The Urban Informal Sector in China

Department of Economics

University of Macau

The 5th group

Liu Yang SA822152 Dong Hanghang SA822311

Li Lianjun SA821140 Peng Lizhe SA822133

Wang Shengxi SA822149 Zhang Peng SA822378

Abstract: The informal sector has become a dispensable part of the whole economy. The informal employment now is the main part of the total employment. In this paper, we first choose appropriate definitions of informal sector and informal employment. Then we compute that the urban informal employment rose to 60.37% of the labor market in 2008, while the urban informal sector counted for 28.8% of GDP in 2008. The development and the process of urbanization contribute to the rise of the urban informal sector. The social restructuring and the reemployments result in the urban informal employment. Finally we analyze the benefits of the informal sector.Contents

1. Introduction (3)

2. Definitions (3)

1) Informal sector and formal sector (3)

2) Informal employment (4)

3) The difference between underground sector and informal sector (5)

4) Some other definitions (6)

3. Background (6)

4. Method to Estimate the Size of the Urban Informal Employment

and Sector in China (7)

1) Urban Informal Employment (7)

2) Urban Informal Sector (9)

5. Calculation Results and Analysis (11)

1) The Urban Informal Employment (11)

2) The Urban Informal Sector (12)

3) Analysis (13)

6. Benefits of the Informal Sector (16)

1) Firms (16)

2) Governments (17)

3) Labors (17)

References (18)

Appendices:

Table A 1 The Number of Urban Informal Employment

Table A 2 Value-added of Urban Informal Sector1. Introduction

The informal sector becomes inevitable for developing countries. Private enterprises, the self-employed individuals, and the unrecorded part of the economy together make up the informal sector. The informal employments include self-employment and wage-employment that get few protection, remunerative and security. We use the statistics from the China Statistical Yearbook (2009), published by the NBS (National Bureau Statistics), to draw our conclusions. In the last two to three decades, both the size of informal sector and the size of informal employment have been growing substantially, so have the share of informal sector in the economy and that of informal employment in total employment. As a result, the informal employment counts for more than half of the total employment. The increasing informal sector attributes to the expansion of the economy, the features of the process of the urbanization in China, and development of private economy sectors.

2. Definitions

1) Informal sector and formal sector

The ILO (1972) defined the informal sector as being characterized by:

(a) Ease of entry;

(b) Reliance on indigenous resources;

(c) Family ownership of enterprises;(d) Small scale of operation;

(e) Labor-intensive, using adapted technology;

(f) Skills acquired outside the formal school system;

(g) Unregulated and competitive markets.

In the developing country, the units of production or service with low income and unstructured are the informal sectors. Workers who are working in the informal sector often don’t have the regular income, fixed work time and fixed work place. Most of them are self-employment. The operating cost and the level of technology are low.

According to the above, in this paper, the informal sector consists of the following three parts: the private enterprise1, the self-employed individuals2, and the uncounted part. (The definitions of these three parts are at the end of this section)

As opposed to informal sector, the formal sector is made up of State-owned Units, Collective-owned Units, Cooperative Units, Joint Ownership Units, Limited Liability Corporations, Share Holding Corporations Ltd., Units with Funds from Hong Kong, Macao and Taiwan, and Foreign Funded Units.

2) Informal employment3

1私營企業

2個體戶

3Own-account workers, members of producers’ cooperatives, contributing family workers, etc. are defined by the International Classification of Status in Employment (ICSE).The concept of informal sector refers to production units (enterprises) as observation units, while the informal employment had to be defined in terms of characteristics of the persons involved or of their jobs.

Informal employment includes the following types of jobs (ILO, 2002):

(a) Own-account workers employed in their own informal sector enterprises;

(b) Employers employed in their own informal sector enterprises;

(c) Contributing family workers, irrespective of whether they work in formal or informal sector enterprises;

(d) Members of informal producers’ cooperatives;

(e) Employees holding informal jobs in formal sector enterprises, informal sector enterprises, or as paid domestic workers employed by households.

In this sense, informal employment has workers in both the formal sector and informal sector.

3) The difference between underground sector and informal sector

The definition of underground sector is that markets sell the legal merchandise but evade tax. So a part of the underground sector is the informal sector. This part is the market which faces the low-income family.4) Some other definitions4

The self-employed individual means the labor works as an individual. The means of production is owned by the labor. Employees must be less than 8. Also, it doesn’t include farmers. The self-employed individuals are in the informal economy.

The private enterprise: The company which is set up by natural person investment. They must employ the labor. The labor must be more than 8. In countries of Capitalism, they don’t put the private enterprise into informal sector because they have many big private enterprises in the up-market, so it disobeys the definition. However in China, the number of the big private enterprises is small. Many private enterprises are facing the low-income family. Therefore we calculate the data of the private enterprise into the informal sector.

The Uncounted part: differences between household labor survey statistics and employment figures provided by all enterprises. That is, people employed in the informal sectors that are not provided by enterprise in the labor statistics (mainly the rural migrant workers from rural areas).

3. Background

From historical perspective, there are four major sources of the informal sector. The first one is the rise of the town and township enterprise in 80s. Second, in the late 80s,

4國家統計局、國家工商行政管理局《關於劃分企業登記註冊類型的規定》（1998年8月28日，國統字［1998］200號）

considerable amount of migrants entered the city. Third, in 90s, many people got laid from the government-owned corporation. Finally, the informal enterprise and private industry grew rapidly since the 90s.

In general, the informal sector is an important part for developing countries, and the informal employment rate is high. Because of the slowness in the development, the levels of education and skills are very low. So there are many low-skilled labors and their competitiveness in the labor market is weak. At the same time, after some structural reforms, the formal sector is not capable of taking so many labors. To make ends meet, these low-skilled workers have to work in the informal sector, endure the poor condition of employment and low salaries. In southeast and south Asia, the informal employment rate is about 50-70%. In many Latin American countries, this rate is more than 50 %( in 1996), 53.6% in Argentina, 59.3% in Brazil，57.2% in Columbia, etc.

4. Method to Estimate the Size of the Urban Informal Employment and Sector in China

Measuring the size of urban informal employment and sector is a difficult and challenging task. The National Bureau of Statistics published neither the informal sector output, nor the number of informal employment.

1) Informal EmploymentWe will use Philip C. C. Huang’s method to estimate the size of urban informal employment. According to Philip C. C. Huang (2009), “For China, the best way to obtain an overview approximation of the informal economy is to start with the National Bureau of Statistics(NBS) figure for the total of urban employed persons (chengzhen jiuye renyuan, 城鎮就業人員), which is based on the reliable 2000 population census that included rural migrants who worked in the cities for more than six months a year, and deduct from it the numbers of regular employees in the officially registered and counted formal entities reported annually through the enterprises to arrive at the number of employees in the urban informal economy.” Even in this way, the formal sector has temporary workers, and at the same time informal sector has workers who have security of employment, but the amount of the two parts quite small. For simplicity, we only take all the people who work in the informal sector to estimate the size of informal employment and omit those who work in the formal sector.

The following is the formula:

Total urban employment Formal employment

= Informal employment

= Private enterprises + Self-employed individuals + the uncounted part

For example:

The number of employed persons at year-end in urban areas in 2008 is listed below.5

Total urban employment = 30210

Formal employment = State-owned Units + Collective-owned Units + Cooperative

Units + Joint Ownership Units + Limited Liability Corporations + Share Holding Corporations Ltd. + Units with Funds from Hong Kong, Macao and Taiwan + Foreign Funded Units = 11972

Informal employment = Total urban employment - Formal employment = 30210 – 11972 = 18238

The uncounted part = Informal employment – Private enterprises – Self-employed

individuals

= 18238 – 5142 – 3609 = 9505

2) Informal Sector

Then we will use Hu Angang’s method to estimate the size of informal sector. Hu Angang (2006) has estimated the size of urban informal sector in China in his paper. He divided urban informal sector into two parts: one is private enterprises and self-employed

5

“4-2 按城鄉分就業人員數 (年底數)＂（《中國統計年鑒-2009》）

Urban Areas (10 000 persons)

Year

Collective- Cooperative Joint

Limited Share Holding Private Units with Funds Foreign

Self-

owned Ownership Liability Corporations

from Hong Kong,Funded employed Region

Subtotal

State-owned

Units

Units

Units

Units

Corporations

Ltd.

Enterprises

Macao and Taiwan Units Individuals

2008 30210 47 662 1 43 2194 840 5124 679 943 3609

individuals, calculated according to the national average labor productivity in non-agricultural industries; the other one is the uncounted part, calculated according to the national average labor productivity. Then the sum of the two parts is the size of urban informal sector.

The following is the formula:

Y i = P 1 (L 1+L 2) +P 3L 3

Y i : The value-added of urban informal sector

P 1: The national average labor productivity in non-agricultural industries P 3::The national average labor productivity

L 1: Number of employed persons in private enterprises L 2: Number of employed persons in self-employed individuals L 3: Number of employed persons in the uncounted part

For example:

The raw data that need to use in 2008 is listed below.

Value-added of Number of Employed persons 6 (10 000 persons) Number of Employed persons

(10 000 persons)

GDP 7 Non-agricultural National Non-agricultural Private Self-employed Uncounted Industries 8 Total Industries

Enterprises

Individuals

Part Year Region

(100 million Yuan) (100 million Yuan)

(L 1) (L 2) (L 3) 2008

300670

266670

77480

46826

5124

3609

9505

6 “4-3 按三次產業分就業人員數 (年底數)” （《中國統計年鑒-2009》）

7

“2-1 國內生產總值” （《中國統計年鑒-2009》） 8

“2-1 國內生產總值” （《中國統計年鑒-2009》）

P3 = = 3.88

Y i = P1 (L1+L2) +P3L3

= 5.69 ×(5124 + 3609) + 3.88 × 9505

= 86618.9

5. Calculation Results and Analysis

1) The Urban Informal Employment

Using Philip C. C. Huang’s method, the urban informal employment is estimated to be about 29,840,000 in 1990 and rose to 182,380,000 in 2008. The size of urban informal employment has been attached at the end of the article in Table A1. The share of urban informal employment also rose. In 1978 most of the urban employment belongs to the formal employment. The informal employment only has 0.16% of the whole urban employment. It rose very fast. The ratio rose to nearly 50% in 2000. It even rose up to 60.37% in 2008, which is the largest one in the employment system. At the same time, the share of the formal employment rate decreased. In 2008, the formal employment decreased to 39.61%. The share of urban informal employment is shown in Figure 1.Figure 1 the share of urban informal employment and formal employment

The figure shows that one important indicator of China’s economic transition is the change of the employment, from formal employment to the informal employment. The informal employment becomes the main employment pattern in China and answers to the national labor force condition.

2) The Urban Informal Sector

We used Hu’s method to calculate the size of urban informal sector. The result of the size of urban informal sector has been attached at the end of the article in Table A2. Before 1985, the size of urban informal sector is very small. In 1985, the value-added of urban informal sector only takes up 1.72% of GDP. From 1990, the size of urban informal sector increased

faster than before.Especially from 1997-1998 the urban informal sector increased about 5% of GDP. In 2008, the urban informal sector takes up 28.8% of GDP. It was quite a big part of GDP. The share of value-added of urban informal sector is shown in Figure 2.

Figure 2 the share of value‐added of urban informal sector

3) Analysis

If you read carefully, you will find that although urban informal employment accounts for 60% of the employment in 2008, urban informal sector contributes only 28.8% to the GDP. Then somebody may ask why the urban informal sector which possesses the largest population does not have the highest contribution.

First we will explain why the size of urban informal employment became so big. Thereare two reasons bring about these situation.

a)The urbanization policy of China

The urbanization doesn’t progress equally as fast as the growth of economy. This slowness keeps the population off the cities, so the Chinese government turns to promote the town and township enterprise to drain the pressure. However, the downside of this policy leads to low demand of tertiary industry. Consequently, the growth of the tertiary industry mainly focuses on urban area. In cities, which only took up 17.4% of total area, the growth rate of tertiary industry was 79%. The huge markets in the cities lead to tremendous build-up in urban service sector, informal sector and vendors (mostly from suburbia).

One important indicator is the rate of increasing industrial workers. Speaking from experience from other countries, the total number of urban population should increase by 2% when the number of industrial workers increases by 1%. But in China, the urban population increased only 18.3 % when the industrial workers increased 28.2%. It means that the urbanization in China is too slow. In the situation of oppression, many cities lower the restriction of floating population. Easy to see, in the future, there will be more rural population enter cities.

Another great influence of the slowness of urbanization is the increase number of rural migrant workers in the informal sector. The tide of rural migrant workers has lasted for more than 20 years. The number of rural migrant workers entering city is huge, 0.1994 billion in1990, 0.1998 billion in 1995 and 0.2002 billion in 1999. Because of the restriction of the Hu Kou system, most of these rural migrant workers fell into the informal sector. In practice, without the urban Hu Kou, it is almost impossible for the rural migrant workers to go into the formal sector, which make the enlargement of the informal sector.

In a word, the growth of economy and the comparative slowness of urbanization lead to the rise in urban informal sector.

b)The social restructuring

On one hand, it promoted the informal sector. As two crucial ingredients of urban informal sector, the growth of private enterprise and self-employed individuals gave impetus to the growth of urban informal sector. The private economic sector plays a more and more important role. In 1979, the party encouraged the private economic sector in the first place. During 1978 to 1991, the government marked the status of private economic sector in the constitution. From 1992, the sector was growing at the speed of light. It certainly impelled more people throw themselves in to this area. Since 1997, the role of the private economic sector became more and more important. It gradually becomes one of the most important parts in the growth of GDP.

c)The reemployments

On the other hand, the new reemployments are mostly informal employment. In the 1990s, the unemployment increased. Lots of workers got laid. The formal employmentdecreased as the informal employment increased. Let’s take Fushun city as an example, in 2004, the total number of employment among those unemployed people was 0.22 million. Among these people, there were 0.2002 informal employees, which was the 91.1% of the totality.

Second, we will explain why the contribution of informal sector is low.

We should look at the main part of informal sector－ Uncounted part (mainly the migrants from rural areas). It is difficult for them to find a good job in formal sectors with their low education and low skill background. The large, low education and low job-training rural migrant workers can only do the low skilled work. In addition, most of the self-employment individuals and workers in private enterprises are not better than labors in formal sector in China. At the same time, after some structural reforms, the formal sector is not capable of taking so many labors. To make ends meet, these low-skilled workers have to work in the informal sector, endure the poor condition of employment and low salaries. Thus, it can be seen that the labor productivity is low in the informal sector.

6. Benefits of the Informal Sector

1) From the perspective of firms, the informal sector makes them realize profit maximizing. A firm’s profit equals revenue minus cost. Because of the intensive competition, itis hard for firms to boom their revenue. They are trying to reduce their cost. Absorbing informal employment assistants them to achieve this goal. Firstly, the attributes of the informal employment determine that they take low wage cost. Secondly, the labors of informal sectors do not have social security. They are not paid unemployment, endowment, and medical insurance, which lower the welfare cost of firms. Thirdly, the labors of informal sectors have no contract with firms. It frees the firms from managing contractions, training and assessing employees, etc. In a word, informal employment is a crucial way to make firms to minimize cost. For this reason, their benefit increases. As a result, there will emerge more investment, therefore stimulate the economic to increase.

2) From the perspective of governments, informal employment can somehow alleviate the pressure of unemployment. One of the most significant goals of macroeconomics policy is to fully utilize labor resource. The labor supply surplus cannot only be resolved through the state-owned and collective enterprises. The informal sector can relieve the labor supply surplus pressure in urban areas, facilitate people to get employed in the big cities and low the pressure of the floating people in the cities.

3) From the perspective of labors, informal employment relieves unemployed workers’ surviving pressure. As the adjusting of economic structure, lots of labors from state-owned enterprises were laid off and rural immigrates were floating into cities, making the job market more competitive. For low-skilled labors, they just get informal jobs to survive.References

(1) Bacchetta, M., Ernst, E., & Bustamante, J. (2009). Globalization and Informal Jobs in Developing Countries. WTO & ILO.

(2) Guifu, C and Shigeyuki, H. (2009). “Formal Employment, Informal Employment and Income Differentials in Urban China”. Xiamen University & Kobe University.

(3) Huang, P. C. (2009.2). “China‘s Neglected Informal Economy：Reality and Theory”, Open Times, pp. 51-73.

(4) Liang, V. (2003). “The Chinese Informal Labor Market and the Hukou System: Its Origin Implementation and Social Consequences for Migrating Rural Women”. Duke University.

(5) Schneider, F. (2002). “Size and Measurement of the Informal Economy in 110 Countries around the World”. Australian National Tax Centre.

(6)陳秀華. “非正規就業的經濟學分析＂. 《中文文摘》. 北京交通大學. 2006

(7)胡鞍鋼, 趙黎. “我國轉型期城鎮非正規就業與非正規經濟(1990-2004)＂. 《清華大學學報(哲學社會科學版)》. 2006年第3期第21卷.

(8)潘雪濤. “我國城鎮非正規經濟對GDP貢獻的研究＂. 《中文文摘》. 復旦大學. 2007.

(9)中華人民共和國國家統計局. 《中國統計年鑒-2009》. 中國統計出版社. 2009.

Appendices:

Table A 1: The Number of Urban Informal Employment

Urban Areas

Year

Informal Employment

Total

Private Self-employed Uncounted

(10 000 persons)

Subtotal

Enterprises Individuals Part

Region

Subtotal

Formal Employment

1978 40152 9514949915 015 0 1980 42361 105251044481 081 0 1985 49873 1280812358450 0450 0 1990 749 17041140572984 57614 2313 1991 65491 17465145062959 68692 2199 1992 66152 17861147873074 98740 2236 1993 66808 18262148313431 186930 2315 1994 67455 18653152493404 3321225 1847 1995 68065 19040152913749 4851560 1704 1996 650 19922152124710 6201709 2381 1997 69820 20781150195762 7501919 3093 1998 70637 216161268630 9732259 5698 1999 71394 224121********* 10532414 6837 2000 72085 231511158511566 12682136 8162 2001 73025 239401112312817 15272131 9159 2002 73740 247801087013910 19992269 93 2003 74432 256391080914830 25452377 9908 2004 75200 2761093715539 29942521 10024 2005 75825 273311122516106 34582778 9870 2006 700 283101148516825 39543012 9858 2007 76990 293501180117549 45813310 9658 2008

77480

30210

1197218238 51243609 9505

Table A 2: Value-added of Urban Informal Sector

Value-added (100 million Yuan)

In % of GDP

GDP Private Self-employed Uncounted Informal Informal

Enterprises Individuals Part Sector Sector Year Region (100 million Yuan)

(Y1)

(Y2)

(Y3)

(Yi)

Private Enterprises

Self-employed Individuals Uncounted

Part

1978 35.2 0.0 3.3 0 3.3 0.00%0.09%

0.00%0.09% 1980 4545.6 0.0 19.4 019.4 0.00%0.43%0.00%0.43% 1985 9016.0 0.0 154.9 0154.9 0.00% 1.72%0.00% 1.72% 1990 18667.8 30.0 323.4 666.91020.2 0.16% 1.73% 3.57% 5.47% 1991 21781.5 42.4 431.0 731.41204.7 0.19% 1.98% 3.36% 5.53% 1992 26923.5 75.2 567.6 910.01552.8 0.28% 2.11% 3.38% 5.77% 1993 35333.9 181.2 905.8 1224.42311.3 0.51% 2.56% 3.47% 6.54% 1994 48197.9 416.0 1534.9 1319.73270.6 0.86% 3.18% 2.74% 6.79% 1995 60793.7 725.3 2333.1 1522.04580.4 1.19% 3.84% 2.50%7.53% 1996 71176.6 1038.4 2862.2 2457.96358.5 1.46% 4.02% 3.45%8.93% 1997 773.0 1383.6 3540.3 3498.58422.4 1.75% 4.48% 4.43%10.66% 1998 84402.3 1909.4 4432.9 6808.413150.7 2.26% 5.25%8.07%15.58% 1999 677.1 2213.2 5076.2 8587.915877.3 2.47% 5.66%9.58%17.70% 2000 99214.6 29.5 4994.5 11233.819192.8 2.99% 5.03%11.32%19.34% 2001 109655.2 3925.4 5479.5 13753.323158.2 3.58% 5.00%12.54%21.12% 2002 120332.7 5626.6 6387.1 15735.927749.7 4.68% 5.31%13.08%23.06% 2003 135822.8 7956.8 7431.0 18080.033467.8 5.86% 5.47%13.31%24.% 2004 159878.3 10381.1 8742.7 21311.440435.2 6.49% 5.47%13.33%25.29% 2005 183217.4 13286.5 10671.3 23849.147806.9 7.25% 5.82%13.02%26.09% 2006 211923.5 16947.1 12910.8 27344.857202.7 8.00% 6.09%12.90%26.99% 2007 257305.6 23000.4 16618.9 32277.7717.0 8.94% 6.46%12.54%27.94% 2008

300670.0 29180.7 20552.9 36885.2

86618.9 9.71%

6.84%

12.27%

28.81%