Regional Unemployment in Transitional China: A Theoretical and Empirical Analysis

Abstract

The purpose of this paper is to explain the pattern of regional unemployment in transitional China. A model is developed to explore how urban unemployment in the provinces is influenced by peasants' wages, formal sector wages, and the size of the formal sector. Evidence from panel data suggests that a significant indicator of high unemployment rates is greater Urban–Rural Income Inequality within the province. The hypothesis is that the urban–rural income gap produces migration, and more rural migrants substitute for urban workers, causing further urban unemployment. Since the economic reforms began in 1978, the non-state owned enterprises have been carrying an increasing weight in the economy, and they have contributed significantly to the rapid economic growth of China. Empirical evidence shows that economic reforms have reduced unemployment. The provinces that are still heavily dependent on the state sector are therefore more likely to experience higher unemployment.