Domestic

Which Comes First in China

Equality or Efciency,

Today?
XIN Changxing ( )
Press Spokesman of Ministry of Labor and Social Security

Editorial note Employment, income distribution and social security have always been the hot topics in economic development. Economists tend to argue that employment discrimination, unfair distribution and absence of a social security system will ultimately impair the incentives of the economic players, which will undermine the sustainability of economic growth. Because the author serves in a government department, his thoughts on these problems represent, to some extent, the tendency of the government ofcials.

The relationship between equality and efciency should always be handled properly during the reform and development. Employment, income distribution and social security are essential for social development which focuses on raising peoples living standard and they are where efficiency and equality

converge. Handling the relationship between equality and efficiency well in the process of reforming the employment, income distribution and social security is of great importance to realizing social equality and justice and promoting social harmony. The paper sheds some lights on problems in employment and

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social security from the perspective of the relationship between equality and efciency. choosing their jobs. Workers shall not be subject to discrimination because of their nationality, race, gender or religion. There are specic provisions on how to enforce the right to equal employment. It is no exaggeration that this is a milestone in the legal system concerning employment and offers a legal basis for the elimination of employment discrimination. However, the laws cannot enforce themselves, so we should take further actions to ensure the implementation of the law. The actions include: enacting relevant laws and rules to make the principled articles more specic and operable; stepping up popularization of legal knowledge, raising the awareness of equal employment among employers and job intermediaries and create a level playing eld for equal employment; intensifying supervision of law enforcement, standardizing market order and rectifying employment discrimination in job market. While focusing on the solution of employment discrimination, we should give more attention to the fulfillment of the right to employment. I believe eliminating employment discrimination can only ensure equal employment opportunity in the context of certain labor supply and demand, but not the realization of the right to employment. Equal employment opportunity is important, but even more important is a fair result; and a fair result implies the realization of the right to employment, which depends on job creation and ultimately on development. Few job opportunities and oversupply of labor means many workers will have to accept unfair results and suffer the agony of unemployment, in spite of equal employment opportunities. In fact, discrimination in Chinas job markets can be attributed to insufficient job opportunities and oversupply of labor, which encourage employment discrimination and talent waste. By expressing such an opinion, the author does not intend to downplay the importance of anti-discrimination in the job market. The author thinks that we should not focus

I. Equal opportunity versus equal result

Employment is fundamental for peoples life. The right to employment is the foundation and prerequisite of other socio-economic rights. The Global Employment Agenda adopted in the 2001 Global Employment Forum highlighted: job are the core of peoples lives, not only because they rely on them to survive, but because jobs are a means for people to integrate into society, realize themselves and deliver hopes to their children, which makes jobs essential for social and political stability. To provide job opportunities to capable laborers is an important prerequisite of socio-economic development and an important responsibility and policy target of a government. The core of equal employment is the equal right to employment. To create a level playing field for people in terms of employment and ensure equal employment opportunities for laborers is an important part for a fair and just society. At present, considerable attention is given to discrimination in labor markets , which indicates that we are not doing enough to promote equal employment and thus should increase our efforts to combat the discrimination urgently. Generally, employment discrimination refers to any distinction, exclusion or preference made on the basis of race, gender, age, regional origin, residential registeration, appearance or other factors that are not connected with the job he is seeking. The employment discrimination in its broader sense includes not only the discrimination in the hiring process but also the discrimination in terms of salary. The Employment Promotion Act adopted in the 29th Session of the Standing Committee of the Tenth National People's Congress provides: workers have the legal right to equal employment and the right of freedom in 96 China Economist July 2008
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only on employment discrimination when promoting equal employment. We should have a broader view and think from the perspective of the whole employment process. In a nutshell, the priority should be given to the following aspects in addition to the elimination of employment discrimination. F i r s t l y, w e s h o u l d w o r k h a r d t o a c h i e v e full employment and ensure equal employment opportunities and results by creating more jobs. Fuller employment is required to build an all-around welloff society -- a target set in the Report of the 17th CPC National Congress. Compared with relatively full employment, fuller employment is more ambitious and demanding. My understanding is, the new requirement has been proposed on the basis of a deep insight into the important role of employment in building a well-off society and also on the basis of a sound analysis and prediction of the employment trend at present and in future. Only by realizing fuller employment, can the citizens right to employment be ensured and equal employment opportunities at a higher level and equal results in the real sense be achieved. Fuller employment entails, in the final analysis, development, i.e. employment growth is

fuelled by economic development; jobs are created by new businesses, that is to say new businesses are the engine for economic development and thus the inexhaustible source of new jobs. We must implement the strategy of increasing employment and promote the role of new businesses in fueling job growth in accordance with the strategy of the 17th CPC National Congress. In the meanwhile, we should follow a proactive employment policy, improve our job market, restructure our employment and enhance the growth elasticity of employment so that a certain economic growth rate can engender more jobs and a lower unemployment rateii. Secondly, we should promote equality in providing public employment services. Different from the overall unemployment since the introduction of the reform and opening-up, the frictional unemployment and structural unemployment have emerged as two increasingly serious problems. The most effective measure to tackle the frictional unemployment and structural unemployment is to improve employment services and job training. The public employment services should target all laborers instead of certain part of them. In line with the principle of social justice and equality among laborers, those unemployed, if they have the desire and ability to work, should have equal access to public employment services, regardless of whom they are and why they lose their jobs. From the perspective of the government function and better employment, the employment promotion target can be achieved only when we attain equality in public employment services and universalize the employment 97

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support policy i.e. helping all of the jobless get a job. Our supportive policy was once intended to help only the workers of stateowned enterprises due to limited financial resources and the then government priority. In future, our reform in this respect should lay more emphasis on and give more prominence to social justice. The following practice is detrimental to better employment and social justice: on the one hand, we are calling for the workers to overcome the identity problem and discard the traditional employment idea, on the other hand, we are implementing policies that reinforce identity differences between workers of state-owned enterprises and workers from the non-public sectors. Equality in employment services encompasses at least the following three aspects: the rst is equal resources of public employment services among different regions; the second is equality between urban and rural employment services; the third is equal access to public employment services among all kinds of workers. Thirdly, we should improve employment relief system targeting the poor. While equality of the employment policies in general sense is reflected in indiscrimination, when it comes to the poor, the equality requires preferential support to them. To offer the disadvantaged job market competitors special protection and support is the duty of our government in its efforts to offset the negative impact of the market forces. The special support is also indispensable to an equal and fair result. Because, unlike equal opportunities, equal and fair results embody the respect for difference among people. Although the increase of job opportunities depends on economic growth rate and structure, the disadvantaged groups like the disabled, relatively old and hardcore unemployed will 98 China Economist July 2008 not get a job on their own and are even marginalized in some countries in spite of the booming economy and labor undersupply there. Therefore, the majority of market economies opt to give them special support to promote full employment and social equality. China has adopted employment support policies since 2002, which have played an important role in helping the laid-off workers from state-owned enterprises. For ve years, 25 million laid-off workers have been reemployed. Now we are no longer in the period of massive job cuts in the state-owned enterprises, so it is necessary to adjust our employment support policies. The reform should be oriented toward a generalized preferential treatment system i.e. a change of focus from the laid-off workers in state-owned enterprises to the disadvantaged groups. Ones identity e.g. a laid-off worker from state-owned enterprises or not, should no longer be a factor in determining his eligibility for employment support. As long as he belongs to the disadvantaged group, he is eligible for it. Only in this way, can we attain the employment promotion target. The focus now is on the hardcore unemployed and the young unemployed and especially on the jobless families.

Equal employment opportunity is important, but even more important is a fair result; and a fair result implies the realization of the right to employment, which depends on job creation and ultimately on development.

II. Primary distribution versus secondary distribution

In spite of the fact that the relationship between equality and efficiency is a factor in all aspects of citizens socio-economic rights and that theorists are

conducting research into more elds, the focus is still on the income distribution. This is no surprise because the income gap is an important measurement of social fairness and a fair income distribution system is illustrative of social justice in a country. As to income distribution, we focus on the primary distribution and secondary distribution when discussing the relationship between equality and efficiency. One of the important innovations in the theories put forward in the 17th CPC National Congress Report is the principle that the relationship between equality and efciency should be handled well, be it in the primary distribution or the secondary distribution. And more focus should be given to equality in the secondary distribution. This principle is a leap forward from the previous one that features priority to efciency with due consideration to fairness. The author, one of the first researchers into unequal income distribution, once wrote articles in the 80s and argued for the principle of greater efciency by reinforcing the role of market forces in the primary distribution and greater equality by reinforcing the role of the government in the secondary distribution. Looking back, we realize that the defect of the previous principle lies in the overemphasis on the role of the secondary distribution in promoting equality and oversight of the fundamental effects of the primary distribution. The secondary distribution is important, but it is only a post de facto adjustment and compensation on the basis of the primary distribution. The focus on efficiency and oversight of equality in the primary distribution and the dependence on correction and adjustment in the secondary distribution cannot give rise to the desired fairness. The widening income gap in recent years is a good testament to this. The difficulty of the problem is how to handle the relationship between equality and efciency, or in another word, how to factor in equality in the primary

distribution. The 17th CPC National Congress Report has put forward a series of new measures in addition to its continued emphasis on adherence to and improvement of the system whereby distribution according to work remains the predominant mode and coexists with various other modes and on the improvement of the distribution system to allow factors of production such as labor, capital, technology and managerial expertise to have a rightful share according to their respective contribution. The rst measure is to gradually increase the share of personal income in the distribution of national income, and raise the share of work remuneration in primary distribution. This is an important decision concerning income distribution and is of great strategic significance to the overall situation. The reduction of the two shares is a serious problem in the national income distribution. The ratio of personal income to GDP has fallen from 56%-- the peak level since the reform and opening-up to 45% in 2006, and the ratio of salary to GDP from 17% to 11%. Contrary to this is the substantial increase of scal revenue and enterprises prots for consecutive years. This suggests that factors of production such as labor, capital, technology and managerial expertise have not been allowed to have a rightful share according to their respective contributions. Capital has taken precedence over labor and prots have eroded salary. Only by reversing the trend and increasing the two ratios, can the foundation be laid for an equitable income distribution system and increase of domestic demand. The second measure is to gradually raise the employees salary and residents income. This is a step taken to raise the two ratios. Low labor cost is a competitive advantage but driving the labor cost down can bring negative effects, such as inhibiting the consumption of consumers which is detrimental to the increase of domestic demand. We should 99

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raise employees income in light of our economic development. The priority now is to raise the income of low-income groups, gradually increase povertyalleviation aid and the minimum wage, and set up a mechanism of regular pay increases for enterprise employees and a mechanism for guaranteeing payment of their salaries. The third measure is to create conditions to enable more citizens to have property income. This is a key measure to increase the proportion of the middle class population. The increase of property income depends on more diversied investment choices and a larger capital market. The fourth measure is to standardize the income distribution system, such as protecting lawful incomes, regulating excessively high incomes and banning illegal gains. In the meanwhile, we should regulate the income of employees in the monopolized industries. The key is to break the monopoly or undermine the monopoly, eliminate market barriers, bring into full play the role of market in income distribution, hinder the fast growth of the incomes for monopolized industries and to gradually narrow the income gap between different industries. More attention should be given to equality, but the prerequisite for this is a better relationship between equality and efficiency in the primary distribution. The government plays different roles in the two distributions. In the primary distribution, the government plays the role of a rule maker. The government should not play a part in determining the income of employees, which should be the result of the negotiation between an enterprise and its employees. What determines the income level is labor supply and demand, the average national income level and the performance of the enterprise. The government is responsible for setting the minimum wage standard, making rules to guide collective negotiations and supervising the implementation of the rules. In 100 China Economist July 2008 addition, the government should, in accordance with such factors as economic growth, prices and labor supply and demand, propose an income level for the consideration of the enterprises and employees in the process of their negotiations. Only when the negotiations reach an impasse, can the government intervene, mediate and arbitrate if necessary. The government should take executive measures to directly intervene in wage increases only when serious inflation spiral takes place (such as wage freeze policy promulgated in economic crises of some market economies). In the secondary distribution, the government can play a more direct role. Readjusting income distribution in the secondary distribution is to offset the negative effects of the market forces, and the readjustment should, in the rst place, aim to promote equality. And the readjustment is very effective. For example, British families fall into ve income categories during 1994 and 1995. The income of the top 20% families is 19.8 times as much as that of the bottom 20%. But the pre-tax gross income gap is narrowed to 6.2 times after welfare is taken into consideration. After income tax, national insurance tax and local tax are subtracted, the disposable income gap between the two is reduced to 5.4 times. And after educational, medical, housing and transportation allowances and aids are added, the nal income gap is reduced to 3.7 times. Therefore, every distribution readjustment leads to a narrower gap. This stands in contrast with China, which hasnt brought the role of secondary distribution into full play, so we should focus our efforts on strengthening the role. There are mainly two tools in the secondary distribution: one is tax and transfer payments, and the other is social security. Levying tax aims to regulate high incomes, while the social security intends to protect the low income groups. Of course, tax is one source of social security funds and social security can play a part in narrowing income

gaps. One tax measure worth considering is to apply progressive tax rate to some service and property incomes other than wages. Social security must give top priority to promoting social equality, and on this basis institutional arrangements should be made to promote efficiency. In precious discussions, some scholars argued that social security program should also give top priority to efciency, which, I think, is a misinterpretation of the principle priority to efciency with due consideration to equality and a distortion of the function of the social security. A social security system designed according to this interpretation will inevitably result in a dysfunctional social security system.

perspective, the key to solving this problem is to press ahead with the reform of the endowment insurance system in companies and institutions and properly coordinate endowment systems of different groups. Here, the focus is on the institutional problems. With years of efforts, China has made great progress in its social security system and set up a framework of the social security system. In towns, a social insurance system covering pension, health care, unemployment, industrial injury and maternity insurances has been put in place and a minimum living standard system is fully functioning; in the rural area, a minimum living standard system is being set up, an insurance for the aged system is being experimented and a new system of cooperative medical care is being generalized. However, we should realize that a large number of workers havent access to the insurance programs partly because the programs havent covered all citizens in the urban and rural areas and partly because some eligible for the programs havent bought insurances. The author thinks that a large number of workers who have no access to social security because of the absence of institutional arrangements are suffering greater injustice than those who are subject to unfair salary treatments due to the presence of certain institutional arrangements. Chinas history can account for why its social security system is flawed. At the beginning of the reform and later, the social security reform was carried out as part of a bigger reformthe reform of state-

III. Different salary treatments and institutional arrangement

As far as justice is concerned, two problems should be addressed in an urgent manner: one is different salary treatments and the other is institutional arrangement. In recent years, the salary gap between the employees and the retirees is signicantly widened. To address the problem, the central government has made a plan to increase the pension in the next three years beginning from 2008, and the future increases will be larger than those in the previous three consecutive years. The decision is acclaimed by the retirees. The problem can be alleviated gradually as a result of the implementation of the plan. From a long-term

China has made great progress in its social security system and set up a framework of the social security system in the rural area, a minimum living standard system is being set up, an insurance for the aged system is being experimented and a new system of cooperative medical care is being generalized.
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owned enterprises. The reform was intended to balance the enterprises costs, reduce their burden and ensure enough payment instead of guaranteeing social justice rst. The basic philosophy behind the social security reform is tailing or going after i.e. the social security system would be established only following where the enterprises were reformed. The complexity of the reform of the enterprises and lack of nancial resources confined the coverage of the social security system to state-owned enterprises. This was inevitable and reasonable at that time. But it led to an unsystematic and incomplete institutional arrangement i.e. during a long period, there was no proper social security program that covered the employees of enterprises and institutions, particularly those in private enterprises, migrant workers and informally employed workers. The policies enacted later all specified the coverage and amount of insurance on the basis of the ownership of the enterprises and employees identities. 102 China Economist July 2008

The reform of the rural social security system started even later, so the minimum living standard insurance hasnt been made universal, the new system of cooperative medical care is still a pilot program and the endowment insurance in the rural area hasnt been institutionalized. The absence of institutional arrangement has deprived some people of their social security rights. Unfair salary treatments are a matter of quantity within the framework of the institutional arrangement, while the absence of institutional arrangement results in non-coverage, the solution of which calls for more efforts. Therefore, we should improve our social security system to promote equality among different groups by establishing a system that can cover both the urban and rural citizens and provide basic security for all of them. The priorities are: first of all to incorporate the informally employed workers in towns and cities into

the social security system, so that the endowment insurance program can cover all workers in towns and cities, the health care insurance and medical aid can cover all workers and residents in towns and cities and the unemployment insurance and industrial injury insurance can cover all workers in companies and institutions, and the minimum living standard insurance system can cover all citizens in towns and cities; Secondly, to adapt to the urbanization and rural labor migration, push for the establishment of a social security system for the farmers whose land has been seized, and provide basic security for migrant workers by establishing a endowment insurance system that accommodates their characteristics and can be integrated into the existing endowment insurance system; Thirdly to establish a rural social security system by increasing our efforts to improve the minimum living standard system and the new system of cooperative medical care in the rural area on the one hand, and creating various forms of rural endowment insurance that are suited to the economic growth and tted into the social context in the rural area on the other hand.

Welfare trap did exist in some welfare states, but after welfare reforms, many states have emerged from the traps. And these reforms focused on the improvement of design instead of reduction of welfare. The core was the switch from welfare to work i.e. emphasis on the reciprocity of rights and obligations and focus on the constraints and incentives applied to eligibility for welfare. The citizens of the Northern European countries still enjoy high welfare from cradle to grave and at the same time, the economy of these countries is dynamic and robust. Another topic worth considering is that dynamics and efciency have to do not only with social welfare system, but with the flexibility of the labor market. When the author visited Britain in 2006, the social security experts in Cambridge University introduced to us one of their research results. The researchers divided the European social welfare into four models, namely the Northern European model, British model, the Continental model and Mediterranean model, and made comparative studies. Their finding is that the British and Northern European models are sustainable, while the Continental model and Mediterranean model are not. The reason is the Continental and Mediterranean models represented by Germany and France are not functioning as well as the British and Northern European models to incentivize efficiency, although they are doing equally well in poverty reduction and equality promotion. Although the welfare level in Northern European countries and Britain is high, their labor markets are flexible with few legal restrictions imposed on job cuts; and while adopting generous welfare systems, the Continental countries implement rigorous laws to protect workers and make it difficult for companies to cut jobs, which leads to high labor costs and difficult job creation. Germany has been amending its labor laws in the past decade to improve the exibility of its labor market, but its 103

IV. Institutional model and market dynamics

When it comes to the relationship between equality and efficiency in the reform of the social security system, one topic we cannot afford to ignore is how to avoid Welfare Trap. There are some wrong perceptions on the issue. When talking about welfare trap, some articles argued that it is a serous social illness. In fact, high welfare doesnt necessarily mean low efciency. It is an illness that will weaken efciency only when the high welfare regime leads to over-dependence on the social welfare due to a lack of institutional constraints and incentives for work.

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efforts havent yielded any good result. An effort of France also ended up in failure. The Mediterranean model does a lousy job in promoting equality and efciency because of its restriction on job cuts and its low unemployment benets. On the basis of the above analysis, we can reach two conclusions: Firstly, we should not only address the issues of institutional absence and equality, but also pay attention to the rationality and validity of our institutional design, when we are establishing a social security system that cover both the urban and rural areas. At the outset, we should draw upon the experience of some welfare states in their reforms to avoid possible mistakes. Efciency, though not the top goal of our social security, is a goal that we must take into consideration. Incentives and constraints are where the two converge. A logical and reasonable institutional design can offer incentives and impose constraints, for example, linking insurance amount with personal contribution can encourage people to pay their insurance premiums and reduce fiscal burden iii; diminishing unemployment benefits can stimulate the unemployed to seek jobs; reasonable rate adjustment and subsidy can encourage companies to prevent work injuries and reduce job cuts; and premising the claim of unemployment benefits on active participation in jog-hunting and training can reduce the dependence of the unemployed on welfare. These are the areas we can do a lot of work in. Secondly, we should maintain the dynamics and vigor of the human resources market, while protecting the lawful rights of the workers. Human resources are the most important resources. Without a robust human resources market, economic growth will lose its momentum and sustainability. In this respect, we can not only refer to the four European models, but also learn a lesson from India, where the overrigid labor regulations resulted in lack of dynamics and vigor in its labor markets and poor investment attraction.

Footnotes:
i The ILO No. 111 i.e. Convention concerning Discrimination in Respect of Employment and Occupation provides in Article One that: For the purpose o f this Convention the term discrimination includes (a) any distinction, exclusion or preference made on the basis of race, colour, sex, religion, political opinion, national extraction or social origin, which has the effect of nullifying or impairing equality of opportunity or treatment in employment or occupation; (b) such other distinction, exclusion or preference which has the effect of nullifying or impairing equality of opportunity or treatment in employment or occupation as may be determined by the Member concerned after consultation with representative employers' and workers' organisations, where such exist, and with other appropriate bodies. But any distinction, exclusion or preference in respect of a particular job based on the inherent requirements thereof shall not be deemed to be discrimination. China rectied the Convention on January 12th, 2006. In the article Construction of the Interaction Mechanism between Economic Development and Employment Improvement published in China Labor, the author conducted an analysis on the improvement of elasticity of employment. Due to the space limit, I will not elaborate on it here. Introducing personal contribution is a tendency in reforming the endowment insurance systems of many countries. This is reminiscent of classic economics. Adam Smith argued long ago that it was much better to realize common welfare by relying on people s pursuit of self interest than by relying on their sense of public goods.

ii

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