IDEAS home Printed from
   My bibliography  Save this paper

When the bureaucrats move out of business : a cost-benefit assessment of labor retrenchment in China


  • Yi Chen
  • Diwan, Ishac


The author estimate the costs and benefits of labor retrenchment in state-owned industrial enterprises in China. Their results indicate the prevalence of low and stagnant labor productivity, low capital productivity, and excessively high wages in the state sector for the period reviewed (1994-97). The private sector exhibited consistently greater productivity. The authors'most striking finding: A greater gain could be realized from capital transfer than is being gained from labor retrenchment. Their simulation results for 1996 estimate that 43 percent of the workers in state enterprises and 70 percent of the capital are redundant. By itself, a transfer of labor from the public to the private sector at the current magnitude (20 percent of the labor force) would secure only two percent gains in output. A transfer of ten percent of both capital and labor would achieve a greater efficiency gain than transferring the full 43 percent of redundant workers. This is partly because the private sector uses capital more efficiently than the public sector and partly because it needs capital to hire workers transferred from the public sector. Their results suggest that reform in state enterprises should concentrate more on the efficiency of capital allocation, not just on labor retrenchment. More efficient capital allocation would reduce the pressure on labor and would bring larger gains at a lower social cost.

Suggested Citation

  • Yi Chen & Diwan, Ishac, 2000. "When the bureaucrats move out of business : a cost-benefit assessment of labor retrenchment in China," Policy Research Working Paper Series 2354, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2354

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Chen, Vivian Y., 2004. "A Macro Analysis of China Pension Pooling System: Incentive Issues and Financial Problem," Discussion Paper 195, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    2. Claustre Bajona & Tianshu Chu, 2010. "Reforming State Owned Enterprises in China: Effects of WTO Accession," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(4), pages 800-823, October.


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:2354. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.