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 in the process of state-owned enterprises out of the market by private enterprises with relatively high productivity. The article explains China’s economic growth well, especially the part regarding economic transformation, and emphasizes the improvement of economic efficiency brought about by the flow of factors within the non-agricultural sectors. However, in the process of China’s economic development, the improvement of the efficiency of production brought about by the flow of labor factors from the agricultural sectors to the non-agricultural sectors, represented by the transfer of agricultural labor, is equally important. Besides, human capital is improved through “learning by doing” in the process of investment and production, and the embedded technological progress relevant to fixed assets is utilized to achieve endogenous technological progress and the transfer of agricultural labor, thus exerting a profound impact on China’s macroeconomic growth model. This book attempts to better understand the specific mechanism of China’s rapid economic growth from these new perspectives, and also expects that the results of this study can provide policy suggestions for China in formulating its national strategy of development.
1 The data come from the World Economic Outlook Database compiled by the International Monetary Fund.
2 The details are as follows: Since the reform and opening-up, the level of income of both urban and rural residents in China has been constantly improved. The per capita disposable income of urban residents and the per capita net income of rural residents amounted to only RMB 343 and RMB 134 in 1978, and reached up to RMB 28,844 and RMB 9,892 in 2014, with an increase of 83 times and 73 times from 1978 in nominal terms, respectively. Based on the international poverty line of less than $1.25 of expenditure per person per day, the number of people living in absolute poverty in China fell from 835 million in 1981 to 68 million in 2013. By the end of 2014, the number of people participating in the basic endowment insurance for urban workers reached 341 million nationwide, the number of people participating in the basic endowment insurance for urban and rural residents reached 501 million and the number of people participating in the basic medical insurance reached 598 million.
3 For example, the International Monetary Fund (2015) cut its forecast for China’s growth rate in 2015 and 2016 to 6.8% and 6.3%, respectively.
4 The World Bank (WB) China Office: China Quarterly Update, May 2006.
5 Bai, C., C. Hsieh and Y. Qian: The Return to Capital in China, Brookings Papers on Economic Activity, 2006 (2), pp. 61–88.
6 Shu Yuan, Zhang Li and Xu Xianxiang: An Analysis of the Chinese Industrial Capital Return and Allocation Efficiency: Calculation and Decomposition, Economic Review, 2010 (1), pp. 28–36.
7 Fang Wenquan: China’s Capital Returns: A Re-estimation from the Perspective of the Vintage Capital Model, China Economic Quarterly, 2012 (11) (2), pp. 159–178..
8 Zhang Xun and Xu Jianguo: Re-measurement of China’s Return on Capital, The Journal of World Economy, 2014 (8), pp. 5–25.
9 Fan Gang and Lv Yan: Economic Development and National Savings Expansion: Extended by the Lewis Dual Economy Model, Economic Research Journal, 2013 (3), pp. 19–29.
10 Greenspan, A.: The Fed Didn’t Cause the Housing Bubble, The Wall Street Journal, 2009 (11), p. 15.
11 Fan Gang and Lv Yan: Economic Developing Stage and National Saving Expansion: Extend by the Lewis’Dual Economy Model, Economic Research Journal, 2013 (3), pp. 19–29.
12 Blanchard, O. and F. Giavazzi: Rebalancing Growth in China: A Three-Handed Approach, China & World Economy, 2006 (14) (4), pp. 1–20.
13 Jiang Wdei and Liu Shicheng: The Okun Model and China’s Empirical Data (1978–2004), Statistics and Decision, 2005 (24), pp. 7–9; Li Han and Pu Xiaohong: An Analysis of the Applicability of Okun’s Law in China, Commercial Research, 2009 (6), pp. 21–22.
14 Yin Bibo and Zhou Jianjun: China’s High Economic Growth and Low Employment: Empirical Study of Okun’s Law in China, Finance & Economics, 2010 (1), pp. 56–61.
15 Fang Fuqian and Sun Yongjun: Applicability Test of
