ISSN 1471-0498

DEPARTMENT OF ECONOMICS DISCUSSION PAPER SERIES

HOW PRODUCTIVE IS CHINESE LABOUR? THE CONTRIBUTIONS OF LABOUR MARKET REFORMS, COMPETITION AND GLOBALISATION

Linda Yueh

Number 418 December 2008

Manor Road Building, Oxford OX1 3UQ

HowProductiveisChineseLabour? TheContributionsofLabourMarketReforms,CompetitionandGlobalisation LindaYueh UniversityofOxford linda.yueh@economics.ox.ac.uk December2008 Abstract.Productivityadvancesdrivelongruneconomicgrowth,andacrucial factor is labour productivity improvements. The productivity of labour in China was marginally relevant in the pre1978 period, but the picture has changed dramatically in the reform period due to numerous labour market reforms as well as radical changes in ownership structure whereby the dominance of stateowned enterprises has given way to the rise of private sectorfirmsandglobalisation.Usinganationalfirmlevelpaneldatasetfrom 2000to2005,thispaperhypothesisesthatlabourproductivityhasimproved as a result of labour market reforms, increased competition, and greater opening to the global economy, and finds that all of these factors to be important. JELCodes:J24,O12,O53 Keywords:Labourproductivity,China,economicreform Acknowledgements:ThesupportofaBritishAcademyLargerResearchGrant isgratefullyacknowledged.Researchassistancewaskindlyprovidedby MarkusEberhardt,LefuLi,andJingXing.Thehelpfulcommentsofthe participantsofTheMicroeconomicDriversofGrowthinChinaconference organisedbytheUniversityofOxfordandtheChinaCenterforEconomic ResearchatPekingUniversityareappreciated,particularlythoseofAlbert GuangzhouHu.

1.Introduction Productivityadvancesdrivelongruneconomicgrowth,andacrucialfactoris labourproductivity.TheproductivityoflabourinChinawasmarginally relevantinthepre1978periodwhenthelabourmarketwasadministered, wageswerecentrallydeterminedanddetachedfromeffort(KnightandSong, 2005).However,thepicturehaschangeddramaticallyinthepost1978 reformperiodduetonumerouslabourmarketreformsaswellasradical changesinownershipstructurewherebythedominanceofstateowned enterprises(SOEs)hasgivenwaytotheriseofprivatesectorfirmsand globalisation,allofwhichintroducecompetitionintothepreviouslyplanned economy. Labourmarketreformshaveincludedliberalisingwagestobetter rewardproductivecharacteristicssuchaseducation,aswellasincreasingjob mobilitytopermitbettermatchingbetweenworkerandemployer characteristics,leadingtoamorecompetitivelabourmarket(KnightandYueh, 2004).Ownershipreformhasalsoprogressedsignificantlythroughoutthe reformperiod(Doughertyetal.,2007).Fromstateownedenterprises dominatingGDPtoaccountingforlessthanhalfofChinasoutputby2005 (NBS,2006),Chinaseconomyisthereforeincreasinglycharacterisedby privatesectorcompetition(Jeffersonetal.,2006).Moreover,theopendoor policyculminatedinmembershipoftheWorldTradeOrganisation(WTO)in

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2001,whichheraldedaperiodofglobalintegrationandmarketopening, whichagainresultsingreatercompetitivepressures. Thesechangesarehypothesisedtoinfluencelabourproductivityinthe followingways.Thevalueofmarginalproduct(VMP)oflabourisequaltothe wageinacompetitivelabourmarket,whichisafarcryfromtheadministered wagesystemofChinawherecompensationdependedonageandseniority, amongotherfactors,allofwhichwereunrelatedtoeffort(Yueh2004). ReformofthelabourmarketbetteralignsVMP,whichistheproductofthe marginalproductoflabour(MPL)andthepriceofthegood(P),withthewage: VMP=MPLxP.Therefore,byliberalisingwagestomatcheffort,MPLshould beraisedasaresultofrewardingeffortexertedinproducingoutput.Also, reformstoincreasetheflexibilityoflabourmarketsduringthe1990sallowed workerstomovetofirmswhichbettermatchtheirskillsandthusimprove productivity.Thisstandsinstarkcontrasttothelifetimeemploymentsystem thatresultedinovermanningandsurpluslabour,whichreducedproductivity aslabour,likeotherfactorinputs,issubjecttodecreasingreturns.Reforms gearedtowardamorecompetitivelabourmarketwouldthusincreaselabour productivity. AstheVMP=MPLxPequationfurthersuggests,wagesarenotonly determinedbyeffort,butafunctionofMPLtogetherwiththepriceofthe good.Whenpricesareadministered,thendemandfor,andthequalityof,a gooddonotmatterasinacompetitivemarketandthuswouldstiflelabour

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productivityifwagesarekeptdowndespitehigherMPLbyastaterunproduct market.TheriseofthenonstatesectorinChinaforetellsofincreased competitioninwhichmarketswouldbetterrespondtotheforcesofdemand andsupply.Competitionmaywelldrivedownpricesaswellasincreasethem, butmarketforcesratherthanadministrativeoneswouldoperateto appropriatelyrewardfirms. Factorandproductmarketreforms,therefore,playanotablerolein increasinglabourproductivity.Labourproductivityisalsoinfluencedbythe reformofthemarketfortheotherfactorsofproduction,notably,capital. WithoverinvestmentcommoninSOEsthatseektheirfundingfromthestate orstateownedbanksandthecontinuedpresenceofthestateownedsector, thecapitaltolabour(K/L)ratioisinefficientlyhighinChina.Byreformingthe industrialsectorandreducingobsoletecapital,labourbecomesmore productiveasK/Lfalls.Therelationshipisevidentinthealternative formulationofVMP,whichisthemarginalrevenueproduct(MPR)oflabour,a moreprecisemeasureinlessthanperfectlycompetitivemarketswhereprice doesnotnecessarilyequalmarginalrevenue:MPR=MPLxMR.Themarginal revenueofafirmdependsonitsproductiveefficiencyandthedemand conditionsthatitfacesforitsgoods.Afirmwouldonlyhiremoreworkersif thevalueoftheadditionaloutputfromtheworkerwaswarrantedbythe marginalcosttothefirmofthatoutput.MRP,aswithVMP,inturns determineswagesandthereforetherewardstothemarginalproductof

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labour.Afirmscapitalstock,aswellasitsindustryconditions,wouldshape itsrevenueandcostcurves. Itfollowsthatlabourproductivityisfurtherdeterminedbynotonlythe factorinputsbutalsobythetechnologyandefficiencyoftheuseofitsworkers andcapital.Afirmwithlaggingtechnologywouldbelessefficientthanone withmoreadvancedproductioncapabilities,affectingitscostcurvesand thereforetheproductivityofitsworkers.ForChineseandfirmsfrom developingcountrieswhichlagbehindtheknowhowofcompetitorsfrom moreadvancedeconomies,itwouldhavelowerlabourproductivitythan otherwisecomparablefirms(seee.g.,BlomstrmandSjholm,1999,forthe findingthatfirmswithforeignequityinIndonesiahadhigherlabour productivity).Globalisationandtheincursionofforeignfirmsdirectlyintothe domesticmarketaswellasactascompetitionintheglobaleconomywould exposethesedifferences,whileatthesameofferinganopportunityfor Chinesecompaniestobecomeexposedto,learnfromandevenobtainthe technologicalknowhowofthosefirms.Thismechanismoflearningfrom technologyembodiedinforeigncapitaliswellknownandformsthebasisfor thetheoryofcatchingupoftendiscussedineconomicgrowthmodels(see e.g.,Solow,1956). Usinganationalfirmlevelpaneldatasetfrom2000to2005,thispaper investigatesthecontributionofthesefactorstoimprovinglabourproductivity inChina.Thepaperhypothesisesthatlabourproductivityhasimproveddue

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tolabourmarketreforms,increasedcompetition,andgreateropeningtothe globaleconomy.Theextentoflabourproductivityadvanceswouldinform Chinasgrowthprospectsandgaugetheeffectivenessofthepoliciesgearedat increasingthemarketdrivenelementsoftheChineseeconomyandaimingfor thesamegoalofsustainedgrowth(seeKokko,1996,whoarguesthatlabour productivityessentiallyreflectsthetechnologicalabilityoffirmswhichwould constitutethelongrundriverofeconomicgrowthofacountry). Fewpapershavefocusedexclusivelyonthedeterminantsoflabour productivityinChina,thoughalargenumberhasexaminedthefactors influencingfirmtotalfactorproductivity(TFP),includingthoseimpactingon theproductivityoflabour(seee.g.,JeffersonandSu,2006).Kraay(2006) investigatestheroleofexportsonlabourproductivityusingapaneloffirms from19881992andfindsapositiveandsignificantinfluence.Jeffersonetal. (2000),usingaNationalBureauofStatistics(NBS)ofChinadatasetcovering 19801996,similarlyfindlargeincreasesinlabourproductivity,particularlyfor the1990s,andnotablyforSOEsduringthisperiodattributedtothelargescale layoffpolicy(xiagang)overthelatterperiod.Jeffersonetal.(2006)explore thesourcesofChinasgrowth,includingaspectsoflabourproductivity,usinga NBSpaneldatasetoflargeandmediumsizedenterprises(i.e.,thosewith salesoverfivemillionRMB)from19952004.Theyconcludethatthereis evidenceofimprovedallocativeefficiencyfromlabourmovingoutof

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agricultureandbetweenindustrialandownershipsectorswhichreflect productivityadvances. Anotherstrandoftheliteratureviewslabourproductivityin comparativeperspective.Overtheperiod1952to1997,Wu(2001)concludes thatChinascomparativelabourproductivityincreasedfromabout3.0in1952 to7.6in1997(USA=100),showingasignificantgapwiththeU.S.evenafter threedecadesofreform.Jeffersonetal.(2006)likewisefocusonChinas internationalproductivitygapandestimatethatChinaslabourproductivity mustincreasebysomesixfoldbeforeitachievesaGDPpercapitathatisone quarterthatoftheU.S.Althoughtheyfindevidencethatindustriesinthe coastalregionsarealreadynearlyonequarterofthatoftheU.S.bytheearly 2000s,therestofChinalagsbehind. Theconclusionacrossthesestudiesemphasisesontheimportanceof productivityindrivingChinaseconomicgrowth.Whetherincomparativeor internallycomparativeperspectiveacrossChinasregions,assessingthe factorswhichincreaselabourproductivitywillshedlightonthereformswhich havecontributedtoChinasgrowth. 2.Data Theprimarydatasetusedinthispaperiscomprisedofanationalfirmlevel survey.Thesurveypertainedto2005whichwasthenmatchedbyChinasNBS totheirannualenterprisesurveytocreateapanelfrom2000to2005.The

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questionnairewasdesignedbyaninternationalresearchteam,andcarried outbyNBSwithsupportfromtheWorldBank.Thesurveywasconductedin thesummerof2006on1,268firmsin12cities(provinceinparenthesis): Beijing(municipality),Changchun(Jilin),Chifeng(InnerMongolia),Dandong (Liaoning),Hangzhou(Zhejiang),Shijiazhuang(Hebei),Shiyan(Hubei),Shunde (Guangdong),Wujiang(Jiangsu),Xian(Shaanxi),Zibo(Shandong),Chongqing (municipality).Thesurveydatawasthenmatchedtotheenterprisepaneland isarepresentativesubsampleofthatlargescaledataset.TheNational BureauofStatisticstakesconsiderablecarewiththeirannualenterprise surveysuchthatthefiguresmatchdataobtainedindependentlybythe Chinesetaxauthorities. AftermatchingthedatatotheNBSpanel,observationswith incompleteinformationwereeliminated,sothedatausediscomprisedof unbalancedpaneldatafrom1,201industrialfirmsfortheyears20002005for which2005providessurveyinformationaswellastheNBSdata.The informationwasalsocheckedagainsttheprovincialleveldata,whichrevealed thatthesubsampleisbroadlyinlinewiththeprovincialaverages.Comparison withtheaveragesforotherstudiesusingthelargeNBSfirmleveldataset (Doughertyetal.,2007)yieldedsimilarresults.Alsoinlinewithmost enterprisefirmstudies,thesurveyonlycoveredfirmswithanannualsales volumelargerthan5millionYuanfollowingtheNBSpractice(seee.g., JeffersonandSu,2006).TheNBSdatasetonlyincludesfirmsinindustry,and

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doesnotincludeconstructionandtransportationcompanies.Thus,the majorityoffirmsoperateinthemanufacturingsector,withasmallnumberof firmsinminingorutilities. Toavoidinfluentialobservationsduetoreportingerror,theproduction dataiscleanedusingstandardproceduresofwindsorising:forthepooled dataonfirmlevelvalueadded,capitalstockandlabour,thevaluesatthe1st and99thquantileofthedistributionisfirstdetermined.Then,allobserved valuesbelowtheformercutoffarereplacedwiththatofthe1stquantileand allobservedvaluesabovethelattercutoffwiththatofthe99thquantile. Additionalinformationavailableallowsforidentificationoffirmswhichare multiplantgroups.Dataformultiplantenterprisesmayleadtobiasinthe estimates,andarecontrolledforwithaseparatedummyvariableinthe estimations,asistheageofthefirm.Theyearofentryintothedatasetisalso controlledforwithadummyvariabletocontrolforanybiasresultingfromthe dateofappearanceinthedataset. Othersourcesofdatausedinthepaperincludethe2002CHIP(China HouseholdIncomeProject)nationalhouseholdsurveyaswellasdatafromthe InternationalLaborOrganization(ILO)andChinasnationalandprovincial statisticalyearbooks.Thesesourcesofdataareusedtoprovideadditional measuresofinterestingvariablesratherthanformthecoreoftheestimations, whichutilisethefirmleveldataset.

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3.MeasuringLabourProductivity FIGURE1HERE FIGURE2HERE TABLE1HERE Figures1and2showChinaslabourproductivityincomparative perspectiveandovertimerelativetoastartingpointin1980whenitbeganits marketorientedreforms.Figure1inparticularshowstheextraordinarygains inlabourproductivityinChinasincethen.GainsinGDPperworkerin manufacturingweresteadyandcomparabletointernationalincreasesuntil theearly1990swhenChinasopendoorpolicytookoff.Afterwhich,whilst othermajoreconomiesexperiencedanearlytriplingofproductivityandIndia improvedmoremodestly,Chinasproductivitylevelsincreasednearlyseven fold.TheproductivityleaderneverthelessremainstheUSA,whichisevident inFigure2.Chinaisaround1/8thasproductiveastheleader,althoughits gainsaremuchfasterthantherichercountry.By2005,asseeninTable1, ChinasGDPperworkerinthebroadereconomyaswellasinmanufacturing wasstillmodestrelativetoothercomparablesizedeconomiesduetoitslow levelofdevelopment,whichcontributestoitscostadvantage.However,ithas hadfasterlabourproductivitygrowthevenagainstasimilarlypoorcountry suchasIndia,whichcontributestoChinasfasteroverallGDPgrowth. Turningtothemicroeconomicdatausedinthispaper,Table2provides measuresofthelevelsandgrowthratesoflabourproductivity.Perthe

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standardcomputation,valueaddedisthesumofprofits,profittaxes,wages andadditionallabourcompensation(insuranceandwelfarepayments).The valueaddedmeasurewasdeflatedbytheExFactoryPriceIndexofIndustrial Products,whilethecapitalstockwasdeflatedbytheNationalPriceIndexfor InvestmentinFixedAssets(NBS2006).Table2showsthataverageannualreal valueaddedperworkerwas50,259RMBover20002005withanannual averagegrowthrateof4.77%.Thisisinlinewithotherrawestimatesof labourproductivitygrowthduringthereformperiod,whichhavebeenaround 46%(seeJeffersonandRawski,1994).Thegrowthrateslowsconsiderably betweenthefirsthalfoftheperiod(20002003)ofnearly10%realperannum growthtoaround1.5%for2003to2005.Thepatternisechoedintheaverage profitperworker,growthofwhichwasaround6%fortheperiodbutslowed downfromover12%inthefirsthalftojustover2%duringthelatterhalf. Measuredintermsofsalesperworker,therealannualaveragegrowthrateis animpressive13.5%forthesampletimeframe,withperannumgrowthrate speedingupinthelatterhalfoftheperiod(14.7%from20032005from11.8% in20002002).Althoughimpreciseasameasureoflabourproductivity,the salesmeasureindicatesthatrealoutputperworkerhasgrownrapidlyover theperiod20002005,whilegrowthinprofitsandvalueaddedhadslowed.It suggeststhatmarginsarebecomingtighter.Figure3showstheevolutionof labourproductivitylevelsovertimeover20002005,whileFigure4provides theannualgrowthrateoverthesameperiodwhichmapsoutthenotedtrends.

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TABLE2HERE FIGURE3HERE FIGURE4HERE Chinasindustrialsectorhasalsochangeddramaticallyoverthepast

fewdecades,particularlyseeninthediverseownershipstructuresof enterprisesinthe2000s.Sincethegaizhiorrestructuringpolicyofthelate 1990s,thenonstatesectorhasincreaseditspresenceinChinaseconomy, accountingforeverlargersharesofindustrialoutput.Thenonstatesector comprisesofprivatisedSOEs,privateChinesefirmsandforeigninvested enterprises(FIEs),suchasChineseforeignjointventures(JVs)andwholly foreignownedenterprises(WOFEs).FIEscanbefurtherdisaggregatedinto thosefromGreaterChina(HongKong,MacauandTaiwan)andothercountries. SincetheestablishmentofthetwostockexchangesinShanghaiandShenzhen intheearly1990sandthemorerecentlypermittedoverseaslistings,anumber offirmshavebecomepubliclylisted(gufen)companies.Tables37provide descriptiveinformation,includingmeasuresrelatingtohumancapital,listing andexportcapacityofsuchfirms.Giventhediversity,ownershipsectorand listingarecontrolledforbeforeanyinterpretationsaremadeofthedriversof labourproductivity. TABLE3HERE

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Table3providesfirmlevelinformationonvalueadded,employees,

capitalstockandthewagebillforthedifferenttypesofenterprises.Itshows thatmeanvalueaddedperfirmishighestforJVsfromcountriesotherthan GreaterChinaandlowestforprivateChinesefirms,althoughWOFEsfrom othercountrieshavethehighestmedianvaluewhilstthelowestremainsthat ofprivateChinesefirms.MeannumberofemployeesishighestinSOEsand lowestforprivatefirms,whilethemediangivesasimilarpicturebutforthetie forlargestwithGreaterChinaWOFEs.CapitalstockishighestforSOEs measuredinmeans,butgreatestforotherWOFEswhenmeasuredinmedians whichislesspronetoskewnessinthedata.PrivateChinesefirmscontinueto havethelowestvalueofthedifferentownershiptypesinbothmeanand median.Finally,thefirmmeanwagebillishighestinSOEsandlowestin privatefirms.But,whenmeasuredinmedians,thehighestwagebillbelongs toGreaterChinaWOFEsandtheloweststillforChinesefirms.Thefirm characteristicsindicatethatprivateChinesefirmstendtobethesmallestin termsoflabourandcapital,aswellasvalueadded,whiletheprivatisedSOEs areonlyslightlylarger. TABLE4HERE

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Table4providesinformationonaveragefirmcharacteristicsper

worker:valueaddedperworker,capitalstockperworkerorthecapital/labour ratio,wagebillperworker,hourlywageandtheaveragenumberofhours workedperweek.ValueaddedperworkerishighestinotherJVsbyboth averagemeasures,whilethelowestisprivatisedSOEs,againmeasuredin termsofmeanandmedian.TherawdescriptivesindicatethatFIEsallhave higherlabourproductivitythanChinesefirmswithSOEsataboutthesame levelasprivateChinesefirmsonaverage.Capitalperworkerisalsouniformly higherforFIEsthanChinesefirms,whileSOEshavemorecapitalperworker thanotherChinesefirms.ThelargestcapitaltolabourratioisfoundinWOFEs fromothercountries.WagebillperworkerisalsohigherforFIEs,thoughthe hourlywageforSOEsexceedsthatofWOFEsfromGreaterChinaandis broadlyinlinewithFIEsratherthandomesticfirms.OftheFIEs,WOFEsfrom GreaterChinapaythelowesthourlywageandhavethesecondlongesthours inaworkingweek(46hours).Themosthoursworkedperweekonaverageis inprivateChinesefirms,whileSOEsandotherJVshavetheshortestworking week(around42hours).Themedianvaluesprovideasimilarpicturewiththe longesthoursworkedinChinesefirmascomparedwithFIEs. TABLE5HERE

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Table5providessomemeasuresofhumancapitalofthelabourforce

(theshareofworkerswithsecondaryandhighereducationandtheshareof managerswithhighereducation),includingforthedifferentownershiptypes. Acrossallfirms,some62%ofworkershavesecondaryeducation,withmore educatedworkersfoundinGreaterChinaWOFEsandtheleasteducatedin otherWOFEs.Intermsofhighereducation,theproportionfallsconsiderably tosome20%acrossallfirms,andthelowestfoundinprivatisedSOEsand highestinGreaterChinaJVs.FIEshave,onaverage,moreeducatedworkers thanprivateChinesefirms.Thepictureismorevariedwhenconsideringthe shareofmanagerswithhighereducation.Acrossallfirms,around40%of managershavehighereducation.ThelowestproportionisfoundinJVsfrom othercountrieswhilethehighestproportionisinWOFEsalsofromother countries.SOEshavehighersharesthanotherChinesefirms,thoughall ChinesefirmshavemoreeducatedmanagersthanFIEsexceptforWOFEsfrom othercountries. TABLE6HERE Table6showsthepercentageoffirmswhicharelistedondomesticor

internationalstockexchanges.Theaverageisjustunder5%ofallfirms,with SOEshavingthehighestproportionatover12%.Thelowestshareoflistingsis foundinprivateChinesefirms,privatisedSOEsandGreaterChinaWOFEs.

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AmongFIEs,moreWOFEsfromothercountriesarelistedthanother ownershiptypes. TABLE7HERE Table7providesinformationontheproportionofoutputthatis

exportedtoglobalmarkets.Mostfirmseitherdonotexportorexportless than1%oftheiroutput.Acrossfirms,theaverageexportshareis11.5%with otherWOFEsexportingmorethanothertypesofFIEsandSOEsexportinga greaterproportionoftheiroutputthanotherdomesticfirms.GreaterChina WOFEshavethesmallestshareofexportsintheirtotaloutput,whileprivate Chinesefirmsalsoexportjustafractionmoreoftheiroutput.Bothtypesof firmsappeartobeproducingforthedomesticChinesemarket,whileother WOFEs,SOEs,andbothtypesofJVsexportagreatershareoftheirproducts. 4.Empiricalapproach Inastandardproductionfunction,yitisdeterminedbythefollowingequation: yit = k k it + l lit + it , (1)

whereyitrepresentsthelogformofoutputsuchasvalueadded(y)forfirmiat timetproducedbyinputsofcapital(kitisthelogofcapital)andlabour(litis thelogoflabour)andanerrorterm(it)whichcouldrepresenttechnology, managerialability,etc.Theerrortermhastheusualformof:

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it = i + it + t ,

(2)

whereiisthetimeinvariantfixedeffect,taretimedummies,anditisan AR(1)errorterm:

it = it 1 + it .

(3)

Ifthereareunobservablefirmspecificeffects(suchasmanagerial quality)whicharecorrelatedwithboththedependentandtheexplanatory variablesintheOLSestimation,thenafixedeffectsestimatorcanbeusedto sweepoutunobservedfirmspecificdifferences.Also,theinputscanbe endogenouswithrespecttoit,whichwillcausebiasedresultsinOLS.To controlforthetimeinvariantfactors,firstdifferencesofequation(1)canbe takensothattheitermsareeliminated.However,infirstdifferences,there willnotbeanyinstrumentsforthefactorinputsbecauselagsofyitandthe factorinputsarecorrelatedwithpastitshocksandtheautoregressiveerror term.Instead,themodelcanbetransformedintoadynamicmodelwith seriallyuncorrelatedshocksthatcanbeestimatedusinglevelsanddifferenced equationsusingadifferenceGMMestimator(Hansen,1982;Arellanoand Bond,1991).But,thecapitaltermsarelikelytobehighlyautocorrelated,so usingjustthedifferenceequationswillbeproblematicduetothepotential biasfromweakinstrumentsinfinitesamples.Thus,BlundellandBond(2000) proposeusingtheextramomentconditions(seealsoBlundellandBond,1998). Thismeansthatlaggeddifferencesareusedasinstrumentsforthelevels equations,inadditiontothelaggedlevelsasinstrumentsforthedifferenced

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equationsinthesystemGMM.Theoverallvalidityofthemomentconditions istestedthroughtheSargantestwiththenullhypothesisthattheinstruments arevalidorexogenous.Wherethenumberofoveridentifyingrestrictionsis large,theSargantestmayhavelowpowertorejectthenullhypothesis. Therefore,theDifferenceinHansentestsforthevalidityoftheadditional laggeddifferencesinstrumentsinthelevelsequationarealsobothusedas diagnosticsinthesystemGMMprocedure. 5.EstimatingLabourProductivity Toestimatelabourproductivity,equation(1)isrewrittenasfollows: VAit = 1 k it + 2 lit + i + t + it , (4)

whereVAitisvalueaddedperworker(inlogs),capitalandlabourareasbefore, irepresentstimeinvariantcharacteristicswhichaffectfirmperformance suchasindustry,ownershipoffirmasnonstatefirmsandFIEsfromdifferent origincountriesmayhavedifferentialeffectsfromSOEsaswellasifthefirmis listedandpubliclytradedonastockexchange,theindustrialsectoratthetwo digitleveltoaccountfordifferentmanufacturingsectors,locationtocontrol fortheprovince;andalsoothercontrolvariablessuchasageoffirmandifitis partofamultiplantfirmaswellastheyearofentryintothedataset.tisthe changeinthemacroeconomicconditionsfromyeartoyear,anditistheerror term.Identifyingthespecificvariablesofinterest,equation(4)isrewrittenas:

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VAit = 1k it + 2 lit + 3 LM it + 4 COMPti + 5 Git + 6i + 7 t + it . (5) Equation(5)furtheridentifiesthefactorsthatcontributetolabour productivity,suchaslabourmarketreforms(LMit),extentofcompetition (COMPit)andglobalisation(Git).Equation(5)canbeestimatedusingOLS.As OLSisbiasedbythepresenceofunobservablessuchasmanagerialability,a fixedeffectestimatorremovesfirmspecificunobservables.However,the potentialendogeneityofinputswouldcallforanIVapproach,suchasGMM. Robusterrortermsclusteredatthefirmlevelarealsoestimated. Thevariousmeasuresforlabourmarketreforms,competitionand globalisationarenecessarilyimperfectasareallproxies.Ineachofthe categories,avarietyofmeasuresareutilisedtoattempttoidentifythe reforms,e.g.,improvedreturnstoeducationorgreatercompetition,have contributedpositivelytolabourproductivity.Althoughtheproxiesfromthe firmlevelsurveyarehypothesisedtobeexogenousandtherelevant diagnostictestsperformedandreported,measuresarealsosoughtfrom outsideofthepaneldatasetwhichareevidentlyexogenoustothefirm.The regionalandprovincialmeasuresarelesslikelytobesubjecttoendogeneity bias. Table8providesasummaryofthedescriptivesofthevariablesusedin theestimations,whileTable9providesbaselineestimatesoflabour productivityusingthevariousapproaches.

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TABLE8HERE TABLE9HERE Table9reportstheestimatedlabourproductivityfunction.TheOLS specificationisrevisedbytheFEestimatorwhichremovesthefirmspecific timeinvariantunobservables.However,astheremaystillbeendogeneityof inputs,sotheGMMresultsarerelieduponasunbiasedsolongasthe instrumentsarevalid.TheOLS,FEandGMMestimationsarereported,along withtherelevantdiagnostictests.Reassuringly,theGMMestimateslie betweentheOLSandFEestimations,suggestingaconsistentdynamicpanel estimator. TheSargantestdoesnotrejectthevalidityoftheinstrumentseven whentheWindmeijer(2005)finitesamplecorrectionisimplemented,which addressestheseveredownwardbiasofthestandarderrorswhichcausesthe Sargantesttounderreject.Also,theDifferenceinSargantestofthevalidity oftheadditionallaggeddifferencesinstrumentsinthelevelequationsalso doesnotrejectthenullhypothesisthatthoseinstrumentsareexogenous. Thetrendgrowthrateforlabourproductivityisfoundtobe comparablebetweentheFEandGMMestimators.InterpretingtheGMM estimates,thetrendisaround5.7%perannum,indicatingastrongrateof growththatisalsoroughlycommiseratewiththerawestimates.Before

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turningtoinvestigatingthevariouspossiblefactorsaffectinglabour productivity,itisworthtakingintoaccountwhethertherearenotable differencesacrossmanufacturingsectors. TABLE10HERE TABLE11HERE ToinvestigatefurtherthepossibledifferencesinTFPacrossindustries thatcouldconfoundtheresults,Table10firstpresentstheseestimatesby industryafteramalgamatingthe2digitcategoriesinto14sectors,andis followedbyTable11whichestimatesfactorintensitiesandTFPbyallowingfor heterogeneousproductiontechnologies. Thereissomeevidenceofdecreasingreturnstoscalebasedonthe significantlynegativelabourcoefficientrelativetotheaverageuseoflabourin twoindustrieswhicharefairlycapitalintensive,namely,oilprocessing,coking andnuclearfuelprocessingaswellasmachinery,equipmentandinstruments. Therearealsodifferencesinthefactorintensityofcapital.Forthemachinery, equipmentandinstrumentssector,thetransportationequipmentsectorand electricpowerandutilities,thereisevidenceofsignificanthighervalueadded perunitofcapitalrelativetotheaverageuseofcapital.TheTFPofthe differentindustrialsectorsdonotvarysignificantlyfromthatoftheomitted

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categoryofmachinery,equipmentandinstruments,suggestingnosignificant sectoraldifferences. Havingestablishedthebaselinemodelandinvestigatedpossible differencesinTFPacrossindustrialsectorsthatcouldhaveinfluencedthe findings,thenextsectioncanproceedtoinvestigatethethreefactors identifiedaspotentiallyinfluentialinlabourproductivity,i.e.,labourmarket reform,competitionandglobalisation. 6.Thecontributionsoflabourmarketreform,competitionandglobalisation A.Labourmarketreforms OverthecourseofChinasreformperiod,asystemofallocatedlabour wherebyworkerswereallocatedtojobsforlifewasreplacedbyan increasinglycompetitivelabourmarket(KnightandSong,2005).Theresult wasgreaterreturnstohumancapitalintheformofwagesandcompensation waslinkedtoperformanceratherthananadministeredpayscale(Yueh,2004). Theselabourmarketreformsgreaterreturnstoeducationarepositedto improvelabourproductivity.Thehumancapitalofworkershasbeenfoundas asignificantcontributortoproductivitygrowth(seeHallandJones,1999who attributethehigheroutputperworkertotheroleofhumancapitalinacross countrygrowthregression). Usingdatafromthesurveyonthehumancapitalofworkersand managersaswellasexogenousinformationonreturnstoeducationforthe

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region,thebaselinemodelwillbeextendedtotestwhetherhumancapital improvesvalueaddedperworkerinChina.Thethreesurveyvariablesused arefoundinTable4:shareofworkerswithsecondaryeducationandhigher educationandshareofmanagerswithhighereducation. Thesecondsetofvariablesmeasuresregionaldifferencesintermsof thedevelopmentofthelabourmarket.Labourmarketcompetitivenessis measuredbydifferentreturnstoeducation,asmorecompetitivelabour marketswouldrewardeducationandhumancapitalmorethanan administeredone.Theinformationisfromthe2002ChinaHouseholdand IncomeSurvey(CHIP),whichisanationalhouseholdsurveycoveringboth ruralandurbanareaswithdetailedinformationonindividualseducation, employment,incomeandotherpersonalcharacteristics(seeGustafssonetal., 2008fordetailsofthedata).Returnstosecondaryandhighereducationare calculatedforthreeregions(coastal,centralandwestern)ofChinaandthe timeframesuitsthepanelusedinthispaper.Theestimatesarefoundinthe Appendix.Beijing,Dandong,Wujiang,Hangzhou,andZibobelongtothe coastalregion;Xian,ShiyanandChongqingtothewesternregion;andthe rest(Changchun,Chifeng,Shijiazhuang,Shunde)areinthecentralregion. In termsofyearsofeducation,thecoastalregiongeneratesanincomepremium ofnearly6%foreveryyearofeducation,whilethefiguresarelowerforthe central(4.8%)andwestern(4.7%)regions,thoughthedifferencebetweenthe lattertwoisinsignificant.Theregionswiththehighestreturnstohigherand

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secondaryeducationarethecoastalandwesternones,whilethecentral regionhaslowerreturns.Morecompetitivelabourmarketsshouldbetter rewardhumancapitalsuchasthoseaccumulatedineducationalattainment, soregionaldifferencesshouldserveasindicatorsoftheeffectoflabour marketreformsonlabourproductivitythatareexogenoustothefirm. TABLE12HERE Table12revealstheattainmentofsecondaryeducationofworkershas aninsignificanteffectonlabourproductivity,buthighereducationhasa significantlypositiveeffectforbothworkersandmanagers.Labour productivityisalsofoundtobeloweracrossallmeasuresofhumancapital returnsinthecentralregionthantheothers,whichistheregionwiththe lowestreturnstosecondaryandhighereducationaswellastoeachyearof education.Thecoastalregionwiththemostcompetitivelabourmarketis foundtogeneratethelargestimprovementsinlabourproductivityrelativeto theomittedcategoryofthecentralregion,whereasthereisnosignificant differencebetweenthewesternandcentralregions.Theseestimatesindicate thatlabourmarketreformresultinginmorecompetitivelabourmarketshave theexpectedeffectsonlabourproductivityinfirmswhichlocateinthese regions.

23

Increasingthehumancapitalofworkers,specificallytheproportion withhighereducation,by1%willresultina23%improvementinlabour productivity.Similarly,increasingtheshareofmanagerswithhigher educationbyacomparableamountwillimprovelabourproductivitybynearly 13%.Locatinginthecoastalprovinceswithmorecompetitivelabourmarkets willraiselabourproductivityby36.2%ascomparedwiththeinterioror westernregions.Allofthemeasuressuggestthatmorecompetitivelabour marketswillgenerategreaterlabourproductivity. B.Competition Oneofthemainconclusionsfromstudiesofothertransition economiesundergoingtransformationfromcentrallyplannedtomarket economiesistheimportanceofcompetition(seeEstrin2002).Forinstance, EarlandEstrin(2003)foundthatlabourproductivityincreasedinRussiadueto increasedproductmarketcompetition,amongothers. TheextentofprivatesectorcompetitioninChinawillbemeasuredby theresponsesoffirmswhichassesstheextentofcompetitionintheirmarkets aswellasbyexogenousmeasuresofmarketisationandprivatesector developmentintheprovince.Firmswereaskedtoassesstheextentof productmarketcompetitionintheirindustryonascaleof13,where1is fierce,2isstandardand3islow.Competitionisalsomeasuredbytwo provincelevelvariables.First,theNERIChinaMarketizationIndexisusedasa measureoftheextentofmarketorienteddevelopmentoftheprovince.The

24

shareofprivatesectoroutputinthetotalindustrialoutputofaprovinceisthe othermeasure.Bothofthesewouldcontemplatetheextentofmarketforces drivingcompetitionthatareoutsidethepurviewofthefirm. TABLE13HERE Table13,column(2)indicatesthatperceivedproductmarket competitionincreasesvalueaddedperworker.Thecoefficientincolumn(1) wasinsignificantwhenestimatedbyOLS,butbecomessignificantintheGMM estimates.AsGMMaddressessimultaneitybias,theestimatesarepreferredif theexplanatoryvariablecanbearguedtobeexogenous.Asthisquestionpicks upperceptionsoffirms,itmaywellnotbeexogenoustotheperformanceof thefirm,sotheeffectshouldbeinterpretedcautiouslyandcompetitionwillbe measuredbyprovinciallevelvariablesthataremorelikelytobeexogenous. Firmswhichperceivethattheyareincompetitivemarketsarethemore productiveones,lendingsupporttothenotionthatcompetitionimproves productivity. Thisconclusionissupportedbytheprovinciallevelmeasuresofthe extentofcompetition.TheNERIMarketizationIndexfindsthatgreatermarket developmentincreaseslabourproductivity(seecolumn4).Asthemostrecent indexonlyprovidesindicatorsupto2002,theestimationincludedonlythe firstthreeyearsofdata,buttheeffectwasneverthelesssignificant.Thisis

25

supportedbyanothermeasureoftheextentofcompetition,whichisthe shareofprivatesectoroutputinaprovince.Thismeasurealsohasapositive andsignificanteffectonlabourproductivityasseenincolumn(6).Neither measureisperfectincapturingtheextentofcompetition,buttheirfindings areconsistentandsupportthehypothesisthatgreatermarketdevelopment increaseslabourproductivity.Movinganincrementontheperceived competitionvariableisassociatedwitha10%increaseinlabourproductivity, whileoneincrementmoveintheNERIindexinducesan8%improvement. Increasingtheshareofprivatesectoroutputintotalprovincialoutputby1% willgeneratea41%increaseinlabourproductivity. C.Globalisation Anotableeventinthe2000sforChinaisitsaccessiontotheWTOin

2001,althoughgreateropeningandglobalintegrationhadoccurred significantlythroughoutthe1990s(seee.g.,Yueh,2006,fortheestimatethat ChinasexporttoGDPratiodoubledbetween1990to2000from15%to30% whichisintherangeoftheAsianexportledeconomiesofSingaporeand occurredpriortoWTOaccession).Exposuretoglobalmarketsislikelyto improveefficiencyduetothegreatercompetitivepressuresandpotentialto learnfromthepracticesandmoreadvancedknowhowofinternationalfirms (seeKraay,1999whofoundthatexportingincreasedlabourproductivityby 10%forapanelofChineseenterprisesovertheperiod,19881992).However, anumberofstudiescontendthatwhenmicroratherthanaggregatedatais

26

used,exportingdoesnotinduceefficiencybutratherthatmoreproductive firmsselfselectintoexportmarkets(seee.g.,areviewarticlebyWagner, 2007,whoexamined54firmlevelstudiesfrom34countriescoveringthe period19952006andconcludedthatexportingdoesnotimproveefficiency butthatproductivefirmsexport;seealsoCleridesetal.,1998andMelitz, 2003respectivelyfortheoreticalconceptsoffirmheterogeneityandempirical studiesthatfindthatproductivefirmssellinternationallywhilelessproductive onesservethedomesticmarket).Globalisationeffectswillbeinvestigated usingtheinformationonwhetherexportingandtechnologytransfersfrom foreignfirmsaffectlabourproductivity.Again,exogenousmeasuresofthe extentofglobalintegrationoftheprovince,e.g.,exportshareoftotal provincialGDP,willbeincluded. TABLE14HERE Boththeextentofexportingbyafirmortheprovinceprovestobe

significantlypositiveinincreasinglabourproductivity,asseenincolumns(4) and(6)inTable14.Anincreaseinexportshareof1%isassociatedwitha nearly10%increaseinlabourproductivityforafirm,whilethesameincrease attheprovinciallevelwillresultina12%increaseinvalueaddedperworker. Globalisationdoesnotsolelyrefertoexports.Theothersideofthe equationislongtermcapitalflowseitherintheformofJVsorWOFEs.For

27

someyears,ChinasFDIpolicywasgearedatattractingforeigncapitalwhich hadmoreadvancedtechnology.Assuch,Chinaexertedconsiderablecontrol overFDIthroughsolicitingandapprovinginvestmentsthatcouldhelpitsfirms upgradeandmoveupthevaluechain.Therefore,althoughitbecameless commonafterWTOaccessionwhenFDIcontrolsloosened,someJVsincluded technologytransferagreementssignedwherebytheforeignpartner transferredtechnologicalknowhowtotheChineseforeignentityaspartof theJVagreement.Thisisararemeasureofdirecttransferoftechnologyoften assumedtobeembodiedinFDIthatcouldgenerateproductivitygainsin developingcountries.Byincludingthisvariable,whethersuchtechnology transferagreementsarevaluableinimprovinglabourproductivityinChinacan beinvestigated. Ofthe163Chineseforeignjointventures,some26signedtechnology

transferagreements.Theseagreementsaresignedatthetimeofthe formationoftheJV,soshouldnotbeendogeneouswithrespecttocurrent firmperformance.TheaverageageofsuchJVsisaround8.7years,indicating thatestablishmentin19961997,whichisthesamemeanageasJVswhichdid notsigntechnologytransferagreements.TheoldestJVswereformedin1979 atthestartofmarketorientedreforms.AsGuangdongisincludedinthe surveyanditwasoneoftheearliestprovincestoopenrightatthestartof reform,thedatacapturestheearliesttothelatestJVswhichreceived technologytransferswhichwerein2005.Themeanvalueoftheagreement

28

was14.39millionRMBwithalargestcontractworth400millionRMB. Interestingly,oftentheChinesesideinsistedonthesetransfersastheywould belesscostlythanpresumablylicensingthesametechnologygiventhe monopolypricingofintellectualproperty.Thus,around43%ofsuch agreementswerebundledaspartofthecapitalinvestmentintheJVwithout paymentofadditionalconsideration,supportingthefavourablepositionof obtainingtechnologyviathisrouteinsteadofviatheopenmarket.Around onefifth(21.1%)offirmsreportedproducingnewproductswiththe technologyobtainedinthesetransferagreements. Table14column(2)showsthatthesigningofatechnologytransfer

agreementincreaseslabourproductivityinafirmbynearly57%,makingitthe largestcontributortoproductivitygainsamongstthevariablesinvestigatedin thispaper.Theotherglobalisationvariablesalsorevealtheassociation betweenexportsandlabourproductivity.Thethirdfactorhypothesisedto improvevalueaddedperworkeristhereforealsosupported. 7.Conclusion Trendproductivitygrowthmeasuredintermsofvalueaddedperworkerhas beenastrong5.7%perannumfrom20002005.Therearenonotable industrialsectoraldifferencesintermsofTFP,thoughtherearedifferent factorintensities,notablythehighervalueaddedproducedperunitofcapital

29

inthemachinery,equipmentandinstrumentssector,thetransportation equipmentsectorandinelectricpowerandutilities. Thehypothesesthatlabourmarketreform,competitionand globalisationresultinincreasedlabourproductivityweresupportedexceptfor thesecondaryeducationofworkerswhichhadnoimpact.Asnearlytwothirds ofworkershavesecondaryeducationattainment,thereisnotmoretobe gainedifthisproportionincreases.Rather,improvinghighereducationfor workersandmanagerswouldimproveproductivity.Thisisconsistentwith highlevelsofsecondaryeducationalenrolmentinChinaascomparedwith muchlowerlevelsofattainmentoftertiaryeducation.Inthefirst30yearsof reform,secondaryeducationreturnshaveimprovedashavetheproductivity ofworkers.Atthisstageofdevelopment,highereducationismoreimportant. Perhapsthelargestfactorinfluencinglabourproductivity,though,is whetheraChineseforeignjointventuresignedatechnologytransfer agreement.Bysigningone,labourproductivityisboostedbyataround57%. Notdistinguishingjointventureswhichhavesignedsuchagreementsfrom plainvanillaones,therefore,couldconfoundtheproductivitygainsfromFDI andunderestimatetheimportanceofChinasselectivepolicytowardforeign investors. Thefindingssuggestthatcapitalinfusionembodyingtechnological knowhowaswellasmarketorientedreformsinfactorandproductmarkets havemadesignificantcontributionstoimprovinglabourproductivityinthe

30

2000s.Inparticular,Chinaspolicyofobtainingtechnologyaspartofforming JVsappearstobesuccessfulinimprovinglabourproductivity.Labour productivityisakeyfactorinChinascontinuinggrowthprospects.Obtaining technology,aswellasencouragingcompetitionandfurtherlabourmarket reformsaimedathighereducationwouldbefruitful.SustainingChinas developmentwillthereforerequireattentiontomaintainingthemomentum ofitsmarketorientedreformsasitsfirmsseektoincreasetheirvalueadded perworkerwhichwillinducelongertermgrowtheffectsiftheimprovements taketheformofsustainedproductivityenhancements.

31

References Arellano,M.andBond,S.R.(1991).Sometestsofspecificationforpaneldata: MonteCarloevidenceandanapplicationtoemploymentequations, TheReviewofEconomicStudies,58,277297. Blomstrm,M.andSjholm,F.(1999).Technologytransferandspillovers: Doeslocalparticipationwithmultinationalsmatter?European EconomicReview,43,915923. Blundell,R.W.andBond,S.R.(1998).Initialconditionsandmoment restrictionsindynamicpaneldatamodels,JournalofEconometrics,87, 115143. Blundell,R.W.andBond,S.R.(2000).GMMestimationwithpersistentpanel data:Anapplicationtoproductionfunctions,EconometricReviews,19, 321240. Clerides,S.,Lach,S.,andTybout,J.(1998),Islearningbyexportingimportant? MicrodynamicevidencefromColombia,Mexico,andMorocco, QuarterlyJournalofEconomics,113,90347. Dougherty,S.,Herd,R.andHe,P.(2007).Hasaprivatesectoremergedin Chinasindustry?EvidencefromaquarterofamillionChinesefirms, ChinaEconomicReview,18,30934. Earl,J.andEstrin,S.(2003).Privatization,competition,andbudget constraints:DiscipliningenterprisesinRussia,EconomicsofPlanning, 36,122. Estrin,S.(2002)."Competitionandcorporategovernanceintransition," JournalofEconomicPerspectives,16,101124. Gustafsson,B.,Li,S.andSicular,T.(2008).InequalityandPublicPolicyinChina. Cambridge:CambridgeUniversityPress. Hall,R.E.andJones,C.I.(1999).Whydosomecountriesproducesomuch moreoutputperworkerthanothers?QuarterlyJournalofEconomics, 114,83116. Hansen,L.(1982).LargesamplepropertiesofGeneralizedMethodof Momentsestimators,Econometrica,50,646660.

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Jefferson,G.H.,Hu,A.G.Z.,andSu,J.(2006).Thesourcesandsustainabilityof Chinaseconomicgrowth,BrookingsPapersonEconomicActivity,2,1 60. Jefferson,G.H.,Rawski,T.G.(1994).EnterprisereforminChineseindustry, TheJournalofEconomicPerspectives,8,4770. Jefferson,G.H.,Rawski,T.G.,Li,W.andZheng,Y.(2000).Ownership, productivitychange,andfinancialperformanceinChineseindustry, JournalofComparativeEconomics,28,786813. Jefferson,G.H.andSu,J.(2006).PrivatizationandrestructuringinChina: Evidencefromshareholdingownership,19952001,Journalof ComparativeEconomics,34,146166. Knight,J.andSong,L.(2005).TowardsaLabourMarketinChina.Oxford: OxfordUniversityPress. Knight,J.andYueh,L.(2004).Jobmobilityofresidentsandmigrantsinurban China,JournalofComparativeEconomics,32,637660. Kokko,A.(1996)."Productivityspilloversfromcompetitionbetweenlocalfirms andforeignaffiliates,"JournalofInternationalDevelopment,8,517530. Kraay,A.(2006).Exportsandeconomicperformance:Evidencefromapanel ofChineseenterprises,inHoekman,B.M.andJavorcik,B.(eds),Global IntegrationandTechnologyTransfer,WashingtonDC:TheWorldBank, pp.139160. Melitz,M.J.(2003).Theimpactoftradeonintraindustryreallocationsand aggregateindustryproductivity,Econometrica,71,1695725. NationalBureauofStatistics(NBS).(2006).ChinaStatisticalYearbook.Beijing: ChinaNationalBureauofStatistics. Solow,R.(1956),Acontributiontothetheoryofeconomicgrowth,Quarterly JournalofEconomics,70,6594. Wagner,J.(2007).Exportsandproductivity:Asurveyoftheevidencefrom firmleveldata,TheWorldEconomy,30,6082. Windmeijer,F.(2005).Afinitesamplecorrectionforthevarianceoflinear efficienttwostepGMMestimators,JournalofEconometrics,126,25 51.

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Wu,H.X.(2001).China'scomparativelabourproductivityperformancein manufacturing,19521997Catchinguporfallingbehind?China EconomicReview,12,172189. Yueh,L.(2004).WagereformsinChinaduringthe1990s,AsianEconomic Journal,18,149164. Yueh,L.(2006).Chinascompetitiveness,intraindustryandintraregional tradeinAsia,inYao,Y.andYueh,L.(eds.),GlobalisationandEconomic GrowthinChina,Singapore:WorldScientificCo.Pte.Ltd.,pp.139158.

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800

700

600

500

China France Germany

400

India Japan United Kingdom

300

United States

200

100

019 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05

Source:ILO. Figure1 GDPperWorkerinManufacturing(1980=100),19802005

120

100

80

60

40

20

0 India China Germany Japan United Kingdom France United States

Source:ILO. Figure2 ComparativeLabourProductivity(USA=100),2005

36

.5 .4 20032005 .3 20002002 .2 .1 0 -2 0 2 4 6 Value-added per worker (in logs) Note:Valuesareonlyreportedforthosefirmswithfouryearsormoreofdata. Figure3 LabourProductivityLevels,20002005 Density

1 20002002 .5 20032005 0 -4 -2 2 4 0 Growth in value-added per worker (in logs) Note:Valuesareonlyreportedforthosefirmswithfouryearsormoreofdata. Figure4 LabourProductivityGrowthRate,20002005 Density

38

GDPperworker GDPperworkerinmanufacturing (1990US$atPPP) (1997US$atPPP) India 2,421 4,089 China 5,772 12,642 Germany 19,477 57,849 Japan 21,979 59,281 France 22,099 60,835 UnitedKingdom 22,412 60,235 UnitedStates 30,519 104,606 Source:InternationalLabourOrganisation(ILO). Table1 LabourProductivityinComparativePerspective,2005

Country

39

20002005 20002002 20032005 Averagevalue 50,249 47,613 51,181 addedperworker (RMB) Averageannual growthrateofVA 4.77% 9.72% 1.48% perworker Averagesalesper 373,768 282,583 412,237 worker(RMB) Averageannual growthrateof 13.54% 11.77% 14.71% salesperworker Averageprofitper 2,032 1,911 2,099 worker(RMB) Averageannual growthrateof 6.33% 12.72% 2.07% profitperworker Note:Valuesareonlyreportedforthosefirmswithfouryearsormoreofdata (n=4,090). Table2 LevelsandGrowthRatesofRealLabourProductivity

40

Valueadded Employees Capitalstock (inRMB) (number) (in100RMB) Ownership N Mean Standard Median Mean Standard Median Mean Standard Median type deviation deviation deviation SOE 470 47,078 118,475 8,773 1,071 2,189 320 117,606 316,789 16,955 Privatised 175 11,081 24,127 4,268 266 335 172 20,421 62,664 6,497 SOE Private 370 6,702 11,510 3,203 184 214 117 12,665 25,808 4,745 firm Greater 64 22,975 54,190 9,753 519 1,198 269 40,569 59,081 13,486 ChinaJV OtherJV 99 55,335 137,210 14,448 825 1,910 283 105,412 287,332 23,476 Greater 28,657 46,897 12,344 888 1,362 320 64,765 93,148 22,170 China 41 WOFE Other 41 37,007 75,847 109,863 707 1,310 280 91,480 195,711 297,780 WOFE Notes:Eightfirmsdidnotindicatetheirownershiptypeandareomitted. Table3 AverageFirmCharacteristics Firms Wagebill (in100RMB) Mean Standard Median deviation 23,134 108,439 3,472 3,047 5,124 1,200 2,076 8,285 21,089 15,081 2,930 19,436 77,185 26,207 1,115 3,717 5,351 5,606

11,693

21,244

5,137

41

Firms Ownership N type SOE 470 Privatised 175 SOE Private 370 42,363 47,728 26,419 72,327 89,465 firm Greater 64 54,990 65,591 34,669 115,044 190,531 ChinaJV OtherJV 99 87,603 112,056 57,525 155,933 241,601 Greater 41 56,533 108,963 27,201 116,560 268,357 China WOFE Other 41 44,844 61,245 26,378 160,755 184,121 WOFE Notes:Eightfirmsdidnotindicatetheirownershiptypeandareomitted. Valueaddedperworker (inRMB) Mean Standard Median deviation 44,844 61,245 26,378 41,816 51,648 24,561 Capitalperworker (inRMB) Mean Standard Median deviation 94,490 256,425 56,741 71,031 123,777 36,503 44,060 53,107 81,624 59,824 Annualwagebillperworker (inRMB) Mean Standard Median deviation 13,637 10,215 11,246 11,089 6,537 9,688 11,315 17,819 22,313 17,019 8,113 14,019 20,389 8,859 9,800 14,131 16,670 14,476 Hourlywageperworker (inRMB) Mean Standard Median deviation 6.10 3.18 5.28 4.41 1.50 4.17 4.61 6.16 6.60 5.22 2.44 3.02 3.33 2.06 4.40 5.26 5.56 4.72 Averageworkingweek (inhours) Mean Standard Median deviation 42.9 5.9 40 46.1 6.5 48 47.1 45.4 42.8 46.1 7.3 7.1 5.6 8.0 48 44 40 44

109,149

18,794

10,570

16,522

6.22

4.75

5.56

44.2

7.9

40

Table4 AverageFirmCharacteristicsperWorker

42

SOE PrivatisedSOE Privatefirm GreaterChinaJV OtherJV GreaterChinaWOFE OtherWOFE Averageacrossfirms Shareofworkerswith secondaryeducation(%) 64.1 63.7 59.0 63.8 62.2 68.3 55.0 61.9 Shareofworkerswithhigher education(%) 19.9 16.4 17.8 27.7 22.5 23.8 27.1 19.8 Shareofmanagerswithhigher education(%) 44.4 28.5 33.7 47.3 16.3 23.8 51.8 40.3

Note:Thehumancapitalofthelabourforceisestimatedbasedonbandsreportedbypersonnelmanagers.Thequestionsaskedforthesharesofemployeesand managerswithsecondaryorhighereducationwithachoiceofresponsesasfollows:(1)020%,(2)2040%,(3)4060%,(4)greaterthan60%.Theaverageshare iscomputedtakingaverageofallofthemidpointofthebands,e.g.,2040%iscomputedas30%.Asthemaximumvalueis0.8or80%,thisisanunderestimate. Thisiscounterbalancedbythelowerbandforwhich10%isestimatedforestimatesof020%.

Table5 HumanCapitalofLabourForce

43

SOE PrivatisedSOE Privatefirm GreaterChinaJV OtherJV GreaterChinaWOFE OtherWOFE Averageacrossfirms Percentageofpubliclylisted firms(%) 12.2 1.6 1.3 2.9 2.7 1.7 8.8 5.8

Table6 PercentageofListedCompanies

44

Percentage: SOE

01

13

35

33.8 16.5 10.4 PrivatisedSOE 41.1 15.2 14.4 Privatefirm 47.4 15.9 9.5 GreaterChinaJV 29.0 11.6 5.6 OtherJV 24.3 19.5 6.8 GreaterChina 47.3 16.1 2.7 WOFE OtherWOFE 21.5 15.4 0.7 Averageacross firms 36.7 16.1 9.5

510 1020 >20 Averageexport share(%) 12.1 9.2 18.1 13.2 11.5 5.3 12.6 9.9 8.4 9.3 9.6 7.9 15.5 12.5 25.7 18.6 11.3 13.2 24.9 16.3 14.3 8.0 11.6 7.7 13.4 18.1 30.9 19.4 11.3 9.6 16.7 11.5

Note:Thetotalforeachownershiptypedoesnotsumupto100%duetomissingvalues.The averageexportshareiscomputedtakingaverageofthemidpointofthebandsofthe reportedexportshares,e.g.,1020%iscomputedas15%.Asthemaximumvalueis0.6or60%, thisisanunderestimate.Thisiscounterbalancedbythelowerbandforwhich0.05%is estimatedfromthebandof01%.

Table7 ShareofExportsinTotalOutput

45

Variable Valueaddedperworker(inlogs) Employees(inlogs) Capital(inlogs) SOE PrivatisedSOE PrivateChinesefirm GreaterChinaJV ForeignJV GreaterChinaWOFE ForeignWOFE Listedcompany Share of workers with secondary education(inlogs) Share of workers with higher education(inlogs) Share of managers with higher education(inlogs) Coastalregion Centralregion Westernregion Perceivedcompetitioninindustry(1 3) NERIMarketizationIndex(110) Share of private sector output in provincialtotal(inlogs) Shareofexportsinfirmstotaloutput (inlogs) Share of export in provincial GDP (in logs) Signed technology transfer agreement(valueof0or1) Mean 3.405019 5.513498 3.887226 0.3534966 0.0885217 0.2027147 0.0468728 0.0644141 0.024491 0.0275893 0.0513881 0.4358727 Standard Deviation 0.9614361 1.296366 1.203353 0.4780904 0.2840731 0.4020513 0.2113815 0.2455068 0.1545792 0.1638049 0.2208043 0.5604294 Minimum 1.571625 0 0.5191292 0 0 0 0 0 0 0 0 2.302585 2.302585 2.302585 0 0 0 1 0 2.114447 5.298317 3.468063 0 Maximum 6.910009 9.472474 9.196653 1 1 1 1 1 1 1 1 0 0 0 1 1 1 3 9.74 .1746237 .5108256 .0835622 1

1.428458 0.9562638 0.9490729 0.9441268 0.2832694 0.2425494 0.2092063 1.24049 0 4506194 0.4286564 0.4067719 0.4641803

1.930776 3.113895 0.8571019 0.4687703 3.442075 1.995306 0.0702179 1.748414 1.00656 0.2555655

Table8 SummaryofVariables

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Dependentvariable:lnVA/L (1) (2) (3) OLS FE GMM lnL 0.1237*** 0.2762*** 0.1335*** (0.0230) (0.0294) (0.0413) lnK 0.2793*** 0.1416*** 0.2559*** (0.0188) (0.0192) (0.0948) Yeardummies 2001 0.1050*** 0.0576* 0.0867*** (0.0346) (0.0346) (0.0301) 2002 0.2300*** 0.1578*** 0.1717*** (0.0398) (0.0349) (0.0384) 2003 0.2640*** 0.1822*** 0.1798*** (0.0399) (0.0362) (0.0417) 2004 0.3184*** 0.2034*** 0.2084*** (0.0439) (0.0384) (0.0439) 2005 0.4347*** 0.2891*** 0.2837*** (0.0456) (0.0432) (0.0439) Constant 2.3045*** 3.6498*** 2.9539*** (0.2628) (0.2062) (0.3796) Observations 4253 4253 4253 Rsquared 0.133 AdjustedRsquared 0.304 AR1 0.000 AR2 0.058 AR3 0.379 Sarganpvalue 0.085 DifferenceinSarganpvalue 0.283 Notes:OmittedvariablesinOLSareShiyaninHubei,thefirstyearofthedata,andthe industrialsectorofcoalminingandcleaning.AdditionalcontrolsforOLSincludefirmage, multiplantfirm,ownershiptype,listedcompany,citydummies,industrialsectorandyearof appearanceindatasetandbeinganoutlier.ForsystemGMM,theSargantestssuggestthe exogeneityoftheinstruments,whiletheautocorrelationtestforserialcorrelationinthe structureoftheerrortermscannotrejectAR1butcanrejectAR2,sothelagsaretakenfromt 2fortheendogenousfactorinputs.Significanceisdenotedas:***p