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Breaking the “Iron Rice Bowl” and precautionary swings: evidence from Chinese state-owned enterprises reform

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  • He, Hui

    (Shanghai University of Finance and Economics)

  • Huang, Feng

    (Shanghai University of Finance and Economics)

  • Liu, Zheng

    ()
    (Federal Reserve Bank of San Francisco)

  • Zhu, Dongming

    (Shanghai University of Finance and Economics)

Abstract

We use China’s large-scale reform of state-owned enterprises (SOE) in the late 1990s as a natural experiment to identify and quantify the importance of precautionary savings for wealth accumulation. Before the reform, SOE workers enjoyed the same job security as government employees. After the reform, a cumulative of over 35 million SOE workers have been laid off, although government employees kept their “iron rice bowl.” The change in unemployment risks for SOE workers relative to that of government employees before and after the reform provides a clean identification of income uncertainty that helps us estimate the importance of precautionary savings. In our estimation, we correct a self-selection bias in occupational choices and we disentangle the effects of uncertainty from pessimistic outlook. We obtain evidence that precautionary savings contribute to about one-third of the wealth accumulations for SOE workers between 1995 and 2002. Precautionary savings motive is thus an important factor that drives the observed rising Chinese saving rate.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2014-4.

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Length: 35 pages
Date of creation: Jan 2014
Date of revision:
Handle: RePEc:fip:fedfwp:2014-04

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Keywords: Precautionary saving; uncertainty; structural change; self-selection bias; permanent income hypothesis; difference-in-difference methods;

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  1. Giucca, P. & Jappelli, T. & Terlizzese, D., 1992. "Earning Uncertainty and Precautionary Saving," Papers 161, Banca Italia - Servizio di Studi.
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  3. Meng, Xin, 2003. "Unemployment, consumption smoothing, and precautionary saving in urban China," Journal of Comparative Economics, Elsevier, vol. 31(3), pages 465-485, September.
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  8. Christopher D. Carroll & Karen E. Dynan & Spencer D. Krane, 2003. "Unemployment Risk and Precautionary Wealth: Evidence from Households' Balance Sheets," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 586-604, August.
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  12. Franco Modigliani & Shi Larry Cao, 2004. "The Chinese Saving Puzzle and the Life-Cycle Hypothesis," Journal of Economic Literature, American Economic Association, vol. 42(1), pages 145-170, March.
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  14. Aart Kraay, 2000. "Household Saving in China," World Bank Economic Review, World Bank Group, vol. 14(3), pages 545-570, September.
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