By English Edition Staff
Published: 2008-03-06

From Special Report, page 13 -14, issue no. 357, March 3, 2008
Original article:

The controversial Labor Contract Law, which came into effect this year, has affected laborers and businesses in both expected and unexpected ways. Meanwhile, legislators are still debating about how China can maintain competitive advantage if its labor costs increase, and how best to keep unemployment, a potentially major source of instability, low and incomes rising with inflation. This is part three of a five-part series. For more background on the "five haves" and their relationship to the "harmonious society" concept, see below.

Case Study: Losers on Both Ends of Production 

The processing industry has been the lifeline of the Pearl Delta region of south China's Guangdong province for years--70% of Shenzhen's export value last year came from the sector. However, rising production costs and imminent yuan appreciation have left many processing businisses high and dry.  

Processsing has also come under increased pressure from new laws that governed employment, taxes and environmental conservation. Despite rising salaries, many labor-intensive enterprises in the textile, shoe and toy manufacturing sectors still failed to overcome labor shortages.  

On the other hand, the blue-colloar workers in the region have not made real gains in income due to skyrocketing costs of living, from housing prices to food. Both ends of the production chain – the employer and the employees – have felt shortchanged by the recent price spikes. In the end, if the processing industry went under, over two million workers in Shenzhen alone would be affected.  

Update: Employment issues at the NPC and CPPCC 

Chinese Premier Wen Jiabao, in presenting the government's work progress report on March 5, said the government would expand employment by encouraging business startups, and that Chinese would be encouraged to find jobs on their own or start their own businesses while the government strengthened vocational training and other forms of support. He set the target of creating 10 million new jobs this year and keeping urban unemployment rate to 4.5%. (source: Xinhua)

Migrant Workers' NPC representative Zhu Xueqin, when speaking to the press on March 2, called for a paid holiday system for migrant workers to enable them to take time-off to return home outside of the usual fixed nationwide public holidays. Zhu, one of the first three migrant workers elected deputies to the NPC, said that would help ease transportation bottlenecks during the holiday season. (source: Xinhua)

Interview: Chang Kai - The End of China's Cheap Labor

Chang Kai directs the Labor Relations Research Center at Renmin University. He also led the drafting research team that worked on "The Labor Contract Law" under the State Council's Legislative Affairs Office.

The EO: As a country with a large surplus labor force, employment and business start-ups may be more important than labor protection in China. With this in mind, will the implementation of the Labor Contract Law further worsen employment situation?

Chang Kai: It's hard to argue that unemployment is more important than protecting workers. At present, the most prominent problem in China is social injustice. Although there is a lot of unemployment, there are also constanct mining disasters, and frequently over a million people who become sick on the job. Many people work for a year without payment... is this our goal? Social problems caused by labor-capital disputes have become serious, to the point that they are now affecting economic development.

Also, there's no evidence to suggest that the implementation of the Labor Contract Law will further worsen employment situation. Survival of the fittest will of course lead to some businesses closing shop, and this is natural, and will leave stronger businesses to fill in the space. The relationship between labor contracts and unemployment is close, but they only serve to standardize [layoff procedures], and will never actually worsen unemployment.

Debate over the Labor Contract Law actually touches upon the whole guiding principle of reform. When talking about it, you have to also discuss those questions of"rethinking reform". The larger backdrop to this has questions of development and fairness.

The EO: If "development comes first" it is difficult to surpass some stages during economic development.

Chang Kai: Yes, we need development, including both economic and social development. The nation's economic miracle can not happen if without employees' or peasant workers' contributions and sacrifices. But they have not shared the fruits of economic development. Data shows that China's Gini coefficient is up to 4.6, indicating that wealth polarization is serious. Wealth polarization directly leads to labor's resistance and worker strikes.

Theoretically, we have surplus labor forces, but actually many businesses are suffering from labor shortages. These labor shortages and labor-capital conflicts have become two main factors impacting China's economic development.

And talking about development stages, we can not always stay in the "accumulation" stage. With thirty year's of reform behind us, we should get past the first stage.

The proportion of labor income in the first distribution has declined these past years. We just want to pull labor costs into a reasonable range. The previous model of development had some severely unhealthy elements. Now, our goal is not to blame people, but to realize we can't continue that way. We need to restructure.

Keeping labor costs low is not sustainable in the world market. After entering the WTO, China can not avoid connecting labor standards with international trade economics. If we dilute international labor costs with our relatively low ones, foreign labor unions will oppose them, and countries will begin boycotting Chinese goods. Recently, China's lost almost every anti-dumping suit brought against it. Add to that the issues of product safety, and China faces increasingly steep challenges in world trade. It's gotten to the point that some businesses are labeling their products as "Not made in China". The age that China can rely on increasing its competitiveness through leveraging its labor force is over. If Chinese businesses fail to realize this, other dangers await them in the future.

The EO: You say low labor costs have spurred economic development in recent years. Then why, in the middle and western areas of China where labor costs are even lower, has development been much slower than in the east? Cheap labor also existed when China had a planned economy, why didn't the economy not grow then?

Chang Kai: To a large extent, the development in east of China has depended on cheap labors from middle and west areas. The Pearl River Delta is one of the most concentrated areas of low-cost labor, and in the past ten years, their salaries basically have remained the same. If you consider CPI, there has been negative growth in their salaries. Meanwhile, government employees have seen a nine-fold growth in salaries. Is this fair?

The EO: Do you agree that the Labor Contract Law stands in opposition to capital? We hope the law can protect workers. Will the opposite happen?

Chang Kai: We encourage harmony in labor and capital relations. The purpose of the Contract Labor Law is to pursue harmony on the basis of labor protection. We can not blame the Law for some businesses' illegal behaviors.

The EO: Will the labor contract Law break the spontaneity of the labor market?

Chang Kai: Labor market owns its special features which are different from products market or capital market. Labor market can not totally depend on self-regulating mechanisms without the degradation of public rights, because of its tight and special connection with people. Thus, the labor-capital relations of a market economy should be standardized and under control.

The EO: Most peasant workers in China have no organizations such as labor unions.

Chang Kai: Yes, this is a very valid point to bring up. In market economies, workers and employers have influence through labor union. But most labor relations in China are dispersive and non-equivalent. Workers have not formed collective power institutions to protect their rights. This is why we issued the Labor Contract Law.

The EO: It is interesting that some of China's labor unions support employer's interests instead.

Chang Kai: This is a problem with "Chinese characteristics". The Labor Contract Law contains regulations both on unions' rights and duties. How well labor unions fulfill their legal duties is the key issue that will decide the efficacy of the Contract Labor Law.

The EO: Comparing with market economy countries, are the regulations of the Contract Labor Law rather severe?

Chang Kai: Most of regulations in the Contact Labor Law are popular internationally. Our regulations are actually still much looser.

The End of Comparative Advantage?
The EO: Some scholars believe that the Labor Contract Law will hamper the development of Chinese private economy. What do you think about that?

Chang Kai: I believe most businesses oppose the Labor Contract Law because of their misunderstanding of it. For example, they misunderstand that open-ended work contracts cannot be ended. In fact, in other market economies, especially the US, bosses are cautious to dismiss employees because the power of labor union and the law.

Of course, Labor Contract Law limits businesses' rights and regulates businesses' duties. However, these limits are reasonable and necessary. It is not right to say that all of them will hamper economic development.

The EO: Because labor-intensive industries are all over China, flexible employment is important to both businesses and workers. Recently, lots of Korean and Taiwanese enterprises have packed up and left the Peal River Delta. Is there any connection between this phenomenon and the implementation of Labor Contract Law?

Chang Kai: Due to comparative advantage, China has made considerable economic achievements for 20 years. But this has also lead to many serious social problems, such as polarization, unfair distribution, labor and capital conflicts, etc. Therefore, relying on the advantage of lower labor costs should not be a long-term strategy for economic development. We should begin to change the situation.

Of course, the implementation of the Labor contract Law is a factor causing Taiwanese and Korean businesses to withdraw capital from China, but not the only one. Other factors include yuan appreciation, duty adjustments, environment protection, etc.

Some foreign capital enterprises leave Chinese market because they can not bear strong legal pressure. Besides them, the market will also eliminate other businesses not operating according to law. China will not protect the interests of such businesses that become rich by squeezing their workforce.

The EO: It is said that the Labor Contract Law was largely based on the German. But Germany's unemployment rate is very high. Other countries like India also have the same problems with labor laws. What do you think about this?

Chang Kai:I never said that we should use Germany's model, just that Germany's model has its own advantages. Also, we can not simply attribute Germany's high unemployment rate to that one thing.

In the US, France, UK, and India, one of the major measures to maintain labor balance is through labor unions and strikes, which is the strongest pressure for businesses. Of course, we don't encourage the use of strikes to solve such disputes. But we should try to understand the underlying causes of them.

The EO: Many businesses are studying how to avoid the Labor Contract Law. Will this impact its authority?

Chang Kai: There is a process to the implementation of laws. There are also costs.

But even in the freest market that is the US, this is unacceptable. Last year the US House of Representatives passed a law raising the federally mandated minimum wage from 5.15 dollars to 7.25 dollars. But there wasn't a massive calling for the law to be repealed. Around the world people actively participate in the drafting process, and after it's passed, they abide by it.

No law in China has ever been as publicly debated – on the internet and in newspapers. There were various solicitations of suggestions, of which there were ultimately 190,000. All parties who would be affected participated in that process, and thus, no one has the right to suggest that they were not represented.

In fact, not all enterprises in China oppose to the Labor Contract Law. State-owned businesses are discussing how to fulfill it, and most foreign ones working in China find it acceptable.


The Chinese government's goal of constructing a "harmonious society" has recently begun to focus on five core issues (the "five haves") closely tied to the livlihoods of Chinese--that is, universal access to education, employment, housing, social security and healthcare. In the 17th Congress of the Chinese Communist Party, these new focus areas were enshrined by President Hu Jintao's Party report, and are expected to be widely discussed during the top legislative sessions thereafter.

The two sessions (两会 or lianghui in Chinese) refer to meetings of the Eleventh National Peoples' Congress (NPC) and the Chinese Peoples' Political Consultative Conference (CPPCC) from March 3 to 18. 

In view of this, the EO is proud to present a five-part special focusing on each of the "five haves", including case studies and interviews.

By Xin Wang, Yang Xingyun
Translated by Ren Jie