Social Sciences in China (Chinese Edition)

No.12, 2015

The Labor Market and China’s Macro-Economic Cycles: With a Discussion of Okun’s Law in China

(Abstract)

Lu Feng, Liu Xiaoguang, Jiang Zhixiao and Zhang Jieping

In recent years, the Chinese economy has been facing downward pressure from slowing growth, but there has not been a significant rise in the registered/surveyed unemployment rate. The combination of these phenomena shows that Okun’s law does not fit China. Based on empirical observation of the relationship between China’s macro-economic cycles and labor market transition, we put forward a broader version of Okun’s law which is applicable to analysis of the Chinese transition. The specific applications of the law in the broad sense are connected with stage of economic development. The standard Okun model, which includes only the unemployment variable, is suited to developed countries in which labor transfer is complete. The broader version of Okun’s law, which is applicable to transitional economies, introduces an agricultural labor transfer variable. Using Chinese and cross-country panel data, we find that changing trends in the transfer of agricultural labor are significantly correlated with fluctuations in the macro-economic cycle. This discovery broadens our understanding of the general patterns of the relationship between the labor market and fluctuations in macro-economic cycles, and provides academic support for adjustment to employment policies by “taking increased urban employment and the unemployment rate revealed in surveys as important macro-adjustment goals.”