An Institutional Model Based on the Historical Characteristics of China’s Labor Market: Hukou, Social Welfare and the Labor Law System

Talk by Yanrong Guo (ARS) as part of the Research Seminar Series of the IOS Economics Department.

China’s success puzzles mainstream economic theories, as it lacks fundamental elements such as a free market, explicit property rights, and well-established institutions, yet it is recognized as the “world’s factory” driven by “cheap labor.” In this context, the labor market serves as a crucial perspective for understanding how China has consistently utilized its factor endowments to promote export-led growth. Therefore, this research aims to explain how the evolution of China’s labor market has contributed to its economic development. The methodology employs institutional change analysis, revealing that China’s labor market system has been predominantly shaped by three interdependent institutions since 1979: hukou, social welfare, and labor laws. These institutions have evolved through mutually reinforcing relationships. Hukou has been closely complementary to both social welfare and labor law, while the relationship between social welfare and labor law has been reinforced through the development of contract-based employment. These institutional relationships exhibit strong path dependence and have generated self-reinforcing mechanisms that sustain institutional persistence and lock-in. Based on these historical characteristics, an institutional model can be constructed in which hukou, social welfare, and labor law form an institutional triangle, with the state playing a significant role in supporting and coordinating these elements. The model highlights the evolving functions of these institutions over time. As China’s economic and institutional environment changes, their contribution to economic growth has gradually diminished, while their impact on social inequality has become more pronounced. In conclusion, the evolution of China’s labor market institutions is responsible for the increasing tension between economic efficiency and social equity in contemporary China.