organizational uncertainty and labor contracts in china's economic transition

Sociological Forum, Vol. 13, No. 3, 1998

Organizational Uncertainty and LaborContracts in China's Economic Transition

Doug Guthrie1

Lifetime employment was a cornerstone of the Chinese socialist systemconstructed under Mao. In this system, organizations served the function ofsocial security, and as a result, many organizations were overburdened withbloated work forces and retirees that drew from organizational coffers well intoold age. Labor contracts fundamentally alter this system, as they allow firmsto end the socialist institution of lifetime employment. Yet there is significantvariation on the institutionalization of labor contracts in organizations. Basedon a sample of 81 firms in industrial Shanghai, I show that organizations thatare experiencing uncertainty in the economic transition are more likely toinstitutionalize labor contracts on an organizationwide basis. There are twotypes of organizational uncertainty in the economic transition: economicuncertainty and administrative uncertainty. In cases of economic uncertainty,firms that lost money in 1990 and firms that are burdened by large forces ofretired workers are more likely to place their workers on labor contracts. Inthe case of administrative uncertainty, firms that are at the highest levels ofthe industrial hierarchy are also significantly more likely to place their workerson labor contracts. Although these upper level firms were the most protectedunder the command economy, they are being forced to handle the greatestamong the responsibilities in the economic transition, and as a result, theyexperience the greatest sense of being set adrift by the state.

KEY WORDS: China; labor contracts; economic transitions; economic sociology.

'Department of Sociology, New York University, 269 Mercer St., New York, NY 10003-6687;email: [email protected].

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0884-8971/98/0900-0457$ 15.00/0 © 1998 Plenum Publishing Corporation

INTRODUCTION

Scholars from a wide range of fields have examined labor arrangementsand how they relate to the economic and institutional structure of societies. Foragricultural economists, focus on labor relationships has provided insight intothe ways in which economic actors negotiate to arrive at specific contractualoutcomes that define employer-employee relationships (Bardhan, 1984;Eswaran and Katwol, 1985a, 1985b; Bell, 1989; Dutta et al, 1989; Cooper,1987). Another line of inquiry has focused on the ways in which state institu-tional structures and political systems shape shop floor politics (Lee, 1995;Burawoy, 1979,1985; Burawoy and Lukacs, 1985; Walder, 1986,1989). Studentsof socialists societies have explored the ways in which labor arrangements underredistributive systems produced a stratified system that was dependent on theallocation of remunerative resources (wage and nonwage) through state redis-tributive channels instead of through the market mechanisms (Walder, 1992;Szel6nyi, 1983). Labor relationships can give us insight into specific institutionalarrangements, broader political systems, economic action, and general eco-nomic change. Therefore, changing labor relationships can serve as a windowonto a variety of changes in economic transitions.

In the study of the economic transitions from socialism to capitalism,the transformation of the labor relationship is a critical issue for under-standing the nature of economic change.2 In the case of China, lifetimeemployment—and all of the benefits that came with it—was the very es-sence of the labor relationship that existed between enterprises and work-ers. Workers entered their work unit (danwei), and from that moment on,the work unit was the social system that dispensed their salary, housing,medical insurance, and any other benefits the unit might offer. This rela-tionship would extend into the worker's retirement. But as the structureof industry has changed over the course of the economic transition, so toohas the relationship between the work unit and the worker. As enterpriseshave staggered under the heavy burdens of lifetime employment, redefiningthe labor relationship has become a central issue for the industrial reform.There are many state-level institutional changes that have emerged in theattempt to redefine the labor relationship; the pension system (yanglao jin),the Labor Law (laodongfa), and Labor Arbitration Commissions (laodongzhongcai weiyuanhui) are but a few of these critical changes. One of the

2It should be noted here that labor relations differ greatly from rural (primarily agriculturallabor) to urban (primarily industrial labor) settings. It is also the case that changes to laborrelations differ greatly across these settings as economic transitions progress. This study isdecidedly about changing labor relations in urban industrial settings; changes in rural settingsare beyond the purview of the study.

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central changes in the redefinition of the labor relationship has been theemergence of the labor contract (laodong hetong)?

Where analyses of labor relations in agricultural economies often focuson bargaining dynamics between employers and employees (Fabel, 1990;Eswaran and Katwol, 1985a, 1985b; Bardhan, 1984), studies of industrialeconomic systems more often focus on organizational constraints (institu-tional as well as economic) and the resulting decisions that organizationsmake surrounding labor relations (Walder, 1992; Kalleberg and Van Buren,1996). Grounded in the latter approach, in this study, I focus on the insti-tutionalization of labor contracts on an organizationwide basis across a sam-ple of firms in industrial Shanghai. In general, organizational practices thatare adopted as a result of changing social, institutional, and economic mi-lieux can reveal the ways that organizations are responding to changingconstraints and how changing constraints affect organizational decisionsand practices in periods of economic reform. Where institutional changesare often forged at the state level, focus on organizational decisions andpractices in periods of economic reform can reveal the practical meaningof these changes for organizational actors in the economy (Guthrie, 1997,1999). The institutionalization of labor contracts in organizations in indus-trial Shanghai will illuminate the ways that organizations are experiencingthe reforms and how they are responding to the institutional changes ofChina's economic transition.

In this study, I explore the institutionalization of labor contracts acrossorganizations in China's economic transition. While labor contracts offi-cially emerged in 1983, there is still significant variation as to whether ornot firms choose to adopt this institutional reform. Why do some organi-zations choose to place all of their workers on labor contracts, while othersplace only some of their workers on labor contracts?4 What are the mecha-nisms and parameters by which this variation is allowed to occur? How

^he immediate impact of any of these institutions may be questioned on the grounds thatthey may not have any real (as opposed to rhetorical) meaning in China today. However,as institutions such as the labor arbitration commissions and the labor contract have beenaround since the mid-1980s, they are slowly beginning to have more of an impact on eve-ryday relationships. For example, the total number of workers on labor contracts reached26.2% in 1994 nationally (State Statistical Bureau, 1995), and the number of individualswho applied to the labor arbitration commissions for decisions rose 150% from 1993 to1994 (Labor Bureau, interview, 1995). In addition, these institutional changes have meaninginasmuch as they lay the groundwork for fundamental change in labor relationships intothe future. As these laws and policies are taken more seriously, they will become the buildingblocks for the transformation of labor relations and the transformation of post-CommunistChina.

4As I will discuss below, the primary variation in the use of the labor contract is betweenfirms that choose to place all of their workers on labor contracts and those that place onlya portion of their employees on labor contracts.

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does the decision to place workers on labor contracts relate to the availableresources of organizations and the institutional environment in which or-ganizations are embedded in the economic transition?

The institutionalization of the labor contract is dependent upon thestructural circumstances and the political environments in which firms aresituated. Essentially, I argue that the adoption of labor contracts acrossfirms is a form of enterprise self-protection: firms that are more likely toplace all of their workers on labor contracts are experiencing some degreeof uncertainty in the emerging Chinese markets, and they place all of theirworkers on labor contracts as a way of protecting themselves against theburdens of lifetime employment. There are two types of firms that areexperiencing uncertainty in the emerging markets of China's economictransition. First, firms that are in poor economic shape are experiencinguncertain futures, and they are more likely to adopt economic strategiesthat allow them to cope with the changes of the economic transition. Asbudget constraints are hardened for all firms in China's industrial econ-omy, firms that are struggling economically are more likely to adopt prac-tices that allow them to protect themselves against the economic burdensof the transforming socialist system. Second, firms that are experiencinga degree of administrative uncertainty are also more likely to adopt meas-ures that act as protection against the burdens of lifetime employment.In the reform era, administrative and economic responsibilities are beingpushed down the ladder of the former command economy, and some firmsare being forced to take on greater responsibilities than others. Firms thatare at the highest levels of this ladder are being forced to assume moreresponsibilities (economic and administrative) than those at lower levels.Through a combination of hardening budget constraints and increasingadministrative and economic responsibilities, firms at the highest levels ofthe administrative hierarchy experience the market more directly thanfirms at lower levels of the hierarchy. These firms are left with a senseof being set adrift in the economic transition, and they adopt economicpractices that reflect this fact. This part of the discussion will have impli-cations for studies of economic transitions that have asserted that budgetconstraints remain the softest for firms at the highest levels of China'sadministrative hierarchy.

An interesting flip side of the question of why some firms have im-plemented labor contracts on an organizationwide basis will also be ex-plored in the analysis: what is the reasoning behind the decisions of somefirms not to institutionalize labor contracts on an organization wide basis?Similar to the findings and theories of other authors (e.g., Eswaran andKatwol, 1985a, 1985b; Walder, 1986), the in-depth interviews that I con-ducted with factory managers revealed that loyalty, patron-client relation-

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ships, and a socialist ideology still matter in firms that can afford to supportthe employees that have given years of service to the organization. As areward for years of loyalty to the organization and to maintain the pa-tron-client relationships that defined labor relations for years prior to thereform, organizations that have the economic luxury of allowing their olderworkers to avoid contracts most often do so. In sum, in China's rapidlytransforming social and economic system, labor contracts do not mean pro-tection for workers; rather, they mean protection for enterprises againstthe burden of lifetime employment. However, the decision to make fulluse of this protection is tempered by the institutional history of the laborrelationship in a given organization and whether an organization can affordnot to take full advantage of this institutional change.

THEORETICAL ISSUES

In the study of economic transitions, focus on specific institutionalarrangements and the exogenous factors associated with those outcomesis essential for understanding the practical meaning of institutional change.Broad-based state level changes (laws, policies, etc.) are an important partof changing economic structures, but scholars of economic transitions havehad difficulty translating these broad changes into empirical analyses (fordiscussion see Fligstein, 1996a; Walder, 1996; Cabestan, 1995; Guthrie,1996, 1997; Cooper, 1987).5 There have been two central problems withresearch on economic transitions. First, many scholars have focused onincome at the individual level, drawing conclusions about institutionalchange from observations of the amount of money individuals are makingin the reform era. Despite the claims that this type of research revealschanges in "market institutions" (Nee, 1996), growth in income of indi-vidual actors should not be mistaken for actual observations of marketdecisions and practices and the institutional changes that define the eco-nomic transition. Changes in income may be a reflection of changing mar-ket institutions, but changes in income could also be a reflection of overallgrowth, state investment, or any number of other institutional changes (fordiscussion see, e.g., Walder, 1996:1061, 1067). Without direct observations

5As Winship and Rosen (1988) point out, there is still much work to do in developing theoriesof institutional change. One of the ways to begin to get at these issues, which has beenemployed in organizational and institutional sociology, is to focus on specific institutions asthe dependent variables and attempt to isolate the factors associated with the emergenceof these specific institutional forms (see, e.g., Dobbin et al., 1993; Edelman, 1990, 1992;Marsden et al., 1994).


of institutional contexts or specific economic decisions and practices, wecan only guess what changes in income tell us about the emergence ofmarket institutions.6

Second, for scholars that have examined the state level institutionalchanges of China's economic reforms (e.g., Naughton, 1995; Lieberthal,1995), the focus is most often on the politics surrounding the changes atthe state level and the macrolevel consequences of these broad institutionalchanges. There is often little (or no) microlevel data to reveal what thesereforms actually mean in practice for economic actors in the changing econ-omy. For example, although Naughton (1995) presents a significant amountof aggregate data on the implementation of the "dual-track" system, hepresents no firm-level data on the implementation of this system. We havelittle sense of the organizational and institutional characteristics that relateto how firms are dealing with this new system. Broad-based institutionalchanges that are forged at the state level are only meaningful to the extentthat economic actors adopt these changes, and research should focus onhow and why institutional changes are adopted by firms in the changingeconomic systems.

Walder's (1995) work on China's economic transition encounters asimilar problem. Based on the fact that aggregate gains in productivity atthe lower levels of China's former command economy have been muchgreater than the modest gains occurring at the upper levels of this admin-istrative hierarchy, Walder hypothesizes that reforms have not reached thissector of the economy—that firms in this sector of the economy are notbeing forced to deal with market constraints.7 However, Wilder employs

6Nee (1996) attempts to include institutional contexts in his analysis, but he does so in some-what of a tautological manner. Dividing areas into categories of more marketized ("laissez-faire") and less reformed ("redistributive") employs as explanatory variables precisely theoutcomes that market transition theory attempts to explain—the "shift from hierarchies tomarkets" (Nee, 1989:663). Walder (1996:1067) points out that "the extent to which [Nee's]original propositions were true depended upon sectoral and regional variations." Instead ofexplaining this variation, Nee simply has incorporated this variation into the analysis, arguingthat the variation helps explain the individual level outcomes.

7The administrative hierarchy of the former command economy was not only important fororganizational structure and practice in the pre-reform era (Walder, 1992), but it is also acritical factor in the economic transition (Walder, 1995; Guthrie, 1997, 1999). To describebriefly: the issue is what level of governmental administration a given organization fallsunder; at issue is the level of the government office (zhuguan bumen) to which the organi-zation reports. Firms directly under the jurisdiction of the central government (ministries;bit) are considered to be the highest level of the hierarchy, followed (in descending order)by those under municipal bureaus (/'«), municipal companies (shi gongsi), district companies(qu gongsi), and street associations (jiedao) in urban areas. Scale, scope, budget under thecommand economy, and jurisdiction size all vary with position in this administrative hier-archy.

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no microlevel data of firm situations or firm practices in this analysis, basinghis conclusions solely on aggregate measures of productivity across sectors.Here again the problem is that macrolevel data cannot reveal the actualsituations of firms in the transforming economies. While aggregate data onproductivity may broadly indicate which sectors of the economy are adapt-ing most readily to the economic transition, aggregate data reveal nothingabout the decisions and practices firms are adopting in the reform era. Itmay be the case that sectors of the economy that are not experiencing gainsin productivity are not being reformed, but it may also be that firms atthis level of the hierarchy are simply failing to adapt to the changes of thereform era. If the latter is true, the decisions, practices, and strategies offirms—which often reflect the uncertainties they are experiencing—aremuch more apt indicators of the changes of the economic transition thanmacrolevel indicators.

In an earlier article (Guthrie, 1997), I studied the practice of diversi-fication to test Walder's hypothesis of hard budget constraints in China. Inthat article, I showed that, although the upper levels of the command econ-omy (i.e., firms under the central ministry and citywide municipal bureaulevels) do not reflect the gains in productivity that are found in lower levelsof the economy, it is a mistake to conclude that these firms are being pro-tected from the reforms (i.e., that they are still operating on soft budgetconstraints). In fact, firms in the upper levels of the command economyare among the most likely to diversify assets into fast-cash economies, apractice that indicates that these firms are experiencing extreme uncertaintyin the transition era.8 Thus, contrary to conventional wisdom about thereform era (which has been primarily based on aggregate measures of pro-ductivity across sectors of the economy), an analysis of firm-level practicesrelated to uncertainty suggests that budget constraints are being hardenedfor firms in this sector of the economy, and they are adopting strategiesand practices to deal with this uncertainty. The basic argument here is thatthe economic decisions and practices of organizations can reveal manythings about economic transitions that are hidden from aggregate measuresof productivity, including the hardening of budget constraints in differentsectors of the economy.

What I am suggesting here is an actor-oriented approach to institu-tional change, where research focuses on the adoption of institutional

8Several clues point to the fact that diversification into fast-cash economies is a reflection ofuncertainty. For one thing, my interviews with managers at the 81 firms upon which thestudy is based, indicated this; in addition, poor organizational health and losses also aresignificantly associated with the adoption of this strategy, net of several other organizationalfactors. See Guthrie (1997) for details.


changes by economic actors in the transforming economy.9 Beyond thebroad institutional changes of economic transitions, we need to explore howthese broad institutional changes have meaning for economic actors. Howlarge-scale economic actors adapt to changes in the reform era can revealmuch about the meaning of reforms on a microlevel. The important pointhere is that the decisions and practices of large-scale economic actors canoften tell us more about how institutional environments are changing inperiods of reform than can a narrow focus on standard economic indicators.Industrial organizations are a fitting unit of analysis for this research ap-proach for three reasons. First, in China, industrial organizations are situ-ated in a state administrative hierarchy (the former command economy;see Walder, 1992; Guthrie, 1997), and they are therefore often strugglingwith whether or not to implement the institutional changes that are forgedat the state level. Because Chinese industrial organizations are embeddedin this administrative hierarchy, their responses are more directly reflectiveof how that institutional system is changing. Thus, decisions and practicesthat are adopted by organizations over the course of China's economic tran-sition will reveal changing constraints and the changing nature of the stateadministrative system in which the organizations are embedded. Second,organizations (as opposed to individuals) often adopt internal economicpractices that are directly linked to broader institutional changes. For ex-ample, some scholars have explored the ways in which legal changes haveled to new institutional structures in the firm (Edelman, 1990,1992; Dobbinet al, 1993); others have examined the ways in which legal and other in-stitutional changes have led to a variety of organizational structures, strate-gies, and practices (Fligstein, 1985, 1990). As these types of studies show,institutional practices at the firm level are relevant for understanding thepractical meaning of broad based institutional changes forged at the statelevel. Finally, there is an emerging body of theoretical and empirical re-search in economic sociology predicting what organizations will do in theface of uncertain economic and institutional environments (see e.g., Flig-

9l should make clear here that I view organizations as economic actors. An organizationalview is relevant for an action-oriented approach in two ways. First, managers often resiststate-mandated policies or simply make use of policies in ways that they see fit. The inter-esting aspect here is not the policy per se, but rather the managers' actions—their decisionsand practices—with respect to the policy. As the qualitative data presented below will makeclear, managers often resist changes, and this resistance says important things about laborcontracts specifically and economic transitions more generally. Second, organizations arethemselves actors in the economy. In this study, while many of the variables I examine arestructural characteristics of organizations and the institutional environments in which theorganizations are embedded, the decisions and practices the organizations adopt in the eco-nomic transition are examples of decisions and practices of large-scale economic actors inthe economy. The structural characteristics of the organizations contribute to the decisionsand practices the firms adopt. For similar approaches see, e.g., Fligstein (1990), Stark (1996),Groves et al. (1995), and Walder (1992).

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stein, 1996b; Stark, 1996; Guthrie, 1997, 1999). This literature broadly sug-gests that organizations will adopt practices that stabilize their position inuncertain market environments; organizations in crisis are likely to adoptpractices to deal with the uncertainties they are experiencing (see especiallyFligstein, 1996b). If we can identify practices that are linked to crisis ormarket uncertainty, we will be able to develop a sense of what type ofsituations in China's economic transition are giving rise to uncertainty inthe transforming market economy. In the case I will analyze here, organi-zations that make the choice to place their workers on labor contracts andthereby end lifetime employment for their workers are likely to be expe-riencing some type of market uncertainty (relative to organizations thathave not made this decision). The interesting question then becomes, whatare the characteristics of these organizations, and why are they experiencinguncertain market situations?

Further research employing this approach is necessary to gain a clearerperspective on the decisions and practices that firms are adopting in theface of the economic constraints and institutional changes of China's tran-sitional economy. A fundamental change in China's transforming socialistsystem, the labor contract in Chinese industry marks the end of lifetimeemployment. For Chinese industrial organizations, the question will be,Who gets to avoid the labor contract and why? Or, put another way, whogets to remain as permanent laborers in the transforming Chinese industrialeconomy? Below I discuss the emergence of the labor contract in China,what it means for individuals and for firms, how labor contracts have beenadopted across organizations, how we can analyze the emergence of thisinstitution, and what its emergence can tell us about administrative andeconomic uncertainty in the reform era.

The Case of Labor Contracts in China

Under the redistributive system in China, employment was all butguaranteed by the state.10 Workers were assigned to work units by the Mu-nicipal Labor Bureau, and from that point on, the work unit was respon-sible for dispensing income, benefits, and retirement pay for the rest ofthe employees' lives. In different periods, especially in the late 1970s, asmall fraction of the population was classified as "waiting for employment"

10As a document from the State Council put it in 1983, "The current system of employmentin China, under which the majority are permanent workers, in practice operates as a kindof unconditional system of life tenure" (People's Republic of China [PRC], 1983; for fulltranslation, see Josephs, 1989, Appendix A). The Great Leap Forward (1958-1960) provideda caveat to this system, as approximately 16 million workers were laid off and sent downto the countryside during that campaign. This is the only period, however, where layoffswere not accompanied by reassignment (Walder,.1986).


(diaye; Gold, 1980), but for the most part, the state still fulfilled its promiseof finding employment for everyone. By 1980 state sector jobs had becomemore competitive than ever before (only 37% of workers were assignedjobs in state enterprises \guoyou qiye]), but still 80% of workers were as-signed jobs in either state enterprises or collectively owned enterprises (jitiqiye) in that year (Walder, 1986:57). More than this, once jobs were as-signed, except for in rare cases of disciplinary firing and even rarer casesof layoffs (which were often followed by reassignment to another enter-prise), the job assignment was for life (see Walder, 1986:68-74). This is notto say that workers never changed jobs or resigned from a given enterpriseof their own volition. But once workers were assigned to a work unit, exceptin exceptional circumstances, they had the option of staying at that organi-zation for life.11

The emergence of labor contracts in China marks an important turningpoint in the socialist system created under Mao. Whereas under the old sys-tem, individuals were supported by an enterprise for life, labor contracts begana new system in which enterprises are only responsible to workers for as longas the contract specifies.12 If the enterprise and individual sign a 1-, 3-, or

"it should also be noted under this system that the distribution of benefits and resourcesvaried significantly across enterprises. The variation of benefit allocation was both a functionof enterprise type (state or collectively owned) (Walder, 1986; Lin and Bian, 1991; Bian,1994) and of the level at which an enterprise existed in the administrative hierarchy of thecommand economy (Walder, 1992). This variation, however, did not have a strong impacton job mobility, as it was almost impossible to move up the hierarchy (Walder, 1986). Also,it is unrelated to the basic fact presented here: that workers were guaranteed employmentfor life under the old system.

12The labor contract was officially introduced in 1986 with Document No. 77 and Decree No.99, both promulgated by the State Council (State Statistical Bureau [SSB], 1995: 131;Josephs, 1989; PRC, 1986a,b,c). These documents explicitly define three types of contracts:the fixed limited term contract \guding qixian laodong hetong], the nonfixed limited termcontract [wuguding qixian laodong hetong], and the per-project work limited term contract\yixiang gongzuo wei qixian laodong hetong]. My interviews (described below) indicate that,of these three, the fixed limited term contract is the most stable in that it guarantees em-ployment at an organization for the duration of the time period defined in the contract. Itis also the type of contract that workers in industrial factories are signing (and thereforewhat the empirical part of this paper is primarily about). The nonfixed limited term contractand the project work limited term contract are typically used in more project-oriented sec-tors, such as construction. Although all of these institutional arrangements officially emergedin 1986, experimentation with labor contracts dates back as early as 1983, as defined by the1983 State Council Notice for Trial Implementation (PRC, 1983). Following the 1986 docu-ments, the legitimacy of the labor contract was further enhanced by the Enterprise Law(PRC, 1988: ch. 3, article 31), which states, "The enterprise shall have the right to employor dismiss its staff members and workers in accordance with the provisions of the StateCouncil." Though such a statement does not sound radical as far as enterprise rights go inmarket societies, in fact, turning the rights of hiring and dismissing of workers over to theenterprise was extremely radical in the context of China's recent institutional history. Seealso Naughton (1995) for discussion of the labor contract.

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5-year contract, the enterprise is only responsible for the worker for 1, 3, or5 years and is under no obligation to renew the contract at the end of thisperiod. At the end of a contract period, the enterprise has no obligation tocontinue to pay income or benefits to the worker. Against the backdrop of thepre-reform Chinese system, this institution marks, at least in theory, a radicalturning point in Chinese industrial labor relations. From the theoretical posi-tion I articulated above, the salient question for study of China's economictransition becomes, How are economic actors interpreting and employing thisnew institution of the economic reforms?

The creation of the labor contract and the solidification of enterpriserights surrounding staffing would alone have little immediate impact on or-ganizational action in these realms. As Naughton (1995:295) points out "...the mere statement of enterprise 'rights' is, in the Chinese context, no proofthat they will be realized. At each previous reformist phase, an enterpriserights document has been issued, and in each previous case the documenthas often been breached " However, during this period (late 1980s), othersignificant changes in the institutional and organizational structure of Chi-nese industry that would give more salience to the labor contract and enter-prise rights were also enacted. During this period, economic andadministrative responsibilities were starting to be pushed down the adminis-trative hierarchy of the former command economy. Citywide bureaus (theheads of sectors in municipalities) began disassociating themselves from ad-ministrative and economic responsibilities and requiring that the municipaland district "companies" (governmental administrative units that preside di-rectly over enterprises) and the individual factories beneath the citywide bu-reaus start handling these responsibilities themselves (for discussion seeGuthrie, 1997, 1999). Specifically, the enterprise self-responsibility policy(zifu yingkuei) and the reinforcement of enterprise independent accountingsystems (dull hesuari) have forced enterprises to face the economic responsi-bilities of the postreform era often without protection from state administra-tive offices (see especially Guthrie, forthcoming). Among the administrativeand economic decisions for which enterprises are taking greater responsibil-ity, labor relations in general and the labor contract specifically have becomea central issue for factory managers. One manager in the chemicals sectorexplained the gravity of this change saying, "The labor situation has changedtremendously over the last few years 1 think probably the most significantchange is that we have everyone on labor contracts now. If workers violatethe terms of their contracts, they can be fired . . . . We've never had this typeof labor relationship before."13

13A11 quotes with managers, officials, and the like were taken from personal interviews con-ducted over the course of nine months of field research in China. See text of the followingsections for discussion and details of qualitative and quantitative data gathered for this


The proportion of the labor force on labor contracts has risen steadilyand significantly since 1983.14 In 1983, the first year that laborers were puton labor contracts in China, 0.6% of the labor force or 650,000 individualswere on labor contracts. Of these, 570,000 were in state-owned organiza-tions and 80,000 were in collectively owned enterprises. By 1994, about26% of the labor force or 38,390,000 individuals were on labor contracts;of these, 28,530,000 individuals were in state-owned enterprises and6,450,000 individuals were in collectively owned enterprises. Proportionally,the use of labor contracts in manufacturing sectors is far above the nationalfigure. In 1985, 5.2% (1,550,000 workers) of the manufacturing labor forcewas on labor contracts, and by 1994, over 40% (13,540,000 workers) of theworkers were on contract. Variation in the use of labor contracts by ad-ministrative region, however, makes clear that the implementation of thelabor contract is not simply a function of industrial development, as Tian-jin—one of the major industrial municipalities in China—is among the low-est with 13.8% (404,000 laborers) of the labor force on labor contracts.15

(see Fig. 1.)While the rise of the labor contract is somewhat interesting in and

of itself, a more engaging set of questions follows the economic sociologyapproach described above, focusing attention on the exogenous factors as-sociated with the rise of this institution. Rather than a simple discussionof the creation of this institution at the state level or a macrolevel analysisof the rise of this institution across China, we need to focus on what theimplications and meanings of this institution are for economic actors (in

study. Despite the force of this manager's statement surrounding the importance of thelabor contract, there is still significant variation surrounding the meaning of this institutionin China today, and there are still places where the labor contract is viewed to have littlemeaning (see below). However, my argument here is that the labor contract lays the foun-dation for fundamental changes in the labor relationship; these changes are already mean-ingful in many industrial organizations and will become increasingly meaningful in years tocome.

14While the official Provisional Regulations document (see PRC, 1986a,b) was promulgatedin 1986, local governments began experimenting with the practice as early as 1983, by orderof the Trial Implementation Notice of the State Council promulgated in 1983 (see PRC,1983). Typically, this is the way broad institutional changes are set in motion in China: aninstitutional change begins with a policy idea that emerges as a "Notice" from the StateCouncil and is experimented with in different localities and different sectors of the econ-omy. Then, when the kinks have been worked out to some degree, the institutional changeis legitimized through an official law, rule, regulation, decree, or policy set forth by theState Council.

15Shanghai has a considerably higher proportion of its laborers on labor contracts than anyother administrative region, with 49.7% of its labor force on labor contracts or 2,378,000individuals (administrative regions are Shanghai, Beijing, Tianjin, 5 autonomous regions,and 22 provinces; SSB, 1995). The less developed areas of Tibet and Anhui Province areamong the lowest with 11.9% (18,000 laborers) and 14.3% (621,000 laborers) of the laborforce on labor contracts, respectively.

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Fig. 1. Proportion of workers on labor contracts, 1983-1994.

this case industrial organizations). We need to study a sample of economicactors and analyze the characteristics that have contributed to their deci-sion to adopt this institutional change (or not). In this study, I will employthe empirical case of labor contracts in an industrial city in China to ad-dress two sets of questions. The first set of questions will focus on whatthe rise and adoption of the labor contract tells us about the empiricalreality of economic transition in China: What firms are adopting the laborcontract in China, and why are they doing so? The second set of questionswill focus more broadly on the implications of this study for economicmodels of decision making as they relate to changing institutional arrange-ments in periods of economic reform: What does the case of the laborcontract in China tell us about models of economic behavior in transform-ing industrial societies, especially with respect to labor relationships inlarge-scale industrial organizations? The analysis below employs quantita-tive and qualitative data gathered in one industrial city in China to addressthese questions directly.

LABOR CONTRACTS IN THE INDUSTRIAL CITY OFSHANGHAI

Data

The empirical part of this study is based on a survey of firm practicesin China's industrial city of Shanghai. In 1995, I conducted a study of theeconomic decisions, practices, and internal structures adopted by 81 firms

Labor Contracts in China

in four industrial sectors in Shanghai.16 Data were gathered through face-to-face on-site interviews with general or vice general managers of thefirms. A stratified random sample (stratified across the four sectors) wasdrawn in the urban districts of Shanghai (i.e., firms from Shanghai's nineurban districts [shiqu] were included in the study while firms from the sixcounty districts [xian] were excluded); the sampling frame was the sectorallists in The Directory of Chinese Organizations and Institutions (Zhongguoqishiye minglu quanshu)^ In addition to the face-to-face interviews withthe high ranking managers of these 81 organizations, I also conducted 74additional interviews with governmental officials, legal scholars, and othermanagers from organizations that were included in the pilot study and aset of follow-up interviews. Drawing from these sources, the data employedfor this study are based on both the quantitative assessment of the insti-tutionalization of labor contracts across the 81 organizations in the sampleas well as an in-depth qualitative look into how managers and officials inChina think about this institutional change.

For each of the sectors, the random sample of organizations in that sec-tor roughly represents a 10% sample of the producing industrial organiza-tions in that organizational field. In terms of sample size by sector, thissampling is similar to other organizational studies: for example, the researchof Dobbin et al. (1993) was based on 279 (responding) organizations spreadacross 13 sectors, which breaks down into about 20 organizations per sector(assuming response rates were constant across sectors), which is similar tothe number of organizations sampled in each sector of my study. The overall

16The four sectors from which the sample of organizations was drawn are chemicals, elec-tronics, foods, and garments. Sectors from which the sample of organizations was drawnwere theoretically sampled (Ragin, 1994), selecting for variation in parameters of theoreticalinterest. Selection of the sectors for the study was based on a 2 x 2 matrix cross-referencingstate presence (high/low) with asset/technological intensity (high/low); state presence simplymeans the general level of state control in a given sector; asset/technological intensity refersto the size of assets that are required for investment in an organization in a given sector.Each sector was selected to represent one of the four cells from this matrix. Parametersviewed as important for the determination of "state presence" were factors such as statecontrol of price setting, state control of import and export quotas, and state control overproduction decisions. Determination of these sectoral characteristics was made based uponpreliminary interviews with governmental officials and managers of organizations that wereincluded in the pilot study. Mean values for fixed assets for each sector are as follows:chemicals-694,333,333RMB; electronics-49,162,608RMB; foods-13,967,857RMB; gar-ments- 6,473,181 RMB.

17One likely problem with this sampling frame is that it underrepresents small and new or-ganizations (Aldrich et al., 1988). While organizational size is less of an issue—I purposivelysampled on organizations of at least 50 employees—the underrepresentation of new organi-zations in my sample is a concern. However, as the directory was last updated in Octoberof 1993 (less than two years before I conducted the study), I think the problem is attenuatedto some degree.

470 Guthrie

response rate of my study (selected firms that agreed to an interview) was90%, which compares favorably to other organizational studies.18

Retired Workers, Factory Burdens, and Labor Contracts: TheManager's Point of View

Managers of industrial organizations see the issues of lifetime employ-ment and the overemployment that came with the state distribution of laboras among the central challenges of industrial reform. Under the redistributivesystem, the state distributed labor irrespective of enterprise need, and enter-prises now are paying the price with bloated work forces that outstrip the en-terprise needs in terms of running machinery and general production capacity.One manager in the chemicals sector explained his factory's situation, saying,

We have 676 workers and over 200 retired workers, so our economic burden isvery serious. Actually, this issue is one of the biggest problems China is facing inthe economic reform. Enterprises have always been set up to take care of theirworkers as one of their primary functions. So [under the old system] workers wouldjust be distributed to the factories whether they were needed or not . . . . This isthe problem with state-owned enterprises. Not only do we have 200 retired workersto care for, but we also have two or three workers doing the work that one workercould do. It's impossible to be competitive with that kind of responsibility. We havea joint venture [a factory investment with a foreign partner] that is doing very well.It has 100 workers, and they produce about the same amount that our factoryproduces every year. How can we compete with them when we both have the samevolume of production and turnover but they are paying the salaries and benefitsof 100 workers and we are paying for almost 900 workers. It's impossible . . . .

This manager's central point was about overemployment and the troubleit poses for market competition. Managers see their organizations as unableto compete in the market when they are competing against organizationsthat have work forces (and therefore overhead) that are significantly lessthan those of the state- and collectively owned organizations in China'seconomy. This manager's reference point of a joint venture makes the com-petition point explicit: his factory is producing the same amount as thejoint venture factory, yet the organization's overhead is roughly six timesthat of the joint venture.19 Another manager in the electronics sector con-nected this issue to development.

18AdditionaI information on sampling, questionnaire, and data collection is available from theauthor.

19Joint venture salaries are set at a minimum of 1.5 times the salary of workers in the Chinesefactory that is the investment partner. Therefore, assuming that retirement salaries and ac-tive worker salaries are the same (they are usually not, but I do not have the data on retiredworkers incomes), then this factory's overhead is roughly six times that of the joint venture.It is likely that this figure underestimates the disparity, however, because joint venturestypically pay less overhead in additional nonwage benefits than fully owned Chinese organi-zations do.


The biggest problem that our state- [and collectively] owned enterprises have is theretired workers. We are taking care of so many people in comparison to otherprivate companies. We can't compete with them in terms of development. Theytake all of their profits and put them back into the company; we have to use allof our profits to take care of workers who are no longer working here. And manyof these retired people are now working at other companies, but they still comehere every month to get their pay.

As economic and administrative responsibilities are placed more directlyon enterprises (through independent budgets and self-responsibility sys-tems), the enterprises themselves, not the state, are responsible for usingrevenues to cover income, benefits, and retirement costs of the organiza-tion. If factories have to spend all of their income on overhead, they havelittle left over for development projects that could cover anything from up-grading of machinery to diversification investments.

As I have noted above, one important way that the labor relationshipis changing in China today is that some workers are being put on laborcontracts. Industrial officials in China posit that the labor contract has beenset forth as an institution to protect workers in the emerging market eco-nomic system. As one official in the Labor Bureau put it, "The purposeof the contract is to set up an institutional system that protects the work-ers."20 The argument here is that, as the economy becomes more market-ized and the state turns more direct control of administrative and economicdecisions over to enterprises, workers will need institutional protections andguarantees. However, while this view may be the official state line on thelabor contract, managers have a variety of views on the purpose and func-tion of contracts. At the very least, the labor contract is seen by many man-agers as institutionalizing a legalistic relationship between the enterpriseand worker. As a manager of an organization in the electronics sector ex-plained, "The labor contract is a very important change in the conduct ofworkers and in the conduct of the organization. If the worker is actingagainst the contract (weifan hetong) we can just fire her/him. If we actagainst the contract, the worker can take us to the Labor Arbitration Com-mission. It's really a two-sided approach to the labor relation." Other man-agers point out more directly that the function of the labor contract as aninstitution is quite complicated. A manager from another industrial organi-zation explained,

The establishment of contracts with workers is very complicated in China today.Contracts are useful for protecting both the worker and the employer. For both,once there is a contract, there can be no confusion about what is expected of theworker and what the employer is allowed to demand. It is good for the worker sothe employer cannot exploit the worker. It is also good for the employer, though.It used to be that as soon as the organization took on a worker, the organization

20This quote comes from my interviews. However, for additional discussion, see also Zhongguoribao (China Daily), May 24, 1996.

472 Guthrie

was responsible for the worker for life. So bringing on a worker was a long terrafinancial commitment. The organizations had no choice about this. But now theiron rice bowl has been broken, and an organization can decide how and when itwants to hire workers. The contracts allow us to control how long the workers arehired for.

There are beneficial aspects of the labor contract for both the workerand the factory. For the worker, an institutionally secure system is replacingthe void left by the retreat of the socialist state in its direct handling of em-ployment matters. As administrative and economic responsibilities arehanded over to the enterprises, a system is being set in place that allowsworkers to see their rights specified explicitly in a contract. The contractbinds the factory to upholding its end of the bargained outcome for the timespecified in the contract. Other institutions such as the new Labor Arbitra-tion Commissions, which were constructed in the late 1980s, help support theinstitutional guarantees that are specified in labor contracts. But there is alsoa direct benefit for the enterprise with the rise of this institution, as thesemanagers have indicated. The labor contract also "offers protection for thefactories" because it allows the factory to hire a worker for a finite period oftime. It allows them to bring in workers—or transform their relationshipswith current workers—under an institutional guarantee that protects the fac-tory from the economic burden of lifetime employment.

There is considerable variation on how organizations are approachingthis institutional change. An analysis of how organizations are incorporatinglabor contracts will illuminate factors behind changes in the labor relation-ship over the course of China's economic transition. My interviews makeevident a distinction between two types of organizations with regard tothese labor contracts: those that have put all of their workers on laborcontracts (in other words, those that have implemented the labor contracton an organizationwide basis) and those that have put only some of theirworkers on labor contracts (they have not implemented the labor contracton an organizationwide basis). Therefore, the analysis that follows will dealprimarily with the adoption of the labor contract on an organizationwidebasis. What exogenous factors are associated with the adoption of this prac-tice on an organizationwide basis? Why have some organizations imple-mented the labor contract—and thus ended lifetime employment—throughout the organization, while others have only incorporated thischange in a piecemeal manner? What does this tell us about the changingnature of labor relations in China's economic transition?

Quantitative Assessment: Model, Variables, and Analysis

The dependent variable for this analysis is the implementation of thelabor contract on an organizationwide basis. There were three questions


in my organizational survey that were relevant for establishing an organi-zation's practices with respect to labor contracts. The first question was,"What percentage of the organization's employees are on labor contracts?"If the labor contract had been implemented on an organizationwide basis(i.e., 100% of workers on contracts), a follow-up question inquired aboutthe year in which this practice was implemented across the organization:"[If 100%] What year was this practice (the practice of workers signinglabor contracts) implemented on an organization-wide basis?" It could bethe case that some organizations simply conform to the institutional prac-tice of putting workers on labor contracts but actually view the labor con-tract as doing little to alter the organization-employee labor relation. Asa manager of a factory in the foods sector explained:

We've had 100 percent of our workers on labor contracts since 1993. But I'll tellyou something about the labor contract: the labor contract really doesn't meanmuch for state-owned factories. State-owned enterprises are still state-owned, andthey are still the social security system of this country. As long as that's the case,we can't just let workers go or fire them. And as long as we still have to keepworkers on no matter what—unless they do something really bad, but this rarelyhappens—labor contracts will have little meaning. Really little has changed sincewe started making workers sign labor contracts. It's just a procedure we do.

For cases such as these, adoption of the labor contract does not have thesame meaning as it does for those factories that see the contract as fun-damentally altering the labor relationship. To control for this possibility,managers were asked the following question: "Can workers in your organi-zation who are on labor contracts be fired?" If the manager answered "no,"this indicated that the labor contract was not a meaningful institutionalchange in the organization.21 The outcome of adopting the labor contracton an organizationwide basis is analyzed with respect to data for severalorganizational variables also gathered in the survey.22

21There were six organizations that answered "no" to this question. Analyses below show re-sults for both the full sample and a sample that is adjusted to account for the organizationsthat had institutionalized labor contracts but did not view the labor relationship as havingtransformed in any significant way.

A question might be raised as to why the dependent variable in the study is the institution-alization of labor contracts on an organizationwide basis, rather than the percentage ofworkers on labor contract in each organization. First, ordinary least squares regressionsshow the same effects as the logistic equations (although the effect of the "Loser '90" vari-able is a little weaker in these regressions). The similarity across these models is not sur-prising, as those who have institutionalized the labor contract on an organizationwide basishave 100 for this variable, while those who have not institutionalized contracts on an or-ganizationwide basis have less than 100 for the variable. Second and more importantly, myconversations with managers indicated that the measure I have employed as the dependentvariable here is actually more relevant for the organizational decisions and practices sur-rounding labor contracts in China today. The important issue is whether or not managerschoose to spare their older workers (those who where employed by the organization beforethe labor contract emerged) from labor contracts. Those that choose to do so generally

474 Guthrie

where O( is the log of the odds that the ith organization will have institu-tionalized labor contracts on an organizationwide basis, Pt is the probabilityof this dichotomous outcome (yes = 1), ORG is a vector representing sev-eral general organizational characteristics of the firm, and GOV is a vectorrepresenting the governance of the organization. In this model, generalcharacteristics of the organization (ORG) will be a function of the sectorin which the organization is located, the size of the organization, the eco-nomic well being of the organization, and the property rights of the or-ganization. The overall governance of the organization (GOV) will be afunction of the type of the internal governance of the firm and the insti-tutional environment in which the organization is embedded. I estimatelogistic equations to model these effects. Table I presents the means, stand-ard deviations, and variable definitions for organizational data relevant forthis analysis.

Organizational size is measured as the natural log of the number of ac-tive workers employed by the organization; the term is logged because I ex-pect that the effect of size increasing at a diminishing rate. A variable called"employee ratio" is a simple ratio of the number of active employees to re-tired employees who are on a given firm's payroll. The purpose of this vari-able is to account for the number of retired employees an enterprise supportsin relation to the number of productive employees it supports. As the activeemployees are in the numerator, larger values for this variable indicate amore favorable situation for the organization. For example, a value of close

place only the new workers (those hired since 1983, the first year of the labor contract);those that choose not to spare their older workers institutionalize the labor contract on anorganizationwide basis. The problem with using the percentage of workers on contracts asthe dependent variable is that organizations vary with respect to the proportion of employeesthat are in this "older worker" category. For example, in my sample, in two organizationsrespectively, 20% and 70% of the workers where employed before the labor contract emerged(i.e., 20% and 70% are from the "old worker" category). Both of these organizations haveonly partially institutionalized the labor contract, and in both cases (as with all organizationsin this category), they have placed only their new workers on labor contracts. Although theorganizations have the same policy surrounding labor contracts, on the percentage scale, theyhave 80% and 30% of their employees on labor contracts. Thus the percentage measuredifferentiates where there are only differences in proportions not practices. These organiza-tions are enacting the same policy surrounding labor contracts, while those placing 100% oftheir workers on contract are enacting a different policy. For these reasons, I think the 100%practice is the more meaningful distinction with respect to labor contracts.


I view the general model for the institutionalization of labor contractsas:

476 Guthrie

Table I. Characteristics and Variables for Organizations from Four Industrial Sectors inShanghai, 1995"

Organizational characteristics100% of workers on labor

Year 100% lab. con.

Pet. of workers on lab. con.

Workers can be fired*

Organizational size

Organizational size (log)

Turnover (in millions)Turnover (log)Employee ratioc

Employee ratio (log)Profit ratioLoser '90

State ownedOrganizational governance

General manager's speciali-zation

Municipal bureau

Municipal company

District company

Mean

.679

1992.421

77.645

.926

1580.840

6.058

201.9276.058

38.346

1.691.070.235

.580

.444

.296

.296

.321

SD

.470

1.253

35.462

.264

3724.745

1.475

542.6531.475

131.797

1.669.085.426

.497

.500

.459

.459

.470

Definition

Dependent variable; 1 = 100% ofworkers on contracts labor contracts;0 = <100% on labor contract (lab.con.)

The year that 100% of workers wereput on labor contracts; averagetaken only of organizations thathave already institutionalized lab.con.

Percentage of workers on laborcontracts.

Sample control variable; organizationsthat answered "no" (N = 6) are notincluded in restricted sample.

Number of active (not retired)employees, year end, 1994.

Natural log function of activeemployees.

Gross income, year end, 1994, RMB.Natural log function of gross revenues.Number of active employees per

retired employee.Natural log function of employee ratio.Profits divided by size.Organizations that lost money in 1990;

dummy, 1 = loser.State-owned factory \guoyou]

Background of general manager;dummy, 1 = manager hasbackground in business managementor economics; 0 = engineering orno specialization.

Municipal bureau governance; dummy,1 = organization under municipalbureau jurisdiction, highestgovernmental level in data set.

Municipal company governance;dummy, 1 = organization undermunicipal company jurisdiction.

District company governance; dummy,1 = organization under districtcompany jurisdiction, lowestgovernmental level in data set.

"See text for discussion of the variables and data collection.*For contractual variables, all means and SDs were also analyzed for the sample of firms thatdoes not include the six firms for which manager asserted that workers could not be fired,regardless of their contractual arrangement; there were no significant differences betweenthose means and SDs and the ones presented in this table.

to 1 for this variable indicates that the firm is supporting just as many retiredworkers as it is active workers, a very difficult situation for an organization.It may be the case that firms with large burdens in terms of lifetime laborers(lower values), will be more likely to institutionalize the labor contract onorganizationwide basis to protect themselves from this burden in the future.Firms that were supporting no retired employees were assigned a value of 1retired employee to avoid undefinable terms (thus for organizations with noretired workers, the ratio is equal to the size of the organization). The vari-able is logged to pull in outliers. The employee ratio variable is very impor-tant in the analysis that follows for two reasons: first, the variable is a directmeasure of the burdens of lifetime employment for Chinese firms. The vari-able will highlight the association between burdensome employment situ-ations and the institutionalization of management strategies to deal withthese situations. Second, the measure is also an indicator or organizationaluncertainty—organizations with burdensome employment situations arelikely to be experiencing more uncertainty in the changing economic and po-litical environments of the economic transition. An association between thisvariable and the institutionalization of labor contracts will lend support tomy hypothesis that organizations that are experiencing extreme uncertaintywill be more likely to adopt new institutions that will help them deal with theuncertainty they are experiencing.

The economic strength of an organization may have an impact on organ-izational decisions surrounding labor relations, and I have included three vari-ables to capture this effect. The profit ratio of an organization is based on the1994 profits relative to the size of the organization. Loser indicates whether ornot an organization lost money in 1990. Like the employee ratio variable, theloser variable tests the hypothesis that firms experiencing extreme uncertaintywill be more likely to adopt institutional changes that will help them deal withthis uncertainty. The turnover of the organization is included in the analysis asanother way to account for the scale and scope of the organization. This vari-able is also logged, as it is likely that its effect increases at a decreasing rate.

There may be differences between the state and collective sectors withrespect to this institutional change. Therefore, the effect of ownership isalso included in the analysis by observing the effect of state ownership(guoyou qiye), as opposed to collective (jiti suoyouzhi) and other (qita suoy-ouzhi) ownership.23 Finally, it may be the case that the governing patterns

23Both state- and collective-ownership forms are actually owned by the "state"; the primarydifference has to do with where these organizational types are in the administrative hierarchy(Walder, 1995) and when they were formed. In this survey, state ownership \guoyou] iscorrelated with bureau control (the highest level of governmental control under municipaljurisdictions) at r = .388 (p < .01); collective ownership \jiti suoyouzhi} is correlated withbureau governance at r = -.287 (p < .01); state ownership is correlated with age at r =.601 (p < .01); and collective ownership is correlated with age at r = -.339 (p < .01).


and structures that organizations are situated in are critical for the eco-nomic decisions they make. I observe the effect of governance in two ways.As Fligstein (1987, 1990) has shown, institutional structure and action inorganizations is not only a function of the institutional environments inwhich firms are located, but structure and action are also dependent uponthe type of leadership within the firm. I look at both of these aspects ofgovei nance. First, I look at the internal governance of the firm by exploringthe background of the organization's general manager: if the general man-ager had an educational background that specialized in economics or busi-ness management—as opposed to engineering, general education, or nocollege education at all—the variable was coded appropriately. Second, Iexplore the effects of an organization's "administrative rank," a variablefirst explored by Walder (1992) in his study of the distribution of benefitsby organizations under China's redistributive system. This governance termis included in the equations as a dummy variable for governance by a city-wide municipal bureau (each sector is governed by a citywide bureau). Theeffect of governance by a citywide bureau is compared to governance bymunicipal and district companies two governance units that are lower inthe government's administrative hierarchy than citywide municipal bureaus.This final variable is critical for the analysis that follows for two reasons:first, the variable tests the extent to which the adoption of new institutionsby organizations is dependent on the institutional structure of state admini-stration. Second, the variable is an implicit test of theories of soft budgetconstraints. If the upper levels of the administrative hierarchy are not beingreformed as Walder (1995) has argued, then we should expect that firmsat this level of the former command economy would be less likely to adoptnew institutions that can be linked to organizational uncertainty.

Table II presents the models for the logistic regressions that explorethe factors associated with institutionalizing the labor contract on an or-ganizationwide basis. Model I tests the influence of several measures ofthe firm's economic well-being while controlling for sectoral and size ef-fects. Controlling for several organizational characteristics, there are no sig-nificant sectoral effects for implementing labor contracts on anorganizationwide basis. Profit ratio, turnover, and location in the "state-owned" sector do not show significant effects in this model.^4 The loser'90 variable, however, does show a statistically significant positive effect,indicating that organizations that lost money in 1990 were more likely to

24It is likely that the lack of significance of several of the variables is due to the low numberof cases (A' = 81). With a low number of cases, the focus of the analysis must be on ex-plaining the variables that are significant rather than on explaining the variables that arenot significant. Despite the fact that several variables are insignificant in the models, theyare important as controls to show that the significant findings are significant net of severalother organizational factors.

478 Guthrie


Table II. Logistic Coefficients for the Decision to Place 100% of Employees on LaborContracts for Organizations in Four Industrial Sectors, Shanghai, 1995"

Independent Variables

Organizational characteristics (chemicals omitted)Garments

Electronics

Foods

Active employees (log)

Employee ratio (log)

Turnover (log)

Profit ratio (profits/size)

Loser '90

State owned

Governance variablesMunicipal bureau

General manager's background(econ./bus. specialization)Constant

x2

Degrees of freedomMcFadden's Pseudo R*Number of cases

Model I

-4.497(12.163)-5.054

(12.164)-3.392

(12.169)-.014(.485)-.478'(.228).030

(.260).006

(.007).792^(.399)-.111(.409)

-

-

-3.331(12.517)34.0W

9

81

Model II

-5.871(17.489)-7.048

(17.497)-4.234

(17.490)-.755(.643)-.679*(.282).175

(.325).008

(.009)9S<?(.485)-.782(.590)

2.099^(.775).041

(.402)-1.305

(17.872)42.940^

11

81

Model III6

-5.994(17.562)-7.128

(17.871)-4.498

(17.866)-.754(.648)-.667e

(.283).135

(.321).009

(.009).91 Y(.486)-.816(.590)

2.17/(.811).126

(.413)-.876

(18.237)42.048'

11

75"See text for discussion of variables.frln this model those firms (N = 6) for which the manager asserted that individuals wouldnot be fired even though the organization had instituted the labor contract for all workerswere omitted. Thus Model III is based on a sample size of N = 75 instead of N = 81.

cMcFadden's Pseudo R2 is calculated as 1— \nL(B)/lnL(a) where InL(B) is the log-likelihoodof the full model with all variables included and no restrictions, and lnL(o) is the log-like-lihood of the intercept model.

dp < .1, two-tailed test.ep < .05, two-tailed test.fp < .01, two-tailed tests.

implement labor contracts on an organizationwide basis than organizationsthat did not lose money in 1990. The significance of this variable indicatesthat the group of firms institutionalizing the labor contract were in eco-nomically more unstable situations in the early part of the decade.25 The

25It is likely that those firms are still in economically unstable situations, as the Loser '90variable is highly Correlated with the Loser '94 variable (r = .803, p < .01).

fact that firms that were in poor shape economically were more likely toimplement labor contracts for all employees supports the idea that somefirms were using labor contracts as a form of protection against the eco-nomic burdens of lifetime employment. Lifetime employment of large workforces (both active and retired workers) is among the greatest burdens en-terprises are experiencing in the economic transition, and organizations thatare in poor financial shape are barely able to stay afloat precisely becauseof labor costs. Thus when the institutional opportunity of ending lifetimeemployment arose, firms began to take advantage of the opportunity inaccordance with their economic health. Firms that were closer to the brinkof bankruptcy (which is becoming increasingly possible in China as eco-nomic responsibilities are turned over to firms and as other institutionalchanges such as the Bankruptcy Law [PRC, 1986d] are forged) ended life-time employment throughout their enterprises. Firms that were in bettershape financially have not implemented the labor contract throughout theirenterprises, allowing some of their working population to remain as lifetimeemployees. Consistent with this finding, the employee ratio, the variablethat assesses the impact of the retired labor burden on an organization'sdecisions regarding the labor contract, shows a significant negative effectin this model. Like the positive effect of losses, the effect of the employeeratio is important for making clear the relationship between the economicsituation of a given organization and its decision to institutionalize changesto the labor relationship in the firm. With the number of retired workersin the denominator of the ratio, the employee ratio is set up such thatlarger values mean a healthier ratio of active (productive) to retired work-ers; small values indicate that an organization is supporting as many ormore retired workers than there are active workers in the factory. Thenegative association between this variable and the organizationwide adop-tion of the labor contract indicates that firms that have more healthy (lessburdensome) employment ratios are less likely to take advantage of thisinstitutional change and completely shift the nature of the labor relation-ship. This makes sense because it is the firms that are most weighed downwith labor burdens—especially labor burdens relating to lifetime employ-ment (i.e., retired workers)—that are most interested in changing the na-ture of the labor relationship completely. Firms that have very low ratiosof active to retired workers are more likely to institutionalize labor con-tracts on an organizationwide basis; those that have higher ratios are lesslikely to adopt labor contracts across the organization. In sum, these effectsindicate that organizations that are doing worse financially and those thathave overwhelming burdens of retired workers are significantly more likelyto take advantage of an institutional opportunity to implement the labor

480 Guthrie

contract on an organizationwide basis and, in effect, change the nature ofthe labor relationship completely.

Model II adds two governance variables to the equation, one assessingthe impact of internal governance and leadership, the other assessing thegovernance environment in which an organization is situated. There is nota statistically significant effect of internal governance—measured as thegeneral manager's area of specialization—for the implementation of thelabor contract on an organizationwide basis. There is, however, a statisti-cally significant positive effect of location under the jurisdiction of a city-wide municipal bureau, relative to all other levels of governance in urbanareas. This effect indicates that organizations directly under high-level gov-ernmental offices are more likely to adopt the labor contract on an organi-zationwide basis than organizations under governmental offices that are atlower levels of the governmental administrative hierarchy, namely munici-pal and district companies. A few important aspects of citywide bureaugovernance are relevant for explaining the positive effect it has on adoptinglabor contracts. These must be viewed in context of the fact that economicand administrative responsibilities are being pushed down the hierarchy ofthe former command economy.

In general, I interpret the significance of bureau governance for theinstitutionalization of labor contracts on an organizationwide basis as sup-port for the view that firms at the upper levels of China's administrativehierarchy are experiencing a good deal of uncertainty in the reform era.And the economic strategies and practices they adopt reflect the uncer-tainty they are experiencing in the economic transition. These findings arevery consistent with results reported in an earlier study from the same dataset, in which I showed that organizations in the upper levels of China'sadministrative hierarchy are adopting economic strategies (namely diversi-fying assets) to help them deal with the uncertainties they are experiencingin the economic transition (see Guthrie, 1997). Thus, contrary to Walder's(1995) hypothesis (which was based on slow gains in productivity in thissector of the economy), firms at the upper levels of China's command econ-omy are experiencing the reform directly (i.e., they are not being protectedfrom the reforms), and they are adopting economic strategies to help themdeal with the uncertainty they are experiencing. If firms were still operatingunder soft budget constraints, as Walder has hypothesized, what would bethe incentive for them to adopt economic strategies that are clearly linkedto uncertainty in China's emerging markets?

Citywide municipal bureaus occupy the highest level of governance inmunicipal areas. In a given sector, the municipal bureau presides over thesector, which is made up of factories and administrative companies. Mu-nicipal and district companies are governmental offices that have direct


jurisdiction over enterprises. As the heads of sectors, citywide bureaus haveindirect jurisdiction over municipal and district companies. But, like ad-ministrative companies, bureaus also have direct jurisdiction over some en-terprises in the sector. Under the command economy, bureaus controlledvirtually all economic and administrative decisions for all enterprises andadministrative companies in the sector. As economic and administrative re-sponsibilities have been pushed down the hierarchy of the former commandeconomy, two factors have made bureau governance unique (for more ex-tensive discussion, see also Guthrie, 1997, 1999). First, while enterprisesunder the jurisdiction of administrative companies still have a governmentaloffice that is responsible for the administrative and economic responsibili-ties of their jurisdiction, enterprises directly under the jurisdiction of bu-reaus no longer have a governmental office to shield them from theeconomic responsibilities of the market economy. Under the old system,administrative companies were simply another "layer" of governmental bu-reaucracy; they were the "governmental funnels" (zhengfu loudou) that car-ried out the bureau directives in the enterprises directly under theirjurisdictions. In recent years, they have themselves taken on the economicand administrative responsibilities of the enterprises under their jurisdic-tions. So what was just another layer of governmental bureaucracy underthe old system has acted as a buffer under the new system. The economicand administrative responsibilities that rested in the hands of bureaus underthe old system were passed down to administrative companies that havetaken a pro-active approach to guiding the enterprises under their juris-dictions through the reform. Enterprises directly under the jurisdiction ofbureaus have had no such luxury: when economic and administrative re-sponsibilities were pushed down the hierarchy, the enterprises themselveswere suddenly directly responsible for economic decisions in a rapidlychanging marketizing system.

The result of this difference between enterprises under citywide bu-reaus and those under administrative companies is that enterprises underbureaus experience the economic reforms much more directly than thoseunder municipal and district companies. They are directly responsible foreconomic decisions, and there is evidence that budget constraints are beinghardened for enterprises at this level of the administrative hierarchy (seeGuthrie, 1997). Further, as these firms are set adrift by the state, they canno longer count on a state office to bail them out should they experiencea shortfall and be unable to meet costs. As a result, firms at this level ofthe administrative hierarchy are more likely to take advantage of institu-tional changes that can assuage the changes of the economic transition. Asthe discussion above indicates, labor contracts, because they offer a solutionto the burden of lifetime employment, are one such institutional change.

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As enterprises directly under the jurisdiction of bureaus are themselves re-sponsible for all economic responsibilities in the transition, the end of life-time employment becomes a very meaningful part of the economic reform.Enterprises that are fully responsible for managing the reforms themselvesare experiencing much more unstable worlds than those that are still beingadministered by governmental offices—they have a much stronger sense ofbeing set adrift by the state—and they are taking advantage of the insti-tutional reforms of the economic transition that are changing the labor re-lationship in a way that is favorable to them.

The second aspect of citywide bureau governance has to do with thevariation in size of governmental jurisdictions at different levels of the ad-ministrative hierarchy and the ways in which this affects monitoring andthe implementation of state-mandated institutional changes. The jurisdic-tion of firms that municipal bureaus have direct control over is much largerthan those of municipal and district companies. In the sample of firms sur-veyed for this study, the size of jurisdictions for firms under municipal bu-reaus ranged from 100 to over 400 factories in a jurisdiction; municipalcompany jurisdictions ranged in size from 8 enterprises to 40 enterprises;and district company jurisdictions ranged in size from 3 enterprises to 10enterprises. Some scholars have argued that monitoring may be more ef-fective at lower levels of the administrative hierarchy where jurisdictionsare smaller and there are fewer firms to keep track of (Walder, 1995;Guthrie, 1997). The argument here is that the fewer firms a governing or-ganization has under its jurisdiction, the more time and administrative re-sources the governing organization will be able to spend on a given firmunder its jurisdiction. The important point again is the extent to which agiven firm experiences a sense of being set adrift in the economic transition.For bureaus, with direct jurisdiction over more than 100 firms, they do nothave the time or administrative resources to help guide organizations undertheir jurisdictions through the economic transition. These firms are left ontheir own in the period of economic reform, and having been among themost protected firms in the economic transition, this change comes with agreat deal of uncertainty. Consequently, these high-ranking firms areamong the first to adopt new strategies that help them deal with the eco-nomic transition.

Model III excludes the six organizations that had implemented the la-bor contract on an organizationwide basis, yet did not see the change ashaving a major impact on the labor relationship (i.e., the interviewee didnot believe the labor contract allowed them to end lifetime employment).This model reproduces almost exactly the results displayed in Model II.This model raises the confidence in the findings reported above, becauseall organizations included in this model answered in the affirmative to the


question of whether or not the labor contract marked the end of lifetimeemployment and whether or not relationships with workers could actuallybe terminated as a result of the labor contract.

DISCUSSION

The results presented above suggest that, like organizations in othereconomic transitions (see Stark, 1996) and like organizations in the earlyand middle part of this century in the United States (see Fligstein, 1990),Chinese organizations that are experiencing uncertainty adopt new institu-tional practices to help them deal with those uncertainties. In the case Ihave presented above, firms experiencing extreme uncertainty in China'stransition take advantage of a new institution forged at the state level thatallows firms to end lifetime employment. Other research on organizationaluncertainty in China's economic transition has distinguished between eco-nomic uncertainty and administrative uncertainty (Guthrie, 1997), andthose categories are relevant for this study as well. For economic uncer-tainty, firms that are in poor financial shape in the economic transition aremore likely to adopt labor contracts across the firm; similarly, firms thathave onerous burdens of retired workers are more likely to adopt laborcontracts across the organization. With regard to administrative uncertainty,those organizations that are under the jurisdiction of municipal bureaus,as opposed to municipal or district company governance, are more likelyto implement labor contracts across the firm because, as economic and ad-ministrative responsibilities are shifted down the hierarchy of the formercommand economy, it is these firms that are experiencing the reforms mostdirectly, relative to firms under lower level administrative offices shieldedfrom the reforms by an additional layer of governmental bureaucracy. Asa result, firms in these situations are embracing an institution that marksthe end to the socialist institution of lifetime employment.

At this point, I have presented evidence for why firms are adoptingthe labor contract as an institutional change. There are economic and po-litical reasons for this. However, the situation also begs the opposite ques-tion: given that the labor contract offers organizations the possibility ofending lifetime employment—a possibility that can only have positive eco-nomic results for firms—what would be the incentive to not take full ad-vantage of this institutional change? In other words, for the organizationsthat are not implementing the labor contract on an organizationwide basis,what are the reasons behind their decision to allow some of their workersto avoid labor contracts? In a time when budget constraints are being hard-ened for all firms in China's transitional economy, what are the reasons

484 Guthrie

for organizations allowing some workers to stay on as permanent lifetimeemployees, given that there is no economic incentive for them to do so?

The first distinction that becomes clear regarding the decision to notimplement labor contracts has to do with a worker's age and tenure in anorganization (which are highly correlated). New workers, particularlyyoung, new workers are almost always the first to be put on labor contract.This is especially true for workers that have been hired after the organi-zation began using labor contracts. Older employees that were part of theorganization before the institution arose are most often the ones allowedto remain on as long-term employees in cases where the organization hasdecided not to adopt contracts across the organization. As one managerin a firm in the electronics sector explained,

We have about 20 percent of our employees on labor contracts. Of course the newpeople all sign the contracts; this is a requirement of working here now for newemployees. But the older workers are not the same as the newer workers; they arenot in the same situation. They have been here a long time, and it's not really fairto just say, "Now you have to sign a three or five year contract." We're havingthem sign contracts a few at a time . . . .

This statement not only points to the distinction between old and newemployees with respect to labor contracts, but it also points in the directionof the reasoning behind the distinction.

Basically, there are two factors that come into play in firms' decisionsto not implement labor contracts on an organizationwide basis. The firsthas to do with loyalty and past patron-client relationships. As Eswaran andKatwol (1985b) have argued, factors such as loyalty and monitoring costsmust also be figured into the equation of labor relations. Walder (1986)showed that pre-reform China was based on a system of clientelism andpatron-client relations. In these relationships, managers developed rela-tionships with their employees, and loyalty was rewarded through benefitsand favoritism in the firm. The discussions of loyalty in relation to sparingolder workers from labor contracts suggest that these relationships still mat-ter, even as the institutional structure of labor relationships are changingin the economic transition. In China today, where firms can afford to doso, they reward years of loyalty and honor these past relationships by al-lowing workers to stay on as lifetime employees. If the firm is not con-strained economically, or in general, if the organization is not experiencingextreme uncertainty (administrative or economic), managers do not see itfitting to simply break off what has been a long term patron-client rela-tionship when it becomes institutionally possible. Thus, if the firm can af-ford to do so, it rewards the loyalty and clientelism of past relationshipsretroactively. As one manager in the garments sector put it,

Of course the simplest thing would be to put everyone on contract and not beresponsible in the long term for anyone. But it is not so easy to do this. The labor


contract system really only started in 1990 [for us]. Virtually all workers who startedworking after this time have been put on contracts. But what do we do with workerswho have been working for our company for so many years of their lives? It's notfair to just say to them now: "OK, now you have to sign a contract." It's complicated,and we have to look at it on a case by case basis. We have to take care of theworkers that have been with us for so many years of their lives.

As this manager makes clear, the relationships and the feeling that theolder workers have given years of loyalty to the organization factor intothe decisions surrounding changes in the labor relationship. A manager inthe electronics sector echoed this way of thinking as he explained the de-cision to only partially institutionalize labor contracts in the organization:

There is a historical reason for this way of doing things. For our older workerswho haven't reached retirement age yet, people who are in their fifties and arestarting to get old and tired, it's really not fair to just put them on contracts. Manyof them have been working for this factory for 20 or more years; they have spentmost of their lives working for this factory, but they just haven't reached retirementage yet. To suddenly put these people on labor contracts would be cruel. Suddenlythey would have no retirement security; that would be very unfair to them . . . .It's no way to treat people who have been working for you for so long.

Second, in the case of China, it is not only loyalty that matters formaintaining labor relationships that are most favorable for the worker (i.e.,lifetime employment), but socialist ideology and a sense of equity also playinto the economic equation of labor relations and contractual outcomes.Although enterprises are experiencing a market economic system and theconstraints such a system places on them, managers still speak the socialistlanguage of doing that which is "right for the workers," and making deci-sions that are fair. They talk about a commitment to a socialist system andtaking care of their workers, even as the government sets forth new insti-tutions that are much more reflective of a market economic system. Asone manager in the garments sector explained,

We only have about 50 percent of our workers on labor contracts, because about50 percent of our workers came over from the original factory. All of the workerswho were already employed in the old factory were not put on labor contracts, andall of the newly hired workers were put on labor contracts. Many of these oldworkers are nearing retirement age, and they have been working for the factoryfor many years. It wouldn't be fair to suddenly put them on contracts, just beforethey are about to enter re t i rement . . . . It is a heavier burden for our factory, butin these kinds of situations we have to do what's right for the workers. So we onlyput the new workers on labor contracts, and the workers who have been here fora long time and are expecting retirement benefits will still get them.

One manager's tone approached that of defiance in the face of the gov-ernmental mandate that enterprises comply with the state-mandatedchange of adopting contracts throughout the enterprise:

We have the new workers that have come into the factory over the last few yearssign contracts. But there is no need or reason for the older workers to sign. Theolder workers were already here for many years before we ever started this labor

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contract policy. It wouldn't be really fair for us to just make them sign contractslike the new workers. They would feel like they've been working here for all thistime and suddenly the factory says you can stay for a fixed amount of time. Butnow the government has this rule that all workers are supposed to sign laborcontracts. Since we think it's not fair for the older workers, we only follow this rulefor the newer workers in the factory. Our older workers are staying on as permanentemployees.

What is at stake here—and it is the source of the tension surroundingthe emergence of labor contracts—is the previous model of socialism withthe factory as the central organizational structure in that system. The lan-guage of fairness to and taking care of workers that have given years ofservice to the enterprise indicates that, for enterprises that choose to allowsome workers to remain on as permanent employees, the economics ofdecision making extend beyond profit measures and productivity outcomes.When organizations can afford to, they reward loyalty and patron-clientrelationships that were in place prior to the economic reforms. Managersin these organizations resist the institutional changes of the economic tran-sition, choosing instead to maintain a focus on the socialist system and thatsystem's commitment to taking care of workers, continuing to support work-ers in the name of socialist ideals.

CONCLUSIONS

As the data for this study were gathered in four industrial sectors ofone large industrial city in China, the results should not be overstated.However, given that the survey is a random sample of organizations inthose sectors, at the very least, the results of the study can be inferred tothe broader sectors from which these organizations were drawn. In addi-tion, the sectors and research site were selected purposively to capturetrends that are currently occurring in important areas in industrial China.In a number of ways, Shanghai, one of the largest cities in China(Chongqing is officially larger in terms of population), is a step ahead ofmany other cities and regions in the implementation and incorporation ofmany of the changes of the market reform.26 But the trends that are cur-

26Managers and officials often refer to Shanghai as the "head of the dragon" [Shanghai shilongtou] when discussing institutional changes and trends across China. The idea, accordingto these managers, is that Shanghai is in the forefront of development in China in manyways. In addition to Shanghai having a higher proportion of workers on labor contracts(the subject of this study) than any other province or municipality, among cities in 1990, italso was second only to Guangzhou in terms of the number of foreign contracts signed andfar outpaced all cities (including Guangzhou) in terms of the amount of foreign capital thatwas actually used; it had the highest GDP, the highest rate of consumption, the most de-veloped service sector, and led China in many other categories (SSB, Zhongguo chengshitongji nianjian 1990).


rently occurring in industrial Shanghai are trends that the rest of Chinawill likely face.

Labor contracts in industrial China mark the end of a socialist institutionthat has been the hallmark of the Chinese work unit system: lifetime employ-ment. Organizations adopt this institutional change in accordance with theconstraints and uncertainties of their social and economic environments. Myanalysis focuses on the specific institution of labor contracts to show that, inChina's economic transition, economic actors (in this case firms) respond toconstraints in ways that are explicable from the perspective of general organ-izational theories. Without descending into the assumption that the economicsystem in China is converging with Western capitalist forms (for discussion,see Parish and Michelson, 1996; see also Sachs and Woo, 1997), it is never-theless useful to think about how organizations act in similar ways acrosssocieties. For example, a general message of organizational theory is thatfirms respond to uncertain environments by adopting new practices and newinstitutional forms (Fligstein, 1996b). Empirically, we can see that this is truein societies as different as Hungary (Stark, 1992), the United States (Flig-stein, 1990, 1991), and China (Guthrie, 1997).

The decision to institutionalize labor contracts on an organizationwidebasis and thereby end lifetime employment for all workers in the firm is afunction of the economic uncertainty (as indicated by the significance oflosses in 1990 and the proportional size of the retired work force for whichthe organization is responsible). Organizations in more difficult economicsituations are significantly more likely to adopt labor contracts across theorganization, thus making use of the institutional opportunity to end life-time employment. Fitting with theories of political sociology and path de-pendency, the institutional structure of state administration also mattersfor the decisions and practices that organizations adopt over the course ofthe reforms (Stark, 1992, 1996; Walder, 1992, 1995; Fligstein, 1996b). Thedecision to implement labor contracts on an organizationwide basis is afunction of the level of governmental administration that presides over agiven enterprise, as organizations under municipal bureaus are significantlymore likely to institutionalize labor contracts on an organizationwide basis,and firms under the jurisdiction of administrative companies are less likelyto do so. One factor that may lie behind this effect is that, as economicresponsibilities are pushed down the hierarchy of the former commandeconomy, firms under the jurisdiction of municipal bureaus are experienc-ing the reforms more directly than those under municipal and district com-panies. As a result, with less governmental support (and less ability to counton funds from state coffers), firms at the upper levels of China's commandeconomy are experiencing a kind of administrative uncertainty (Guthrie,1997), and they, like the economically uncertain firms, are more likely to

488 Guthrie

take advantage of the institutional reform that allows them to end lifetimeemployment. Contrary to predictions of lingering soft budget constraintsfor firms that are close to the central government (see Walder, 1995), thefirms that were protected the most under the command economy (see Wal-der, 1992) are now experiencing the greatest sense of being set adrift inthe economic transition; they respond to this sense of being set adrift—thisadministrative uncertainty—by adopting new institutional strategies thathelp them assuage the burdens of the socialist employment system.27 Inthis sense, for both economically and administratively uncertain firms,adopting the system of labor contracts on an organizationwide basis is away of hedging their bets against an uncertain future. These findings offerstrong support for what has been labeled "state-centered" analysis (e.g.,Walder, 1995; Oi, 1992; Lin, 1995). Nee chastises "state-centered analysis"for "focusing almost solely on change in the state organizational hierarchy"(Nee 1996:945). But if state-centered analysis has focused too much atten-tion on the state organizational hierarchy, it is because this is the mostimportant institution of the most important part of the economy (the in-dustrial sector). In my own research on firms in Shanghai (see Guthrie,1997, 1999), time and again a firm's position in this industrial hierarchymatters, net of other effects, for how that firm experiences the transition.

A final finding with respect to labor contracts emerges from the viewsof the managers interviewed in my study: in firms that are not experiencinga great deal of uncertainty, the managers prefer to keep some elements ofthe old system intact. In organizations that are financially and administra-tively stable, managers protect their older workers from the personal un-certainty of the labor contract by rewarding loyalty, maintaining "clientelist"relationships that were established prior to the period of reform, and es-pousing socialist ideals of supporting workers over the profit motive. Inone revealing interview, a general manager of a medium-sized firm in theelectronics sector proclaimed, "I'm not interested in profits [literally: 'Idon't do profits'—wo buzuo lirun]. My goal is to raise the living standardof my employees as much as possible. So when we have an excess, I usuallyjust re-invest part of the money in the factory and distribute the rest ofthe money evenly among the employees."28 Statements such as these indi-cate that managers in China have their own ideas of how organizationsshould be run, ideas that diverge significantly from the classical ideals ofprofit maximizing economic actors.

27Once again, the question here is, If organizations were still operating on soft budget con-straints as hypothesized, what would be the incentive for these firms to adopt an economicstrategy that is clearly linked to organizational uncertainty?

28It was also revealed in the interview that the general manager's salary was only slightlyhigher than that of the average worker in the factory.


Nee (1989, 1991, 1996) posits that market forces and marketlike situ-ations are emerging across China's transition economy. Where the spirit ofNee's view seems most clear is in the fact that market-driven decisions andpractices (such as replacing lifetime employment with labor contracts) arebecoming an integral part of the strategies adopted by many economic actorsin the economy. However, based on my analysis of labor contracts and otherfindings (see Guthrie, 1997), I would argue that this shift to market action isnot necessarily driven by "the pursuit of power and plenty by economic ac-tors" (Nee, 1996:945). Rather, the movement to market practices is beingdriven primarily by uncertainty. Organizations (and the managers that runthem) are experiencing various degrees of administrative and economic un-certainty in the face of hardening fiscal constraints, and they are adopting arange of strategies (placing workers on labor contracts, diversifying assets) todeal with their uncertain situations. Among managers that are not experienc-ing uncertainty, many reject the blind pursuit of profit maximization, appar-ently more interested in a mixed economy that places personal relationshipsand socialist ideology on par with profit maximization. Ironically, the organi-zations that are experiencing the most stability in the economic transition(through strong performance and close relationships with governmental of-fices) are the least likely to resemble firms in market economies.

Walder's (1986) early work made clear the centrality of clientelist re-lationships in the China's pre-reform factories. In many ways, given theimportance of these relationships in pre-reform China, it is not surprisingthat the patron-client relationships would still be important even in theface of new market institutions. The views of the managers interviewedover the course of the data collection for this study make clear that thereis still significant commitment to the relationships that were formed underthe system prior to the economic reform. The managers spoke of fairnessand years of commitment to the enterprise and the ideals of what was rightin a system that looks first to protect workers. In some cases, they alsospoke in defiance of the idea that they should accept the government man-date to incorporate these market-oriented institutional changes and therebydisavow the relationships that were forged over many years prior to theeconomic reform. If an organization is not constrained economically, thecommitment to these clientelist relationships appears to be the crucial fac-tor in the survival of a socialist institution that is being discarded for theburden it lays upon struggling firms.

At the same time, the fact that many of these same firms are adoptinglabor contracts for their new workers also suggests a wave of change thatwill follow the market reforms, yet it is a wave of change that, for manyfirms, is contingent upon the existence of no prior relationship with theworker. Workers that were loyal through years of service to the organization

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are rewarded with continued support through this system even as the or-ganizations are no longer required to provide such support. For workersthat have no history with the organization, organizations offer no guaran-tees about the new workers' futures with the factory. Lifetime employmentwill eventually end for all organizations in China's economic transition, butit is not because the state says it should end. Economic actors choose howand in what ways they will incorporate institutional changes, and the laborcontract is no exception in this. It is because as old workers are replacedby new workers, they new workers will be put on labor contracts from thetime they enter the firm, and there will be no conflicts of past relationshipswith managers or years of service to the organization in an age of lifetimeemployment to stop this from happening. As the workers of China's workunits grow old, retire, and die, so too will the system of lifetime employ-ment. The situation of labor contracts in China today illuminates the ten-sions among growing economic constraints, long-term personalrelationships in work units, and a still extant socialist ideology that inevi-tably arise in periods of economic reform. It is precisely these tensions thathave given rise to the mixed economy of reform-era China.

ACKNOWLEDGMENTS

The research for this study was supported by the Social Science Re-search Council and the American Council of Learned Societies with fundsprovided by the Ford Foundation and a University of California at BerkeleyVice Chancellor's Research grant. Administrative support was provided byZhao Nianguo and Li Yihai of the Shanghai Academy of Social Sciences.I would like to thank three anonymous reviewers for extensive comments.I would also like to thank Sivan Baron, Neil Fligstein, and Tom Gold forcomments and support on earlier drafts and throughout the research.

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