Unregistered Employment, Lower Volatility of Unemployment Rate and Sustainable Development of the Chinese Labor Market

Abstract

Recent literature and empirical evidence reveal that, compared to advanced economies (AEs), most emerging market economies (EMEs) exhibit much lower volatilities of unemployment rate, and they link these differences to the larger size of informal economies in EMEs. As a representative EME, real data indicate that China also exhibits a lower volatility of unemployment rate, while the size of informal economy in China is quite small. Therefore, we argue that it is the large size of unregistered employment, not the size of informal economy, that plays the key role in explaining the lower volatility of unemployment rate in China. We constructed a DSGE model incorporating unregistered employment and revised Nash wage bargaining to support our hypothesis. We found that there exist “diminishing effects” to the deviations of unemployment rate triggered by shocks under bigger size of unregistered employment condition. The standard deviation of unemployment rate has negative correlation with the size of unregistered employment, which means identical shocks will induce lower volatility of unemployment rate under larger size of unregistered employment condition. We conclude that the costs of unregistered employment far outweigh their benefits and, facing a complicated, changeable and deteriorating external environment, a labor market without such distortion of employment is more beneficial for the sustainable development of the Chinese labor market.