Breaking the "Iron Rice Bowl" and Precautionary Savings: Evidence from Chinese State-Owned Enterprises Reform

We use China's large-scale reform of state-owned enterprises (SOEs) in the late 1990s as a natural experiment to identify and quantify the importance of precautionary saving for wealth accumulation. Before the reform, SOE workers enjoyed the same job security as government employees. Since the reform, over 35 million SOE workers have been laid off, although government employees kept their "iron rice bowl." The change in unemployment risk for SOE workers relative to that of government employees before and after the reform provides a clean identification of income uncertainty that helps us estimate the importance of precautionary saving. In our estimation, we correct a self-selection bias in occupational choice and disentangle the effects of uncertainty from pessimistic outlook. We obtain evidence that precautionary savings account for at least one-third of the wealth accumulation for SOE workers between 1995 and 2002.