Missing Market in Labor Quality: The Role of Quality Markets in Transition

This paper characterizes a key feature of the classic socialist economy and state-owned enterprise, namely that of missing markets in labor quality. Under the socialist regime in which students and workers were assigned to work units, the rights of managers to monitor and reward workers were limited. The exchange of labor services was based more on measures of quantity rather than quality. Workers who performed functions broadly consistent with that of their assigned occupations for the duration of the designated workweek received the standard wage. With the reassignment of property rights, this situation has changed. Students and workers have resumed control over the accumulation of their human capital the trade of skill and effort. Managers have acquired greater authority to monitor labor - to discriminate in setting wages and bonuses and to hire and fire - as well as stronger incentives to use this authority to raise efficiency and profits. The result is an emerging market in labor quality.A 1995 cross section of enterprise data spanning 10 ownership types is used to test the hypothesis of an emerging labor quality market. The results show that certain non-state forms of ownership, in which the rights of managers to monitor and reward skill and effort are presumed to be relatively well developed, encourage labor quality, most notably training, which raises productivity. The relative inability of state enterprises to monitor and reward high quality labor is likely to create an adverse selection problem in which the most skilled and motivated workers exit from the state sector, so as to cause a "hollowing" of skilled workers and weakened enterprise performance. The theoretical contribution of this paper is to generalize Coase's analysis of the critical role of property rights in creating resource markets to the creation and exchange of quality in all goods. Analytically, the conditions for a missing market in labor quality are equivalent to those for a missing market in pollution abatement and water quality. The analysis underscores the importance of property rights in creating the conditions for the accumulation and efficient exchange of human capital.http://deepblue.lib.umich.edu/bitstream/2027.42/39645/3/wp260.pd

Missing Market in Labor Quality: The Role of Quality Markets in Transition

This paper characterizes a key feature of the classic socialist economy and state-owned enterprise, namely that of missing markets in labor quality. Under the socialist regime in which students and workers were assigned to work units, the rights of managers to monitor and reward workers were limited. The exchange of labor services was based more on measures of quantity rather than quality. Workers who performed functions broadly consistent with that of their assigned occupations for the duration of the designated workweek received the standard wage. With the reassignment of property rights, this situation has changed. Students and workers have resumed control over the accumulation of their human capital the trade of skill and effort. Managers have acquired greater authority to monitor labor - to discriminate in setting wages and bonuses and to hire and fire - as well as stronger incentives to use this authority to raise efficiency and profits. The result is an emerging market in labor quality.A 1995 cross section of enterprise data spanning 10 ownership types is used to test the hypothesis of an emerging labor quality market. The results show that certain non-state forms of ownership, in which the rights of managers to monitor and reward skill and effort are presumed to be relatively well developed, encourage labor quality, most notably training, which raises productivity. The relative inability of state enterprises to monitor and reward high quality labor is likely to create an adverse selection problem in which the most skilled and motivated workers exit from the state sector, so as to cause a "hollowing" of skilled workers and weakened enterprise performance. The theoretical contribution of this paper is to generalize Coase's analysis of the critical role of property rights in creating resource markets to the creation and exchange of quality in all goods. Analytically, the conditions for a missing market in labor quality are equivalent to those for a missing market in pollution abatement and water quality. The analysis underscores the importance of property rights in creating the conditions for the accumulation and efficient exchange of human capital.transition, markets in labor quality, adverse selection, Chinese enterprise reform

An Investigation of Firm-Level R&D Capabilities in East Asia

This paper uses a survey of 1,826 firms distributed over ten East Asian metropolitan areas – Jakarta, Kuala Lumpur, Manila, Seoul, and five Chinese cities – to investigate the sources of firm-level R&D capabilities. The analysis identifies the impact of 23 survey variables, classified by openness, human capital, R&D network, and institutional quality, on the efficiency of firm R&D operations and on overall firm performance. These firmlevel results are used to construct composite measures R&D capabilities for each of the 10 metropolitan economies. Using the firm samples, returns to R&D are also estimated for each of the metropolitan areas. Where cross economy comparisons are possible, as they are for Seoul and the five Chinese cities, we find a strong association between overall R&D productivity in these city economies and the composite measures of citywide R&D capabilities. In particular, high composite measures in Seoul and Shanghai are associated with high returns to R&D in those cities. The large productivitywage gaps in the Chinese cities appear to be attracting large and visible investment in R&D operations. Whether R&D wages rise to narrow this gap or investment and technology flows continue to sustain the gap will substantially affect the pattern of R&D operations within the Asian region.http://deepblue.lib.umich.edu/bitstream/2027.42/39969/3/wp583.pd

Assessing gains in efficient production among China's industrial enterprises

A central objective of economic reform is to reduce the productive inefficiency that arose under regimes in which markets and material incentives played a limited role. Applying an approach for measuring gains in productive efficiency, the authors evaluate the progress between 1980 and 1989 among China's large and medium-size state-owned enterprises in equalizing factor productivity across enterprises. In the early stages of reform, returns on factor investments varied greatly. Total factor productivity in the most efficient mill was 37 times greater than in the least efficient mill. The differences were partly the result of central planning, including administered prices, restrictions on the flow of resources from low-return to high-return activities, and the lack of market discipline, which protects the least efficient enterprises from bankruptcy. One objective of economic return is to create the conditions that motivate enterprises to improve efficiency and that permit the owners of individual factors to seek the highest returns. Using panel data for 226 industrial enterprises, the authors report evidence that returns on investments in labor, capital and materials became more equal between 1980 and 1989. Such a pattern of convergence can be the product of different factors, but the consistency of the pattern suggests that great exposure to markets and stronger profit-seeking behavior are motivating gains in productive efficiency.Enterprise Development&Reform,Environmental Economics&Policies,Banks&Banking Reform,Municipal Financial Management,Economic Theory&Research

Chinese Enterprise Reform as a Market Process

The reform of China's enterprise system increasingly reflects the outcome of China's emerging property rights market. We distinguish between a centrally-directed reform strategy, with characteristics similar to those of a Pigouvian tax, and a market-driven reform process, which captures the essential features of a Coasian approach to social cost. The Coase Theorem postulates that eliminating transaction costs and attaching well specified property rights to public goods that generate externalities will allow uncoordinated economic agents to negotiate institutional arrangements that produce socially efficient allocation of resources. Extending Coase's reasoning to the case of socialist transition ' we argue that reforms that expand competition, move toward well-specified assignment of ownership rights to public enterprises, and reduce transaction costs will motivate the "ultimate" owners, including officials of national and sub-national government agencies, to reconfigure their assets or to combine their assets with those of other jurisdictions and/or private investors to create more efficient ownership arrangements. We review the extent to which China's reforms have established the conditions for an effective market in ownership rights to industrial property. We tabulate progress from 1 980 to present along the three major analytic dimensions inherent in Coase's analysis: competition, property rights, and transaction costs. We conclude that the sheer size and diversity of China's industrial economy will motivate a continuation of decentralized reform initiatives. To support this Coasian reform process, central and provincial governments need to expand initiatives to clarify property rights, particularly the right of alienation, reduce impediments to competition, and facilitate the reduction of transaction costs.http://deepblue.lib.umich.edu/bitstream/2027.42/39466/3/wp76.pd

An Investigation of Firm-Level R&D Capabilities in East Asia

This paper uses a survey of 1,826 firms distributed over ten East Asian metropolitan areas – Jakarta, Kuala Lumpur, Manila, Seoul, and five Chinese cities – to investigate the sources of firm-level R&D capabilities. The analysis identifies the impact of 23 survey variables, classified by openness, human capital, R&D network, and institutional quality, on the efficiency of firm R&D operations and on overall firm performance. These firmlevel results are used to construct composite measures R&D capabilities for each of the 10 metropolitan economies. Using the firm samples, returns to R&D are also estimated for each of the metropolitan areas. Where cross economy comparisons are possible, as they are for Seoul and the five Chinese cities, we find a strong association between overall R&D productivity in these city economies and the composite measures of citywide R&D capabilities. In particular, high composite measures in Seoul and Shanghai are associated with high returns to R&D in those cities. The large productivitywage gaps in the Chinese cities appear to be attracting large and visible investment in R&D operations. Whether R&D wages rise to narrow this gap or investment and technology flows continue to sustain the gap will substantially affect the pattern of R&D operations within the Asian region.Research and development, Technology transfer, East Asia

Chinese Enterprise Reform as a Market Process

The reform of China's enterprise system increasingly reflects the outcome of China's emerging property rights market. We distinguish between a centrally-directed reform strategy, with characteristics similar to those of a Pigouvian tax, and a market-driven reform process, which captures the essential features of a Coasian approach to social cost. The Coase Theorem postulates that eliminating transaction costs and attaching well specified property rights to public goods that generate externalities will allow uncoordinated economic agents to negotiate institutional arrangements that produce socially efficient allocation of resources. Extending Coase's reasoning to the case of socialist transition ' we argue that reforms that expand competition, move toward well-specified assignment of ownership rights to public enterprises, and reduce transaction costs will motivate the "ultimate" owners, including officials of national and sub-national government agencies, to reconfigure their assets or to combine their assets with those of other jurisdictions and/or private investors to create more efficient ownership arrangements. We review the extent to which China's reforms have established the conditions for an effective market in ownership rights to industrial property. We tabulate progress from 1 980 to present along the three major analytic dimensions inherent in Coase's analysis: competition, property rights, and transaction costs. We conclude that the sheer size and diversity of China's industrial economy will motivate a continuation of decentralized reform initiatives. To support this Coasian reform process, central and provincial governments need to expand initiatives to clarify property rights, particularly the right of alienation, reduce impediments to competition, and facilitate the reduction of transaction costs.China, ownership, property rights, Coarse theorem, transition, merger, transaction costs

The Impact of Ownership Reform in Chinese Industry, 1995-2001

During the 1980s, the restructuring of Chinese industry was driven principally by the entry of new enterprises into the enterprise system and by the restructuring of managerial incentives. In 1993, China’s leadership formally inaugurated the shareholding experiment. This paper examines the impact on eight performance measures of the conversion of both state- and collective-owned enterprises to shareholding enterprises. The analysis distinguishes between the direct effect of conversion and the induced effect, involving the attraction of non-state investment, which reduces the proportion of state assets and state control rights. We find evidence for SOEs that both conversion and a decline in the share of state-owned assets motivate rising productivity and R&D intensity. While rising proportions of non-state assets motive lower employment and rising wages, the initial conversion effect is associated with higher employment and lower wages. These latter impacts may result from agreements with workers as part of the conversion process. The SOE conversion process exhibits selection bias in which SOEs with high rates of capital productivity and profitability, high tax burdens, and comparatively low wages and smaller labor forces are more likely to be selected for conversion. No similar selection bias is evident in the collective sector.http://deepblue.lib.umich.edu/bitstream/2027.42/39927/3/wp542.pd

The Sources and Sustainability of China's Economic Growth

China’s economic transformation is proceeding at different rates across different regions and sectors, and China’s most advanced regional sector, coastal industry, still lags well behind the world’s technology frontier. This paper explores the implications of these internal and international productivity disparities for China’s ability to sustain rapid economic growth. When China’s GDP catches up to U.S. GDP, Chinese living standards still will be only one quarter those of the United States. If, at that time, productivity in some major regions and sectors remains far below the average, coastal industry may have to achieve productivity that approaches or even exceeds U.S. productivity. Coastal industry’s productivity growth is then likely to slow substantially, impeding China’s overall economic growth. The paper examines the need for policies that facilitate economic integration across regions, to enable the lagging regions and sectors to catch up to coastal industry, and the prospects for continued institutional reform.China, macroeconomics, economic growth, China GDP

The Impact of Ownership Reform in Chinese Industry, 1995-2001

During the 1980s, the restructuring of Chinese industry was driven principally by the entry of new enterprises into the enterprise system and by the restructuring of managerial incentives. In 1993, China’s leadership formally inaugurated the shareholding experiment. This paper examines the impact on eight performance measures of the conversion of both state- and collective-owned enterprises to shareholding enterprises. The analysis distinguishes between the direct effect of conversion and the induced effect, involving the attraction of non-state investment, which reduces the proportion of state assets and state control rights. We find evidence for SOEs that both conversion and a decline in the share of state-owned assets motivate rising productivity and R&D intensity. While rising proportions of non-state assets motive lower employment and rising wages, the initial conversion effect is associated with higher employment and lower wages. These latter impacts may result from agreements with workers as part of the conversion process. The SOE conversion process exhibits selection bias in which SOEs with high rates of capital productivity and profitability, high tax burdens, and comparatively low wages and smaller labor forces are more likely to be selected for conversion. No similar selection bias is evident in the collective sector.