Urban labour market reform has been synonymous with reforming employment and wage determination systems in the state and collective sectors.

It was argued in chapter 2 that although both employment and wage determination systems were inefficient in the pre-reform era, the essential problem with pre-reform urban labour arrangements was the lack of labour mobility, which prevented a proper incentive system from being established. This chapter discusses the progress and limitations of labour market reform measures, investigated mainly through an examination of changes in individual wage determination patterns over the period 1980–7.

Labour market reforms in the 1980s

It has been argued by most Chinese economists and policy-makers that the weaknesses of the pre-reform labour arrangements in China were two-fold. On the one hand, the lifetime employment system encouraged over-staffing, shirking and low productivity. On the other hand, the wage grade system valued ‘formal’ qualification – such as education and years of experience – too heavily, while ignoring individuals' real labour productivity. Hence, individuals were paid according to their qualifications and age rather than in relation to their actual labour productivity (Shan 1991).

Consequently, since the beginning of the 1980s, labour market reform has focused on the above two dimensions. The attempt to change lifetime employment was made by gradually introducing a labour contract system. The experimental rules of the labour contract system were first introduced in 1983 to cover new entrants to the state and collective sectors.