CIIDWPNo.44-MaXinXin-Business Star-ups or Disguised Unemployment?
Ma, Xinxin; Li, Shi
Published: 2016/5/26 14:03:36    Updated time: 2016/5/26 14:41:56
Abstract: This paper conducts two hypotheses testing and provides evidence on the determinantsof self-employment for local urban residents and migrants in urban China. UsingCHIP2007 and CHIP2013, the employment status is divided into four categories― self-employed employers, own-account workers, employees, and the unemployed.Several major conclusions emerge. First, utilizing the imputed wage premiums, the business creation hypothesis is rejected for both the local urban residents and migrants groups in 2007. However, in 2013, the business creation hypothesis is supported when a worker choice to become a self-employed employer. Whereas the influences of wage premiums on the probability of becoming an own-account worker are negatively significant for both the local urban residents group and the migrants group, so the business creation hypothesis is rejected when a worker choice to become an own-account worker. Second, the choice to become a self-employed employer for the local urban residents group, and the choice to become an own-account worker for the migrants group in the initial economy reform period can gain more benefit, so the business creation hypothesis is supported for older generation group, whereas this hypothesis is rejected for the younger generation group for both the local urban residents and migrants groups.
Keywords: self-employed employer, own-account worker, business creationhypothesis, disguised unemployment hypothesis, urban China



        Ma, Xinxin--------Institute of Economic Research, Hitotsubashi University, Japan

        Li, Shi--------Beijing Normal University, China

1 Introduction

The self-employed sector is a representative informal sector of the employment market, and it influence on the income inequality as noted in previous studies1 . Transition economists believe the rise of self-employment to be a sign of the growing importance of markets (Hanley 2000; Gerber 2001; Catherine et al. 2005; Dimova and Gang 2007; Jackson and Mach 2009). According to the dualism theory in development economics, in the prior period of economic development, there exist surplus labors in traditional sector (e.g., agriculture industry sector), when modern sector (e.g., manufacture industry sector) offer wage closed or a little more than subsistence wage level, migration from the rural region to the urban region will occur until the economy pass the Lewis’s turning point (Lewis 1954). Todarro (1969), Harris and Todarro (1970) developed Lewis model and pointed out that migrants expect the high wage of modernsector in urban market, so when he doesn’t find the job in the formal sector immediately, he always worked in the informal sector (such as self-employed sector) to wait (or do a job search) for the formal sector job. ILO (1972) indicated that working in the informal sector also can contribute economic development for developing countries.

Along with the economic transition and economic development in China, the number of self-employed workers2 in urban China increased from 150,000 in 1978 to 21.36 million in 2000, before further increasing to 52.27 million in 2011 (NBS 2012). Why was there a large change in the size of the self-employed sector in urban China during the economic transition period? There are two hypotheses about self-employment discussed in previous studies. One is the “disguised unemployment hypothesis,” which is indicated in the dualism theory described as the above. Migrants to the self-employment sector can be explained by this hypothesis, as in the case ofworkers in SOEs who lost their jobs because of SOE reconstruction. Along with the transition from a planned to a market economy, the government enforced ownership reform of state-owned enterprises (SOEs) since the 1990s, a section of employees with urban registration in the SOEs became laid-off workers and some of them re-employed as self-employed workers in order to make a living (Knight and Song 1999; Cai, Du, and Wang 2005; Haggard and Huang 2008). Considering the above, self-employment may result from forced recourse to the informal sector, in which the individual’s activities and wage slightly differ from what they would be if the individual were unemployed. It is thought that self-employed workers barely make a living from working, receiving lower wages and working longer hours than those in the formal sector. Conversely, self-employed workers may also be successful business owners who create new business opportunities and many innovative new products (“business creation hypothesis”). For example, along with ownership reform progress, a part of communist party members or cadres left SOEs to become owners of private firms and started new businesses, and it has been pointed out that such social capital positively affects the premium that may be associated with self-employment (Wu 2006; Yueh 2009a, 2009b) .

As a result, a high percentage of self-employed workers may reflect an environment that encourages risk-taking, business creation, and market development (“business creation hypothesis”) , or it may be a result of the lack of jobs in the formal sector in which wages are set just above the market-clearing level (“disguised unemployment hypothesis”).

Which hypothesis can explain self-employment in urban China? In this paper, we provide some evidence to answer this question. In the previous empirical studies on this issue, although Earle and Sakova(2000), Hanley (2000) and Dimova and Gang(2007) utilized micro-data of Central and Eastern European economic transition countries to test these two hypotheses, Ma (2016), Ma and Deng (2016) test these two hypotheses for the local urban residents group and migrants group in China using the 2007 Chinese Household Income Project Survey data (CHIP2007), an empirical study on the comparison between local urban residents and migrants, and that between two periods has not been conducted. Thus, one of the purposes of this study is to test the hypothesesfor these two groups in China using CHIP2007 and the latest survey data—the 2013 Chinese Household Income Project Survey (CHIP2013).

This paper is structured as follows. Part II reviews the literature, and Part III describes estimate methods, including introduction to the survey data and models. Part IV states descriptive statistics and estimated results, and Part V presents the main conclusions.


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