developed, coastal cities (Guangzhou, Shanghai, and Fuzhou) compared to interior cities. There are multiple possible explanations for this difference. In coastal cities, labor demand is very robust and competition to hire the best workers is keen, which could lead to better treatment of workers. Richer cities also have more resources to spend on enforcement and greater capacity to implement new Laws such as the 2008 Labor Contract Law. Coastal cities also have booming manufacturing sectors where labor regulations are more easily enforced than in the service sector where self-employment and small enterprises are more common. On the other hand, coastal cities have a very high percentage of migrants and vibrant, relatively unregulated private sectors, which could make it harder to maintain high levels of formal employment.

Table 2 examines the correlation in informal job status using the two definitions. For local resident workers, 84.0% of formal employment based on the first definition is also formal using the second definition, and 80.7% of those employed informally using the first definition are also employed formally using the second definition. For migrants, the analogous percentages are 88.1% and 74.4%. Thus, for migrants a larger share of workers who are informally employed based on social insurance coverage are not informally employed using the second definition based on labor contracts. This likely reflects the significant share of migrant workers with labor contracts who do not desire to participate in social insurance schemes or who are excluded from such schemes by their employers. Nonetheless, overall there is considerable overlap in who is working informally using the two definitions.

We can further break down the different types of informal employment based on the categories described in Figure 1. As seen in Table 3, using the first definition of informality the share of workers with different types of informal jobs include the following: 9.3% are informal employees in the informal sector (24.1% for migrants and 5.4% for local residents), 6.6% are informal employees in the formal sector (12.1% for migrants and 5.2% for local residents), 7.9% are self-employed (20.3% for migrants and 4.6% for local residents), and less than 1.4% are unpaid family workers or employers in the informal sector.

Hussmanns (2002, 2005) suggests that both “employment in the informal sector” and “informal employment” are measures that are useful for analytical and policy-making purposes. Table 4 presents cross-tabulations for workers with informal versus formal jobs working in the formal versus informal sectors. We find that 84.1% of local residents are employed in the formal sector, but only 54.4% of migrants work in the formal sector. The household sector provides very few jobs for either local residents or migrants. An interesting finding from Table 4 is that a large share of informal jobs are found in the formal sector, 54.1% for local residents and 37.3% for migrants. Most formal jobs are in the formal sector (94.8% for local residents and 71.0% for migrants).

Next, we examine how the prevalence of informal jobs varies across economic sectors. We report informal job shares for five broad economic sectors: manufacturing, other industry (including mining, construction, and electricity, gas and water supply), public services (including government agencies, healthcare, education, finance and insurance, etc), and services (including communications and transportation, information transfer and computer software, wholesale and retail, lodging and catering). There is a consistent ranking of the share of informal jobs across sectors. Using the first definition of informality, the share of informal employment by sector is as follows (in rising order): public services 8.6%, manufacturing 14.3%, other industry 17.9%, other 28.3%, and services 33.6%. Except for public services, the differences across sectors are more attenuated for migrants. There is a sharp discrepancy in the share of migrants who are informally employed in manufacturing using definitions 1 and 2; 52.8% are informal using definition 1 and 23.5% are informal using definition 2. This suggests that in manufacturing there are a lot of migrant workers who have labor contracts but who do not participate in social insurance programs.

We next break down informal employment rates by demographic groups defined with respect to gender and age (Tables 6-1 and 6-2). Using the first definition of informality, we find evidence that for both local residents and migrants, women are more likely to be informally employed than men, and younger workers are more likely to hold informal jobs compared to older workers. For local residents 19.7% of women are employed informally compared to 13.5% for men; for migrants the difference is 64.0% compared to 57.7%. The greater propensity of younger workers to be employed informally is much more pronounced for local resident workers (31.6% for those aged 16-24 compared to 11.5% for those aged 55-64, the comparable figures are 72.9% and 65.8% for the same age groups for migrants). For both local residents and migrants, gender differences are more pronounced for older workers. Using the second definition of informality, differences across gender and especially age groups are much less pronounced, although women continue to be more likely to be informally employed.

Compensation of formal versus informal workers. Next we compare monthly wages and hours worked per week for formal and informal jobs held by local residents and migrants. Mean wages for the different groups are reported in Table 7 and mean work hours in Table 8. In general, we find that those working in the informal sector are worse off. They earn lower wages but work longer hours, and this is true in nearly every city and for both local residents and migrants. Using the first definition of informality, the wages of informal workers is about 66% of that of formal workers for local residents and 52% for migrants. Local residents employed informally work nearly 9 hours longer than those who work formally; migrants who work informally work nearly 5 hours longer than those who work formally. Migrants work longer hours than local residents on average, regardless of whether their work is formal or informal. The pattern of results using the second definition of informality are similar.

Despite these clear differences in the wages and working hours of formal and informal workers, this does not necessarily translate into higher poverty rates for the families of formal and informal workers. Other research has found that poverty rates of migrant workers in China are not much higher than that of local resident families because migrant workers work longer hours, support fewer dependents, and can leave urban areas and return home if they cannot find a job in the cities (Park and Wang, 2010).

In Table 9, we describe the working hours and years of schooling for formal workers and different types of informal workers. Whether local residents or migrants, those with formal employment have higher years of schooling on average. Formal workers also work the fewest hours on average, although this is not true for migrants. Informal wage employees work similar hours and have similar levels of education whether they work in the formal or informal sectors; if anything working hours are slightly less and mean education years slightly higher when working in the informal sector and not the formal sector. This suggests that many formal work units in China (e.g., government, enterprises) actually treat informal employees worse than small scale enterprises in the informal sector. Finally, those who are self-employed, employers of seven or fewer workers, or unpaid family workers work the longest hours and have the lowest levels of educational attainment.

To get a better sense of working conditions for informal employees, we asked questions about the place of work, with results presented in Table 10. For those who are informally employed, the distribution of informal working places is very similar for local residents and migrants. The vast majority of workers (70.3%) work in conventional work environments (workshop, office, shop, etc.), and this percentage is nearly identical for local residents and migrants. About 14% of workers work in an outdoor place or street. Although our survey is likely to under-sample those working in construction sites or factory dorms, based on these results, there does not appear to exist strong evidence of systematic poor working conditions for informal workers.

Social insurance coverage. Being provided access to social insurance programs by one’s employer is the main criterion used in the first definition of informal employment. However, workers can also obtain pension, health insurance, or unemployment insurance coverage from sources other than their current employer. This can include coverage from public schemes that do not require employment for eligibility or from voluntary purchases of commercial insurance products. The availability of alternative sources of social insurance, especially from other public schemes, may reduce the perceived benefits of formal versus informal employment and increase the likelihood that workers voluntarily work in informal jobs. But such alternative coverage can play an important role in expanding coverage rates to achieve higher rates of total social insurance coverage.

Table 11 summarizes coverage rates for pensions and health insurance, reporting for each type of social insurance the total coverage rate for workers, the share covered by employers, and the share covered from other sources (commercial, other public schemes). These estimates do not include dependents who do not work. We can see that 10.4% of employees obtain pension coverage and 21.6% obtain health insurance from sources other than their employer. Some of these persons also receive benefits from employers, but the difference in total coverage rates and those covered by employers is 5.8% for pensions and 16.1% for health insurance. These compare to 64.1% and 60.6% of workers who receive pension and health insurance benefits directly from their employers. Migrant workers are as likely to obtain pension benefits from other sources as they are to obtain them from their employer, and more likely to receive health insurance benefits from other sources. Most strikingly, 53.9% of rural migrants obtain health insurance from other sources, presumably mainly the New Cooperative Medical Scheme (NCMS) that has been scaled up to reach nearly all of rural China, while only 13.3% obtain health insurance coverage from their employers. Overall, depending on the quality of alternative programs, especially NCMS, China’s efforts to expand social insurance coverage more broadly, and in particular to dependents and the self-employed, may be undermining incentives for workers, especially rural migrants, to take formal versus informal jobs. There remain large gaps in social insurance coverage between local residents and migrants, and between formal and informal employment.

One might expect that migrants who have lived for a long time in cities would be more integrated into the local economy and be more likely to plan to stay in the city permanently. If this is the case, they should enjoy better social insurance coverage rates than more recent migrants. We test this proposition in Table 12 by comparing coverage rates of migrants who have lived in the local city for greater than 10 years with those who have lived there for less than 10 years. We can also compare both sets of coverage rates with that of local urban residents (Table 11). We find that rates of informal employment and social insurance coverage rates for long-term migrants look much more like short-term migrant than local residents, suggesting that even for longer term migrants integration into the local economy has been slow.

5. Conclusions

In this paper, we have estimated the extent of informal employment in China’s urban labor markets using recent household survey data (in 2010) that enables application of definitions of informality consistent with international standards set by the ILO. Estimates of the share of urban workers employed informally ranged from 19.9% to 37.2% depending on the definition used. Despite these relatively low rates of informal employment, there remains a striking difference in the propensity for local residents and migrants to be employed informally, reflecting historically unequal treatment of the two groups and design features of current social insurance programs that make them unattractive to mobile, migrant workers. This suggests that policies should focus on incentives to increases the formal employment of migrants. Higher informality rates in the rapidly growing service and private sectors also merits policy attention.

China has been more successful in mandating that employers sign formal labor contracts with migrant employees than they have in getting migrants to participate in social insurance programs. Some of the reasons for this include: skepticism over likely realized benefits of the programs, lack of portability of benefits, high payroll contribution rates, lack of a legal mandate for participation, and availability of social insurance coverage from sources other than the employer. These patterns suggest that lack of social insurance coverage is likely to reflect voluntary rather than involuntary informal employment.

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九島伸一

Informality in China (World Bank)