China's Unemployment Pressures

In this environment it is unsurprising that the Labor Contract Law (LCL) and other progressive Chinese labor legislation of 2008 have come under renewed assault.  From the beginning, foreign business associations, such as the American and EU chambers of commerce, along with Chinese businesspeople, like CPPCC delegate and paper tycoon Zhang Yin, have opposed or called for amendments to the LCL.  In April last year, soon after the law’s enactment, Stanley Lau, deputy chairman of the Federation of Hong Kong Industries, complained that “the law requires too much of companies too soon."  And at the end of 2008 and early months of 2009, some authorities began listening. 

In January, Guangdong province put forward a much-criticized set of “opinions” reining in the ability of law enforcement to detain factory bosses or freeze their bank accounts for small offenses, while in November the country’s top labor official allowed local governments to delay planned minimum wage increases and reduce social security payments by companies. There is anecdotal evidence circulating online, furthermore, that suggests local governments are turning a blind eye to a variety of labor abuses as long as factories don’t lay off their workers.  I imagine the prevalence of this last problem varies considerably from province to province and city to city. 

However, as ILRF’s Executive Director, Bama Athreya, noted during testimony to the Congressional-Executive Commission on China last week (a summary of her comments is available here), labor costs are a small part of production costs in export processing zones like those in China, the Philippines, Mexico and elsewhere—and are nothing compared to the impact on these factories of a drop in foreign demand for their exports.  For example,Newsweek reports that toy exports from China to the U.S. were down even before the financial crisis started to deepen:

The volume of Chinese toys passing through eight major U.S. ports was down 5.9 percent in the first nine months of this year [2008] compared to the same period in 2007,  according to economic forecaster IHS Global Insight, which tracks the information for the National Federation of Retailers. Toy traffic through the ports of Los Angeles and Long Beach, Calif., which typically handle more than half of Santa's incoming booty, declined 10.2 percent, as measured by tonnage.

By December, “Declining U.S. orders already [had] contributed to the closure of at least 3,600 toy factories” in China.  It stretches the imagination to blame such dramatic shifts in demand on labor costs that at the very most rose by pennies or fractions of pennies per toy in that period.  It is more realistic to blame layoffs on shifts in demand.

There is little empirical data on the economic effect of the Labor Contract Law (to the extent that it has had any effect), but some research is starting to emerge, and it largely undermines the claims of anti-LCL alarmists.  A recent paper  by Yu-Fu Chen and Michael Funke for the Bank of Finland’s Institute for Economies in Transition concludes, “All in all, the … the Labour Contract Law in a literal sense is not ‘wreaking havoc’ and will not reduce employment in law-abiding firms.” According to a sampling survey by Yao Xianguo, the Dean of the College of Public Management, Zhejiang University, companies that were in compliance with pre-existing labor legislation at the time of the Labor Contract Law's passage have only seen labor costs rise 0.69 percent as a result of the law. 

Thankfully, strong statements of support for the Labor Contract Law are emerging from the NPC meetings.   Xinhua quotes Xin Chunying, deputy director of the Legislative Affairs Commission of the Standing Committee of the NPC as stating, “The labor contract law has nothing to do with the financial crisis and won't be revised for it.”  To bolster her remarks, Ms. Xin cited a survey of figures in the first nine months of the 2008 that demonstrated that “the law has… driven up enterprises' labor costs by two percent, but it has also greatly curbed labor relations issues that have been afflicting workers as well as employers for years.” 

While China ponders its options, it needs the world’s support in continuing to bolster workers’ rights.  As Dr. Athreya called for in her testimony to the CECC, the U.S. and China should use the Strategic Economic Dialogue to initiate a high-level, multi-stakeholder dialogue on protecting and empowering workers in both countries.  And the U.S. should continue to support the healthy growth of civil society in China, including labor advocacy groups and labor law programs at universities, alongside capacity-building for government agencies.

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