Comment on “The Labor Contact Law, Macro Conditions, Self-Selection and Labor Market Outcomes for Migrants in China”

The impact of the Labor Contact Law (LCL) adopted in 2008 has been a controversial subject in both academia and policy circles. In the past, many union leaders and public intellectuals often described the poor working conditions and low pay for migrant workers as the “dark side” of China's recent industrialization. They enthusiastically supported the introduction of LCL. Some entrepreneurs and economic policymakers, however, blamed “premature” adoption of the LCL at least partly for economic difficulties in the aftermath of the global financial crisis. Some even call for the suspension or modification of the LCL. Both of these views are based on a strong assumption that the LCL has significant impacts on labor market outcomes, such as increasing wages, reducing working hours and improving access to social protection schemes for migrant workers. As Meng (2017) shows, a number of studies in the literature verified such an assumption. Meng (2017) argues that by simply looking at the correlation between the adoption of the LCL and labor market outcome variables, previous studies may have over-estimated the impacts due to the common missing variable problems. She attempts to obtain more accurate estimates by adding two types of “missing variables”. The first is a set of macro condition variables. A city with a higher average wage rate, for instance, often also has better labor market outcomes. The second is the so-called self-selection issue. Again, individuals holding formal jobs are also likely to have better labor market outcomes. Meng concludes that, while the LCL probably does have some positive impacts, those impacts are often over-stated or mixed. I find Meng's study extremely interesting, with an important policy-relevant question, a well executed statistical analysis strategy and conclusions that are somewhat different from the existing literature. I also conquer with the main findings of Meng's paper. I have two comments, one on the estimation technique and the other on policy implications. While the findings of Meng's paper sound more plausible than some existing studies, they may still be subject to the potential endogeneity problem. For instance, Meng uses the city average wage and a number of other variables to proxy for local labor market conditions. But city-level variables including the average wage rate may also be affected by the LCL or the “labor market outcome” variables. If these newly added “missing variables” are not entirely exogenous, then the new estimates obtained by adding them to the model might not be as accurate as we would like to believe. In addition to the differences across cities, there could also be important differences across enterprises with different types of ownership. My causal observation suggests that the enforcement of the LCL is very uneven. In general, the coastal region complies with the LCL better than the interior region, and state- and foreign-owned firms follow the rules more rigorously than private enterprises. A related policy debate in China today is whether the LCL should continue or should be suspended. The background to this debate is the significant pain of economic adjustment in recent years. China's rapid economic growth during the past decades was powered mainly by exports and investment, while consumption was relatively soft. The dynamic labor-intensive manufacturing industries were the backbones of China's extraordinary export expansion. The export engine, however, came to a sudden stop recently. While it should be expected that labor-intensive industries gradually lose out as the economy advances to higher income levels, the speed that it occurred in China was surprising. Three factors could potentially be responsible for China's sudden loss of export steam. The first is the soft global economic recovery and weak external demand. More importantly, some major countries reversed their globalization policies. The second is the LCL, which probably artificially pushed up China's labor costs and worsened the competitiveness of its industries. The third is the change in labor market conditions in relation to the so-called Lewis turning point (Huang and Cai, 2010). After the global financial crisis, two important economic events occurred alongside the adoption of the LCL: one is continuous growth moderation and the other is steady wage growth. To me, persistent increases in migrant workers' wages over a period when macroeconomic conditions deteriorated indicates a labor shortage problem, especially if the Meng's findings about modest impacts of LCL are reliable. However, Meng (2017) disagrees with our observation that China is already experiencing a labor shortage. We may tentatively conclude from these assessments that weakening external demand and tightening labor market conditions probably played greater roles in the sudden loss of China's export engine. The LCL's role is relatively minor. But the bigger question remains: does the LCL strike a good balance between exploiting cheap labor and hindering labor productivity. Many officials and scholars worry that the “prematurely” introduced LCL could artificially push up labor costs, reduce labor mobility, and damage economic efficiency. Perhaps this is a more fundamental question, which we cannot answer here.