growth rate and the growth rate of employed people proves the inapplicability of Okun’s law in China.14 Fang Fuqian and Sun Yongjun tested the five versions of the empirical form of Okun’s law, such as difference, gap, asymmetry, etc., and found out that none of them is applicable to the Chinese situation.15 By calculating the Okun equation in the expansion period and the recession period, Lin Xiumei found that the coefficient of the rate of unemployment on the growth rate is very small, and only when the value of the deviation trend of the growth rate is about 20 percentage points was the change in the rate of unemployment about 1 percentage point, reflecting the fact that the expansion stage coefficient is a plus sign and is inconsistent with the theoretical hypothesis.16 The results of the calculation of the Okun equation of the three industries by Zou Wei based on the data of the three industries show that a significant Okun relationship exists between the primary and secondary industries, and the positive Okun coefficient estimation sign of the tertiary industry deviates from the predicted meaning of Okun’s law.17
Figure 1.8. Changes in China’s GDP growth rate and unemployment rate (1979–2012).
Note: The data come from the China Statistical Yearbook over the years, estimated by the author.
The above basic empirical facts and the results of the research on the relationship between the unemployment rate and the macroeconomic fluctuation indicate that it is “unacclimatized” to directly apply the existing model of Okun’s law to China. So what is the root cause of this phenomenon? What is the real form of China’s Okun relationship? The answers are undoubtedly of great theoretical and practical significance for judging China’s current employment situation and for formulating labor market policies.
II. The Understanding of China’s Economy from the Perspective of the Transfer of Agricultural Labor
The three basic characteristics or riddles of China’s economic development can be understood from different perspectives. Based on the empirical observation of China’s economic transformation, it is clear that behind China’s high investment, high savings rate and high capital return, a common supporting factor is the continuous large-scale transfer of agricultural labor. What’s more, the short-term change in the transfer of agricultural labor relative to its long-term trend is also a key variable that reflects the relationship between the labor market and the macroeconomic cycle, eventually forming a unique form of correlation between China’s labor market and the fluctuation of the macroeconomic cycle. Therefore, this book attempts to analyze the three riddles of China’s economic development from the transfer of agricultural labor so as to gain some understanding of China’s economic developmental model.
The track of the reform and development of China’s labor market shows that the large-scale transfer of agricultural labor has not only brought about profound changes to China’s labor market but has also greatly boosted economic growth and the improvement of the efficiency of production. Before the reform and opening-up, China implemented a strict household registration system to tightly control the flow of farmers into cities, thus forming a separated urban–rural labor market. Since the reform and opening-up, China has gradually relaxed the restrictions on the movement of farmers in policy to adapt to the rapid development of non-agricultural sectors. The agricultural labor force has been shifting to non-agricultural sectors at an annual rate of 8 million for more than 30 years. In 2014, the number of migrant workers reached 274 million, accounting for more than half of the employed population in non-agricultural sectors.
The continuous large-scale transfer of agricultural labor has not only completely changed the fundamental characteristics and efficiency of the configuration of China’s labor market but has also profoundly affected China’s investments, savings, technological progress, urban–rural income distribution and macroeconomic fluctuations, and more importantly, it has played a vital role in the rapid development of urban sectors. Research shows that the transfer of agricultural labor is closely associated with the improvement of China’s total factor productivity,18 the rapid development and exports of the manufacturing industry,19 the high savings rate and the high investment rate,20 the change in the pattern of income distribution21 and other important macroeconomic characteristic phenomena. Du Yang et al. discovered through their latest research that the flow of the labor force from rural areas to urban areas is conducive to expanding the size of the labor market and improving the total factor productivity of the urban economy. The net benefits brought by the flow of labor are still considerable, despite the negative impacts on the capital–output ratio and working hours.
Furthermore, the empirical observation of the special correlation between China’s labor market and fluctuations in the macroeconomic cycle reveals that, for such a transitional economy as China’s, the short-term change in the transfer of agricultural labor relative to its long-term trend is also a key variable reflecting the relationship between the labor market and the macroeconomic cycle. As shown in Figure 1.9, against the background of employment transformation in China, the agricultural labor force presents a downward trend; however, the amount of decrease in a given year is significantly related to the macro-cyclical changes measured by the growth rate of the GDP. In the years of rapid macroeconomic growth, the number of employed people in the primary industry decreased more rapidly, and vice versa. Therefore, to understand the relationship between China’s labor market and the changes in the macroeconomic cycle during the period of transition, it is necessary to make a breakthrough in limitations of the standard Okun model by using the unemployment rate to express labor market changes, and appropriately introduce the variables of the transfer of agricultural labor to construct a generalized model of Okun’s law. Compared with the generalized Okun model, the standard Okun model is only applicable to the special cases of developed countries. To explore the riddle of the inapplicability of Okun’s law to China, we may go beyond the basic assumptions of the standard model and find a more general way to connect the labor market and macroeconomic fluctuations of economies in different stages of development.
Figure 1.9. Employment change in China’s primary industry and the growth rate of the GDP (1978–2012).
Note: The data come from the China Statistical Yearbook over the years, estimated by the author.
Therefore, this study aims to explain the three basic characteristics of China’s economic development from the perspective of the transfer of agricultural labor to further understand China’s economy in several aspects. It first combines the theory of the development of a dual economy and the theory of endogenous growth to analyze the three basic characteristics of China’s economic development from the perspective of the transfer of agricultural labor. This book argues that the key to get an understanding of China’s high investment and high savings is to understand China’s capital return and the improvement in its productivity, and further to understand the backup technological progress and continuous mass transfer of agricultural labor. The transfer of agricultural labor in turn contributes to the unique pattern of the relationship between China’s labor market and the macroeconomic cycle.
A potential contribution of this study is to supplement the existing literature on China’s mechanism of economic development. China’s mechanism of economic development has been expounded from different perspectives, leading to an in-depth understanding and a summarization of the experience of China’s economy. For instance, in the article “Growing Like China” published by Song et al. in the American Economic Review, the model of economic transformation involving two types of enterprises is constructed to explain that under the assumption of exogenous technological progress, the return on capital of the two types of enterprises remains unchanged, while the total return on capital increases due to the combination effect