Outsourcing and labor migration in China

Outsourcing has been increasing in recent years as more firms in the developed countries have decided to outsource part of their production activities to their subsidiaries or local firms in the developing countries. Outsourcing either reduces a firm’s cost of labor or gives a firm better access to the local market so as to gain a larger market share. This rise in outsourcing activities has created both new opportunities and challenges to the developing countries, not only in the product market but also in the labor market. This is especially true for China, as its labor market adopted a soviet-style command-and-control system for many decades before China’s economic reform in the State-Owned Enterprises (SOEs) started in 1998. This paper will analyze the impact of outsourcing on the productivity of the SOEs and hence labor migration between the state sector and the non-state sector. The paper will then discuss how the development of a market-oriented labor market can intensify this impact of outsourcing. Finally, the paper will draw policy implications for China’s labor market reform in the presence of increasing outsourcing.