The Emergence of Informal Sector and the
Development of Informal Economy in
China’s Transition: A Historical Perspective
(1952-2004)
Angang Hu
Center for China Study
Chinese Academy of Sciences
Tsinghua University
May, 2006
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I. Introduction
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I. Introduction
China employment model is experiencing
a process of large scaled Informalization.
The Chinese academic circles have made
useful explorations into this process and
resulted in a number of basic consensus.
But still, there are a lot of problems that
need in-depth discussions.
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I. Introduction
 The core problems discussed here are:
 What changes, on earth, does the urban Informal
employment undergone since the founding of the
People’s Republic of China? What scale did it reach
during different periods of time?
 What changes has the output value of urban Informal
economy undergone? What are its contributions to the
non-agricultural GDP during different periods of time?
What has contributed to these changes?
 How have the Informal employment and sectors of the
economy changed since reform and opening up,
especially since the beginning of the 1990s?
 What scales have the urban self-employed, private
businesses and rural migrant workers reached?
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I. Introduction
 What are the changes in the contribution by the
Informalization of different players of the economy to
economic development?
 What are the most prominent features of China’s
transition? What uniqueness such transition exhibits
as compared with other transitional economies?
 What are the relations between “Informalization” of
employment model and different economic transitional
models?
 What roles have state policies, as institutional
arrangements, played during different periods of time?
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I. Introduction
 Our main discoveries are:
 China’s urban Informal employment has assumed a trajectory of
U turn – first plummet, then gradually rise – from the time of the
founding of New China to the present.
 The same is true with the changes in the proportion of urban
non-Formal economy in the non-agricultural GDP.
 In the process of such U-curve since the 1990s, the movement
of rural labor encouraged by a series of government policies has
reached an unprecedented scale, making the most contributions
to the rise of the U curve.
 Correspondingly, China’s public sector (or traditional Formal
sector, such as state-owned and collective units) has assumed a
reversed U-curve development (See attached figure 1-4).This is
a true reflection of the transition from “nationalization” to “denationalization”, where policy guidance and institutional
arrangements have played a prominent role.
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I. Introduction
 Besides, China’s urban Informal employment has
developed rapidly since reform, especially since the
beginning of the 1990s to become the main channel for
creating new jobs and a fundamental motive force for
accelerating urbanization.
 In 1990-2004, China’s urban new employment was 94.35 million,
averaging an annual growth of 3.2%.
 In the same period, the urban Informal employment increased by
125.55 million people, 133% of all the increased employment,
averaging an annual growth of 12.5%, the fastest growth in the
world. This has also revealed why China’s economic growth is
the fastest in the world.
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II. Analytical framework
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Beginning of Transition
P
r
o
p
o
r
t
i
o
n
o
f
E
m
p
l
o
y
m
e
n
t
Planned Economy Period
Beginning of Founding
of New China
Late Period of
Transition
Middle of Transition
Employment in Public Sector
Employment in Informal Sector
Employment in Newly-Rising Sector
失业
Unemployment
Transitional stage
Figure 1 Correction of Employment Structure in different
sectors
III. Informal employment in China
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III. Informal employment in
China
 What is Informal employment?
We defines informal employment as incorporating
three kinds of people: the people employed by private
enterprises in cities, self-employed and employees,
mainly rural migrant labor in informal employment not
covered by national statistics. The former two have
statistical data while the last one lacks statistics. The
authors use the difference between total employment
and employment covered by statistics as the
estimated figure.
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Table 1 Comparison of Chinese and Foreign Informal Sectors
Main features of foreign informal sector
Main features of Chinese informal sector
Belonging to the biggest part of
unregistered or recorded by official
statistics，with simple organizational
setups，easy to get into and operate，with
a low level of capital, income and labor
productivity，usually engaging in dispersed
and small scale activities.
It refers to self-employed and private sector
and unregistered rural migrant workers,
with relatively simple organizational
structure, easy to get into and operate.
Compared with traditional service industry，
the rising industries, such as information
industry，their technical level, labor
productivity and income are high.
For the purpose of survival and get jobs
rather than for profit maximization.
For the purpose of survival and getting jobs,
mostly not seek profit maximization. There
are also traditional social and cultural
factors.
Labor relations based on ad hoc or kinship Social relationship based partly on kinship
and individuals and other social relationship and individuals and partly on labor service
instead of on legal contractual relationship. contractual relations.
Not subject to government regulation and
management，not recognized, supported,
protected and managed by the government
and sometimes subject to interference and
curtailment by the government as illegal
activities.
Source: Tabulated by the authors.
Subject to the regulation and management
by the government, encouraged, supported
and managed by the government, different
from illegal activities. It is treated as part of
the national economy and encouraged to
develop together with formal sector of the
economy.
III. Informal employment in
China
Figure 2 Employments of Different Sectors in Cities (1949-2004)
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III. Informal employment in
China
A. Changes in employment model – Analysis of the
general situation of informal employment
 First, the urban informal employment assumed a high-speed
growth, far outgrowing the urban employment.
 Second, informal employment is the biggest contributing factor to
urban employment growth. It has also offset the number of jobs
destroyed by traditional formal sectors.
——China’s informal employment has increased rapidly since 1995
and the number of jobs created has far exceeded those
destroyed by traditional formal sectors and that is the main
factor accounting for the net increase in urban employment.
 Third, the proportion of informal employment in the total urban
employment rose rapidly, with the employment structure going
irregular.
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Table 2 Contributions by Urban Informal Employment Growth to Newly Increased
Employment （1949-2004）
Urban
employment
Informal employment
Total
Self-employed
Private
Unregistere
d
Growth multiples(1949=1)
17.27
15.23
3.48
10.11
－
Growth multiples(1990=1)
1.55
5.21
4.11
52.53
4.33
Average growth（％）（1949
－2004）
5.87
22.72
17.36
4.14
－
Average growth（％）（1990
－2004）
3.2
12.51
11.17
34.38
11.04
Contributions 1949－1956
to new
1956－1963
employment
1963-1978
（％）
1978-1990
100.00
-68.56
-48.49
-20.07
－
100.00
13.17
13.35
-0.19
－
100.00
-4.40
-4.40
0.00
－
100.00
39.44
7.96
0.76
30.73
1990-2004
100.00
133.07
20.21
31.13
81.73
1990－1995
100.00
38.27
47.32
21.41
-30.47
1995－2000
100.00
190.15
14.01
19.04
157.09
2000－2004
100.00
119.48
11.58
51.90
56.00
III. Informal employment in
China
B. From “informal” to “formal” and back to “informal”
– analysis of informal employment in different
sectors of the economy.
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1949
1958
1965
Urban self-employed
1972
1979
Urban private
1986
1993
2000
Uncovered by statistics
Figure 3 Proportion of Urban Informal Employment in Urban Employment（1949－2004）
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IV. Analysis of the General Situation of
China’s Informal Economy
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IV. Analysis of the General Situation
of China’s Informal Economy
 This paper defines urban informal sectors as
(1) individual economy, which mainly refers to individuals
engaging in industrial and commercial operations whose
total production value created is incorporated into the
national statistics. But due to its high flexibility in
management, it falls into the category of partially
covered by statistics;
(2) Private sectors, which refer mainly to medium-sized and
small enterprises that are basically covered by national
statistics;
(3) Economies not covered by national statistics, especially
the part that employs rural labor that is not covered by
official statistics (See Table 3). This means that China’s
GDP figures is far lower than its real value.
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Table 3 Comparison of Chinese and Foreign Informal Economy
Foreign
Chinese
Scope
OECD：Unobserved economy;
US IRS：Economy not declaring legal and nonlegal income；
US GAO：Economy escaping measurement and
observation；
Feige（1989）：Cost ignored in property right
relations, business license, labor contract, fiscal
credit, social security; activities not protected by
management principles and law.
（1）Self-employed；
（2）Private economy;
（3）Unobserved economy.
Source of
employm
ent
（1）Mainly foreign immigrants，such as in the
USA；（2）Mainly local women and children，
such as in Italy；（3）Domestic migrants，such
as Latin American countries.
（1）Individuals engaged in
industry and commerce；（2）
Medium-sized and small
enterprises；
（3）rural migrant labor.
Governm
ent
attitude
Pays little attention and sometimes regards it as
illegal economy.
Encourages, support and
manage it so that it develop
simultaneously with the
formal sectors.
Source: Tabulated by the authors.
IV. Analysis of the General Situation
of China’s Informal Economy
Since reform, especially since the beginning of the 1990s,
China’s informal sector has exhibited the following
characteristics:
 First, the growth of urban informal sector has far
exceeded that of the national non-agricultural economy
(even higher than the national economic growth),
creating a world economic growth record.
 Second, the high-speed growth of urban informal
sector has made increasingly big contributions to
national new non-agricultural GDP to become one of
the most important sectors of the national economy.
 Third, the informal economy has developed rapidly,
with its proportion in non-agricultural GDP rising
steadily to 1/3 in 2004
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Table 4 Output Growth of Urban Informal Sector to National New Non-agricultural
GDP （1952-2004）ª
NonOutput value of informal sector
agricultura Total
SelfPrivate
Unregistered
l GDP
employed
Growth multiples(1952=1)
72.38
33.18
13.09
37.41
－
Growth multiples(1990=1)
4.12
16.63
27.86
124.34 b
13.55
Average growth（％）
（1952－2004）
9.09
22.43
21.43
8.49
－
Average growth（％）
（1990－2004）
10.67
22.57
18.44
43.46 b
22.76
Contributio 1952-1956
ns to new
1956-1963
employment
1963-1978
（％）
1978-1990
100.00
-123.18
-86.69
-36.48
－
100.00
66.86
68.31
-1.45
－
100.00
-2.52
-2.52
0.00
－
100.00
14.15
6.69
0.63
6.83
1990-2004
100.00
45.88
12.21
16.03
17.64
1990-1995
100.00
21.75
14.92
5.72
1.10
1995-2000
100.00
54.60
11.76
12.01
30.82
2000-2004
100.00
55.97
10.66
26.40
18.91
 Note： a. Calculated by comparable price.
b. From 1990 to the present，the private sector has
developed from scratch and has grown rapidly. Calculated
by comparable price，the total output value growth of the
private sector in 1990－2004 was 124.34 times，averaging
an annual growth of 43.46％. The figures from the State
Administration for Industry and Commerce show that the
total output value of private enterprises was 12.176 billion
yuan in 1990，2305 billion yuan in 2004，189.3 times that
of 1990，averaging an annual growth of 50.37％. See
Office of the State Administration for Industry and
Commerce, compiled, “Collection of Statistics” for all years.
 Source: Calculated by the authors.
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IV. Analysis of the General Situation
of China’s Informal Economy

In 1990-2004, the proportion of added value of urban
individual sector in the national non-agricultural GDP
rose from 4.4% to 10.3%; that of the private sector, rose
from 0.4% to 12.2%; that of the unregistered sector, rose
from 4.3% to 14.4% (the added value of the unregistered
informal sector in the national GDP rose from 3.6% to
13.3%),[1] close to the proportion of agriculture in GDP
(15.2%). But the agricultural labor was 352.69 million,
which means the GDP created by about one million
urban peasant-workers is close to the GDP created by
350 million farm laborers. Obviously, the massive
migration of rural labor has not created non-agricultural
jobs but also raised labor productivity and income level.
 [1] We have estimated that such proportion has not been included in the
national GDP.
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IV. Analysis of the General Situation
of China’s Informal Economy
19
50
19
55
19
59
19
63
19
67
19
71
19
75
19
79
19
83
19
87
19
91
19
95
19
99
20
03
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
Individual sector
Private sector
Unobserved sector
Figure 4 Proportion of Output Value of Informal Sectors in NonAgricultural GDP (1952-2004)
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IV. Analysis of the General Situation
of China’s Informal Economy
 The main factors accounting for the high-speed growth
of the urban informal sectors, according to our analysis,
are: First, the labor productivity of private and individual
economies is high (calculated according to national nonagricultural labor productivity), which has produced
structural effect; second, employment level of the
informal sectors is high. The two factors have the
multiplying effect.
 Besides, what needs to be pointed out is that the high
growth of urban informal sectors is highly associated
with the high growth of human capital in the informal
sectors.
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V. Main reasons for the rapid
development of China’s informal
employment
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V. Main reasons for the rapid
development of China’s informal
employment
1.
2.
From the historical perspective, China’s economic
structure was of non-state owned at the beginning of
the founding of New China and, in the course of
coercive institutional changes, radical nationalization
was carried out and, on this basis, a highly centralized
planned economy was established.
From the practical perspective, the transition to the
informal employment is the result of the mutual action
based on the five major motive powers for economic
structural adjustments.
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V. Main reasons for the rapid
development of China’s informal
employment
There are by and large five parallel trends in the current economic
adjustment and transition:
(1) The economy operates according to market rules, thus stimulating
the formation and establishment of labor market, accelerating the
movement of labor and intensifying competition in employment;
(2) De-nationalization of ownership structure has given the incentives to
the development of not only non-public formal sectors (such as
foreign-funded enterprises, limited liability companies, joint stock
companies, joint stock cooperatives) but also non-public (private and
individual) and other informal employment growth;
(3) The non-agriculturalization of economic structure has accelerated
the pace of the movement of rural labor to non-agricultural activities;
(4) Urbanization of population has quickened the pace of the massive
transfer of rural labor to cities.
(5) Internationalization in the context of globalization, China first
established an outward-looking economy and then an open
economy, thus stimulating the development of labor-intensive
product export and the development of associated industries.
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V. Main reasons for the rapid
development of China’s informal
employment
 What needs point out is that the transition of
China’s employment model is a process of mutual
influence, mutual action and going parallel with the
transition of five other aspects.
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VI Summary
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VI Summary
 In the 11th national economic and social development
program, employment is treated as one of the major
problems that affect development and put forward the
objectives to achieve. In 2006, the government has
produced a number of policies concerning reemployment, rural migrant labor and the development of
self-employed, private and other non-public sectors of
the economy. It can be anticipated that, with the policy
encouragement and guidance, China’s economy would
continue to maintain at a high speed and the output of
Informal departments has a great potential in its
contributions to the non-agricultural GDP, likely to reach
about 50%.
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VI Summary
1. Developing informal economy is the secret of
creating more jobs and stimulating economic
growth.
2. The most prominent feature of transition is the
development of informalization.
3. The feature of China’s transition and deformalization is unique in the world.
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 The unique features lie in:
(1) From nationalization to de-nationalization, China’s
economic system and social structure has experienced
a self-revolution, self-negation and self development.



Institutional self-revolution shows that the current de-formalization” is not
the continuation and revival of the model at the beginning of the founding
of New China; neither is it its simple repetition, but regeneration under the
new historical conditions.
Institutional self-negation process indicates that informal employment,
starting from have to not have and back to have, reflects the profound
reflection and summation of the mainstream ideology of China concerning
the history of development and reflect the courage to challenge the
drawbacks and conflicts brought about by institutional arrangements,
courage to recognize errors and make improvements.
The institutional self-improvement process shows that “de-formalization” is
the development regression of the co-existence of multiple sectors of the
economy on the basis of history and therefore the informal sectors have,
during the transitional period, exhibited the development trend of
diversification at the beginning of the founding of New China, that is, a Ucurve.
(2) Radical nationalization is a unique process and so is the
gradual process of de-nationalization.
(3) China’s transition is massive in scale and rapid in speed,
but varies unevenly.
(4) The historical transition in five major aspects has
appeared almost simultaneously and they act upon
each other, having an unprecedented driving effect on
economic development. Under the impact, China’s
informal employment has developed at an alarming rate
and so has the informal economy.
VI Summary
4. The government plays a double-edge sword role in
the transitional de-formalization, making state
policies the most important variables in the
development of different periods.
 There are two mechanisms that provide the incentives for
informal employment: One is that both the central and
local government produced incentive policies to guide its
development. The other is all informal sectors have their
own incentive mechanisms. For instance, in the process of
rural labor migrating to cities, the proportion of the
movement of whole family has increased. The two
aspects of incentive mechanism are mutually
accommodated and mutually complementary.
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VI Summary
 It is necessary to note that the development of informal
employment in the individual and private sectors of the
economy is in a relationship of complementarities and
competition with the formal sectors of the state economy.
Informalization shows that China’s economic players are
being diversified and pluralized instead of replacing the
formal economy. Otherwise, it would go to the other
extreme of historical development.
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1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
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5
19 0
5
19 3
5
19 6
5
19 9
6
19 2
6
19 5
6
19 8
7
19 1
7
19 4
7
19 7
8
19 0
8
19 3
8
19 6
8
19 9
9
19 2
9
19 5
9
20 8
0
20 1
04
Percentage
Appendixes
Public owned sectors
Non-public Sector
Figure 1 Percentage of Total Industrial Output Value of Different Sectors
（1950－2004）
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Appendixes
1.00
Percentage
0.80
0.60
0.40
0.20
19
50
19
5
19 3
56
19
59
19
62
19
6
19 5
68
19
71
19
74
19
7
19 7
80
19
83
19
8
19 6
89
19
92
19
95
19
9
20 8
01
20
04
0.00
Public owned sectors
Non-public Sectors
Figure 2 Proportion of Fiscal Revenue from Different Sectors（1950－2004）
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Percentage
Appendixes
1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
1980
1983
1986
1989
Public owned sectors
1992
1995
1998
2001
Non-public Sectors
2004
Note：As data
before 1980 are
unavailable，the
time sequence
started from after
1980.
Figure 3 Proportion of Fixed Assets Investment in Different Sectors
（1950－2004）
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1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
19
49
19
55
19
59
19
63
19
67
19
71
19
75
19
79
19
83
19
87
19
91
19
95
19
99
20
03
Percentage
Appendixes
Public owned sectors
Non-public Sectors
Figure 4 Proportion of Urban Employment in Different Sectors
（1949－2004）
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Thank You!
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