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| Manufacturing Overcapacity and Employment Volatility in China |
| PI Jiancai, SONG Daqiang
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| School of Economics, Nanjing University |
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Abstract In light of China's transition to a new phase of economic development, the focus on quality is gaining prominence in driving economic growth. Enterprises that fail to meet criteria regarding scale, technology, and environmental protection experience a gradual accumulation of excess production capacity. Generally speaking, the longer overcapacity persists, the more profound its impact on the economy becomes. On the one hand, the rapid growth of the economy may be hindered by the existence of overcapacity, which in turn may slow down employment expansion. On the other hand, overcapacity will also force the adjustment of domestic industrial structure, leading to an increased demand for innovative and high skilled labor by enterprises. Thus, questions arise: What is the impact of overcapacity on employment？ Are there region, ownership, and industry-related disparities in this impact？ If so, what factors contribute to these differences？ Answering the above questions will not only enhance our understanding of the relationship between overcapacity and employment volatility, but also aid in identifying countermeasures to mitigate the adverse effect of overcapacity.
To explore this topic, this article utilizes industrial enterprise data from China spanning 1998 to 2007, as well as panel data from various manufacturing sub-industries across different regions in China from 1999 to 2020. The employment growth rate of different industries in different regions is calculated, and the capacity utilization rate is measured using the stochastic frontier analysis (SFA) method. Subsequently, we delve into the relationship between overcapacity and employment growth in detail. In addition, we eliminate the potential impact of resolving overcapacity on labor demand and re-examine the relationship between overcapacity and employment volatility. Furthermore, we characterize manufacturing employment volatility from three dimensions: the employment creation rate, the employment destruction rate, and the employment net growth rate. Meanwhile, we endeavor to identify the mechanisms through which overcapacity affects employment volatility, thereby providing a test of employment creation and destruction theory in the context of Chinese style overcapacity.
Our study yields five key findings. Firstly, overcapacity significantly suppress employment growth overall. Secondly, only overcapacity in the eastern region exhibits a notable inhibition effect on the employment growth rate from a regional perspective. Thirdly, only the overcapacity of private enterprises exerts a significant exclusion effect on employment growth while considering enterprise ownership. Fourthly, the decline in the employment growth rate caused by overcapacity in the manufacturing industries is primarily evident in labor-intensive ones from an industry nature standpoint. Finally, the mechanism analysis shows that a high degree of financialization strengthens the employment destruction caused by overcapacity in the manufacturing industries, while corporate social responsibility and industrial structure upgrading mitigate employment volatility stemming from overcapacity. Building upon these conclusions, we tentatively propose the following policy recommendations: (1) regions should continue to address overcapacity and minimize its adverse impact on employment; (2) skill training should be provided to enhance and diversify the vocational skills of ordinary workers; (3) private enterprises ought to accelerate their transformation pace, while state-owned enterprises need to establish suitable internal competition mechanisms; (4) labor-intensive industries should regard the improvement of technological content of products as the direction of industrial transformation; and (5) local governments should focus on creating a healthy and orderly financial market environment, guiding manufacturing enterprises to manage financial assets prudently and focus on their main business.
This article offers three innovative contributions. Firstly, by covering the four stages of overcapacity experienced by China since the 1990s, this article uses two sets of data: panel data on Chinese industrial enterprises from 1998 to 2007 and panel data on manufacturing sub-industries in various regions from 1999 to 2020. Secondly, this article comprehensively considers region, ownership, and industry-related differences in the impact of overcapacity on employment volatility, enabling the identification of targeted measures to address the impact of overcapacity. Thirdly, we attempt to clarify the mechanism through which overcapacity affects employment volatility by examining the degree of financialization development, corporate social responsibility, and industrial structure upgrading.
For future research, an interesting direction would be to compare the effect of overcapacity on employment volatility between developed and developing countries and uncover the underlying reasons behind national disparities. Obviously, such a study would enrich the research on the employment volatility effects of overcapacity.
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Received: 24 October 2022
Published: 16 July 2024
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