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The transformation of labour relations in China

Labour relations in China have been transformed over the last 20 years. Professor William Brown explains how power is shifting to the people.

China Business

In just a couple of decades, China has moved from a central planned system to a booming market economy. The average real earnings of its 700 million workers have increased around five-fold. How can the accompanying surge in aspirations be managed in a country where power remains highly centralised?

The outside world may be vaguely aware of the growing number of industrial disputes associated with this unprecedented change. But of much greater significance for the future of all of us will be China’s success in building new institutions to accommodate the needs of its increasing self-confident workers. It is only in the past five years that the shape of these institutions has started to emerge.

To understand how working people’s lives are changing, we need to go back to the 1990s, as the system of total state ownership was being dismantled. The dislocation to workers’ lives was massive. 10 million people a year flooded into the cities from the countryside, yet social security provision was minimal.

Rapid-growth capitalism often proved as ruthless towards Chinese workers as it had to their nineteenth century European predecessors, yet the only legally permitted channel for worker discontent was a monolithic state-controlled trade union – an organisation designed for top-down communication and defined by a race for growth.

By the start of the new millennium government was beginning to become seriously concerned about a growing discontent among both an older generation of displaced state employees and a younger generation of rural immigrants. And alongside these practical concerns was something more profound: an uncertainty about how unconstrained growth might impact on income distribution. Inequality was increasing rapidly, posing a growing threat for social stability. Unless workers could be provided with some means of getting a share of the profits being reaped by their employers, inequalities would deepen.

As a result, tentative steps were taken to give workers a greater voice. Unions were encouraged to form local branches, able to work with employers and government at whatever level was appropriate. Union recruitment in the new private sector was encouraged, as was the development of what was described as “collective bargaining” between these union organisations and employers.

Initial responses were largely token. Many workers did not know they had been made union members and many collective agreements were top-down packages adopted by the employers. The big change came in 2008. First, experience of the financial crisis warned China off undue reliance on export-led growth, resulting in a radical effort to rebalance the economy by raising domestic consumption, primarily through raising incomes. Second, the government was ready with a raft of labour legislation to provide workers with unprecedented rights.

Most significant of these – because so much can be built on it – was the right to have a written contract of employment. With an accompanying system of mediation and courts, employment contracts gave workers sanctions against employers who, for example, failed to pay them. They gave rights to rural migrant workers, and they gave employees the right to be consulted by employers on matters of mutual concern. This provoked substantial public debate, a feature of which was the pragmatic relationship between government officials and the unions.

And that is why I believe that it is the pragmatism of the Chinese that deserves our attention. This vast and very varied country has at least six distinct layers of government, and considerable discretion is allowed to lower levels to experiment, so long as they do not transgress broad guidelines from Beijing. Indeed, officials in Beijing pay great attention to such experiments, monitoring them diligently to see what works and what does not. As a result, central policy can evolve remarkably rapidly, as indeed it has and continues to do with regard to labour.

For example, one consequence of the law protecting employment contracts has been a rapid growth in the use of employment agencies by firms trying to procure cheaper labour. As a result, a year ago restrictions on the ratio of agency to regular workers who could be employed were introduced. Now the government is concerned that the same cheap labour objective is being pursued by firms outsourcing to less than reputable sub-contract firms.

Policy-makers elsewhere will smile wryly, because the same problem and similar legal action, and similar reaction, have been issues in both the European Union and Japan in the past five years. Where markets rule, legislators seeking to protect workers’ rights always face a moving target.

Another aspect of the efforts of the Beijing government to reduce income inequalities is its use of statutory minimum wages. First introduced in 1994, and at different levels in different provinces and cities, these have been raised annually, apart from during the economic crisis year of 2008. But so rapid has been the growth of the economy that until recently minimum wage rates were still falling relative to average earnings.

Now, a strategic policy change means that they have started to improve in relative terms, and while statutory minimum wages in the developing world are often more ignored than observed, it is notable that in China their percentage spread between provinces has been narrowing. Doubtless, despite intensive lobbying from lower-paying western provinces seeking to attract foreign investment, central government seems determined to combat increasing inequality.

Meanwhile, experimentation with collective bargaining continues, within annual guidelines for pay rises from the central planners. Included in the experimentation are different forms of worker representation, often partial, often with management centrally involved, but with serious votes and stories of elected representatives pressured to stand-down by dissatisfied constituents.

Perhaps most interesting is the evidence that these processes are modifying management actions. For example, worker representatives are reported on occasion to have achieved better pay rises for their less skilled colleagues than the employers initially proposed. What is significant is not so much whether such behaviour is typical – it is probably not – but that it is permitted and, indeed, that union officials are increasingly acting as mediators to achieve agreement.

As one interested in the history as well as the economics of labour, I find the echoes of past industrialisation fascinating. When nineteenth century Western European employers in the same region and industrial sector – say manufacturing garments or ceramics – found themselves competing for scarce labour, they tried to bring order to chaotic and unsettling bidding and counter-bidding by forming employer associations and agreeing a scale of pay rates among themselves. From there it was a short step, and one often guided by government, to negotiate with a trade union committee representing workers at the companies affected.

Faced with similar circumstances, in a seminal policy statement in 2009, the Chinese trade union organisation decreed that local sectoral wage bargaining was central to its strategy. In terms of pay bargaining institutions, this is of fundamental importance. Developed economies in the West generally started collective bargaining in this way but met a fork in the road.

Some, for example the United States and Britain, have increasingly let individual firms go their own way, closing down their employers’ associations and either dealing with unions separately or, increasingly, ignoring them altogether. But other countries, for example most Western Europeans, maintained sectoral bargaining, partly as a way of sustaining robust training arrangements and sectoral minimum wages, and they did so with substantial legislative support.

This is not to suggest that China is heading towards some version of Scandinavian industrial social partnership. But the Chinese government does seem to be committed to a legally-backed form of local, sector-based industrial governance with representative worker involvement. The implications are fascinating.

China’s workers have some interesting challenges ahead. Partly as a result of the single-child policy, the working age population of China will peak in 2015. Migration from the countryside is dwindling. Labour is going to become more scarce. On the other hand, Chinese entrepreneurs are beginning to respond to rising wages at home by outsourcing work to Cambodia, Laos, Indonesia and elsewhere. A workforce that, in international terms, will be both highly educated and increasingly well-paid will want to be involved in the government of its working life.

Remarkably rapidly, and in a spirit of experimentation and consensus, China is working out how this might be done. The only certainty? That the solution will be uniquely Chinese.

Professor William Brown is Emeritus Master of Darwin College. This piece was first published in CAM magazine.