Before economic reform was initiated in 1978, China did not have labour markets in the conventional sense. Labour mobility was non-existent and all wages were centrally fixed by the government. When the Chinese Communist Party (CCP) came to power in 1949, China pursued a Stalinist economy, whereby assets and property belonged to the people. Consequently, workers were their own employers and they could not ‘sell’ their labour to themselves. Labour was thus not considered a commodity and wages were not perceived as being the price of labour. Furthermore, given the premise that workers were the ultimate owners of property, they could obtain work whenever they needed to. In addition, no one could dismiss anyone else: full employment and lifetime tenure were fundamental features of this system.

The implementation of these Stalinist policies on a country-wide basis was no simple matter, not least because of China's huge population. Difficulties arose not only because of the requirement that each person be given a job for life, but also because of imbalances between the treatment of the rural vs. the urban labour force. Housing, medical expenses and food were heavily subsidised in the urban sector. As a result, urban workers were more costly to maintain in comparison to rural ones.

This dichotomy reflected the Chinese government's strategy of mutually exclusive rural and urban labour markets. As a corollary, rural people were excluded from working in the cities, and received no social security benefits.