This chapter aims to contribute to the literature by re-analyzing the characteristics of China’s labor force from the point of view of the transformation from fixed cost to variable cost by examining the institutional background and data. Since “the reform and opening up policy” was initiated, firms have been able to adjust employment more flexibly, because of the expanded use of migrant workers and the collapse of the lifetime employment system for urban workers. This transformation from a fixed-cost-type production factor to a variable-cost-type production factor also took place in terms of wages. The fraction of fixed-type wages dropped, and that of wages linked to productivity increased. It is often assumed that the cost of labor was high in the planned economy period in China, because urban workers enjoyed various subsidies provided by firms without fear of being unemployed. However, our analysis indicates that labor cost was much lower in the planned economy period than in the reform period. In the reform period, labor cost increased until the mid-1990s when state-owned firms (SOEs) became able to lay off workers, although the wage level in China was still low compared to worker productivity. As claimed in Chapter 1, a decline in fixed labor cost during the reform period might have contributed to the frequent firm entry into China. Although increasing, variable labor cost is still low. This might lead to infrequent firm exits in China.
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