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The Determinants of Labor Supply of Informal Sector: Two Hypotheses on Self-Employment

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Economic Transition and Labor Market Reform in China

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Abstract

The self-employed sector is a representative informal sector, and it has influence on income inequality as noted in previous studies. In China, along with the economic transition and economic development, the number of self-employed workers (“Geti Gongshang Hu”) in urban regions increased greatly, and the labor market is segmented by the informal sector and formal sector which seems to be similar with the developed countries and other developing countries. Why is there a large growth in self-employment in urban China during the economic transition period? There are two hypotheses proposed to answer this: the disguised unemployment hypothesis and the business creation hypothesis. Chapter 6 investigates the mechanism of becoming a self-employed worker based on these two hypotheses. It is found that excepting the older generation group in 2013, compared with employees, a worker in the self-employment sector does not gain more, and there seemingly is no better choice in urban China, which means the disguised unemployment hypothesis is supported. It also indicated that the liquidity constraint problem may be a main obstruction factor for the new business creation and innovation in China.

This chapter is a revised version of: Ma, X. (2016). Economic Transition and the Determinants of Self-employment in Urban China: 2007–2013. Journal of Chinese Economic and Business Studies, 14(3), 279–307. Copyright ©: The Chinese Economic Association-UK, reprinted by permission of Taylor & Francis Ltd, on behalf of The Chinese Economic Association -UK.

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Notes

  1. 1.

    For the definition of informal sector, please refer to International Labor Organization (ILO) (1972).

  2. 2.

    For detailed surveys of empirical studies on the self-employed, please see Yamada (1996) and Le (1999).

  3. 3.

    There is no unified definition of self-employed workers in previous studies in China. Here, self-employed workers are close to “Geti gongshang hu”, and the total number of workers of “Geti gongshang hu” is published in the Chinese Statistical Yearbook by the National Bureau of Statistics (NBS). “Geti gongshang hu” includes the self-employed employer (the owner of small firm or unit with less than seven employees), the own-account worker (individual self-employment worker with or without family helpers), and a section of employees who work in firms with less than seven workers.

  4. 4.

    The phenomenon of communist party members and cadres leaving the public sector to become business owners in the private sector in the 1980s is called “Xia Hai” in Chinese.

  5. 5.

    For empirical studies on labor market segmentation by public and private sector in urban China, please see Chap. 3 of the book, Dong and Bowles (2002), Yin and Gan (2009), Chen et al. (2005), Zhang and Xue (2008), Ye et al. (2011), Demurger et al. (2012), Lu et al. (2012), and Ma (2009, 2014, 2015, 2016)

  6. 6.

    Number of children, household income, family background (father’s education, father’s occupation), and social capital (the number of relations and the frequency of contact with relations in CHIPs 2007, and being trustworthy to friends and being trustworthy to others in CHIPs 2013) are used as identification variables in this study.

  7. 7.

    Wage survey items in CHIPs 2007 for urban registration residents comprises the basic wage, bonus, cash subsidy, and non-cash subsidy, whereas the wage survey for migrants comprises the basic wage, so the logarithm of the monthly wage based on the basic wage is utilized in the study.

  8. 8.

    For example, Blau (1985), Borjas (1986), Evans and Leighton (1989), Amit et al. (1990), Bruce (1999), Hamilton (2000), Dunn and Holtz-Eakin (2000), and Zhang and Pan (2012) pointed out that individual attributes (such as gender, human capital, and family background) should affect the choice to become a self-employed worker. In addition, Evans and Jovanovic (1989), Lentz and Laband 1990), Holtz-Eakin et al. (1994), and Dunn and Holtz-Eakin (2000) indicated that financial constraints also affect the entry to the self-employed sector.

  9. 9.

    For longitudinal analysis using panel data, please see Blau (1987), Evans and Jovanovic (1989), Blanchflower and Meyer (1992), and Xie (2012) for the transition into self-employment, and Evans and Leighton (1989) and Bates (1990) for the exit from self-employment.

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  1. Hitotsubashi University, Tokyo, Japan

    Xinxin Ma

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Ma, X. (2018). The Determinants of Labor Supply of Informal Sector: Two Hypotheses on Self-Employment. In: Economic Transition and Labor Market Reform in China. Palgrave Macmillan, Singapore. https://doi.org/10.1007/978-981-13-1987-7_6

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  • DOI: https://doi.org/10.1007/978-981-13-1987-7_6

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