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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.

Suggested Citation

  • He, Hui & Huang, Feng & Liu, Zheng & Zhu, Dongming, 2014. "Breaking the “Iron Rice Bowl” and Precautionary Swings: Evidence from Chinese State-Owned Enterprises Reform," Working Paper Series 2014-4, Federal Reserve Bank of San Francisco, revised 14 Feb 2017.
  • Handle: RePEc:fip:fedfwp:2014-04
    DOI: 10.24148/wp2014-04
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    References listed on IDEAS

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    Cited by:

    1. Curtis, Chadwick C. & Lugauer, Steven & Mark, Nelson C., 2017. "Demographics and aggregate household saving in Japan, China, and India," Journal of Macroeconomics, Elsevier, vol. 51(C), pages 175-191.

    More about this item

    Keywords

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

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • P31 - Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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