Written by Lili Wang

Posted on April 24, 2020

Collective wage consultation, similar to but different from collective bargaining, is a strategy in China for preventing and resolving collective labour disputes relevant to remuneration. Under this process, employers and a labour union, or representatives of employees, consult about labour compensation, working hours, rest days and leaves, labour safety and hygiene, vocational training, insurance, welfare benefits, and conclude a collective contract draft, which must then be approved by the workers’ congress or a general meeting of workers of the enterprise, signed by the two of the consultation representatives, and confirmed by local government.

Legislation governing collective wage consultation sets out a model based on co-determination, that is, one which endows rights of wage determination to employees and employers. But in practice, Corporatism-Coordination, a system in which governments regulate collective labor relations, and employees, employers, and district trade unions work together to make it true, better reflects the actual functioning for collective labor relations in China. That is “one party governs, and three parties coordinate”. This article discusses how collective labour relations in China is moving from a model of Corporatism-Coordination towards the envisioned model of Co-determination.

The legislation governing collective wage consultation formally conforms to a model of Co-determination. First, both employers and employees have equal rights to negotiate and determine the wage and essential issues according to article 13 and 15 of Trial Measures for collective wage consultation and article 26 of Collective Contract Provisions. Employers have no right to shutdown business enterprises, and employees have no right of strike, although employees do have rights of final deliberation on the consultation result. Second, governments supervise the consultation process and mediate related disputes, but cannot interfere in the communication of the two parties. Third, related regulations help to keep the balance of the two parties. Article 3 of Provisions on the Democratic Management of Enterprises affirms the rights of workers to know, participate, express and supervise business management activities.

Collective labour relations in China is moving from Corporatism to Co-determination. Under a model of Corporatism, wages were managed by the government, and employees and employers had little opportunity to discuss or influence wage determination. Under a model of Co-determination, as discussed above, wages are determined mainly by employees and employers.

Currently, collective labour relations in China exists under a model of Corporatism-Coordination, in which government is reducing its intervention in the labour market, but continues to provide guidance to employees and employers in the consultation process. The graph below illustrates this change. The thick arrow illustrates strong bargaining relationships, where strength reflects the significance and influence of the relevant parties, and dotted arrow illustrates weak bargaining relationships.

Under a model of Corporatism, there is a strong relationship between the government and employees and employers, but a weak relationship between employees and employers. In Corporatism-Coordination, there is a strong relationship amongst all three parties. In Co-determination, there is a strong relationship between employees and employers, but a weak relationship to government.

The shift from Corporatism and towards Co-determination can be seen in existing collective wage consultation cases in China in the past decade. Based on the analysis of 61 collective wage consultation cases from relevant news in the website of All – China Federation of Trade Unions from January 1, 2008 to April 10, 2017, relevant articles in the magazine of China Worker from July 2009 to December 2016, relevant articles in the graphic database of the newspaper of People’s Daily from January 1, 2008 to December 31, 2016, and cases in the internal material of C district trade union, the practice of collective wage consultation presents four models: co-determination; co-determination with assistance; synergism; and, integration.

One case fell under the model of co-determination, in which parties of employers and employees completed the process with a little guidance from local government. 18 cases fell under the model of co-determination with assistance, in which the process could not be completed without help from local government, district trade unions, lawyers, scholars and other social resources, due to disputes arising during consultation or a lack of familiarity with the consultation process. 40 cases fell under the model of synergism, in which the process was completed by the three parties, two consultative parties and local government. This model is characterized by top-down direction and influence from local government, which persuaded the employers and employees to start collective consultation, gave pressure to the employers to finish it, helped the two parties to summarize their ideas, held informal conferences for them to communicate effectively and even provided the model collective contract and detailed consultation result suggestions. Finally, 2 cases fell under the integration model by enterprises, in which the employers controlled the consultation and the collective contracts did not reflect the needs and interests of employees.

In practice, each of these models fall within the ambit of Corporatism-Coordination. First, government participation is an essential condition in the process of establishing collective labor relations under each model. All cases included encouragement, persuasion, guidance, supervision, or mediation from government. Second, the cooperation between employers and employees is a dominant trend under most models and cases. Although in most cases employers and employees lacked the capacities to consult effectively, they did have motivation to communicate and conclude a collective contract.

Corporatism-Coordination is providing a pathway towards Co-determination for labour relations in China. Between the periods from 2008-2013 and 2014-2017, the cases falling under the model of co-determination by assistance increased from 19% to 55% and the cases falling under the model of synergism is decreased from 76% to 40%. The only co-determination model case appeared in the period of 2014-2017. Therefore, it is shows that the effective communication and cooperation between employees and employers is increasing, suggesting that the model of Co-determination, as envisioned under the legislation, may be emerging in China. Today, the Chinese government is encouraging harmonious labour relations and establishing a social governance model based on collaboration, participation, and common interests. That will also encourage employers and employees to develop a collective labour relationship, and advance Co-determination as the dominant model for collective wage consultation in practice.

Follow

Written By Mu Xin and Wei Cui

Posted on April 13, 2020

A rarely discussed aspect of China’s economic growth is the apparent small size of its underground economy. Until the last decade, at least, there was little controversy that China was a developing country. Even now, China belongs at best to the world’s cohort of “middle income” countries. Yet some studies show that as early as in the 1990s, China enjoyed a small underground economy comparable to much more developed countries.

In a World Bank policy research paper from 2010, for example, Schneider et al (2010)estimated, for the period 1999-2006, that China had the smallest shadow economy among developing countries, one that represented only 12.8% of China’s GDP. By the same estimation, China had the 8th smallest shadow economy among 120 countries in the world. This ranking included many developed countries: for example, Canada placed 15^thin the same ranking, with 15.6% of its GDP underground.

In an updated study published by the IMF in 2018, Medina and Schneider (2018)estimate the size and development of the shadow economies of 158 countries over the period 1991-2015. Again, the authors conclude that China has a particularly small shadow economy compared with other developing countries: its underground economy was the 19th smallest among 158 countries studied, placing ahead of countries like Belgium and Denmark.

The difficulties of measuring the shadow economy are easy to imagine. And the macroeconomic methodologies used for such measurement can be quite abstract. Instead of explaining them, we can point to similar conclusions drawn by other authors using sufficiently different methods. For instance, Elgin and Öztunali (2012)offer their own model to estimate the size of shadow economy in 161 countries during 1950-2009. They found that China shadow economy declined from 34.06% of GDP in 1952 to 11.53% in 2008. The average shadow economy size in China over 1990–2006 was 15.54% of GDP, making it the 12th smallest among 161 countries studied—again coming out ahead of countries like Canada, Germany, and France.

Alm and Embaye (2013)estimate shadow economies across countries over the 1984-2006 period, using yet another method. They calculate that China’s shadow economy had an average size of 21% of GDP from 1990 to 2006. In their study, high-income countries tend to have lower proportions of their GDP underground than China, but China’s level is not far from that found in Italy and Greece. Overall, China ranked 25th in terms of having a small shadow economy, falling behind only Japan, Korea and Singapore among Asian countries.

These conclusions may seem puzzling in two ways. First, people who have lived in China will have had many direct experiences with Chinese businesses or individuals evading taxes and dodging regulations. Cash transactions used to be extremely common before the arrival of smartphone payments, as is informal labor. Indeed, some scholars have warnedthat informal work may have been recently on the rise. Surely, the use of cash and the extent of informal work seem lower in countries like Canada. Are the studies cited above wide off the mark?

One important idea may go some ways to dispel this first puzzle. It is useful to distinguish between two types of informality, firm informalityand labor informality. The first refers to firms not registering for tax purposes or generally not reporting their operations to government offices. The latter refers to registered firms hiring workers informally, not reporting all of their operations on the books or to the government, and so on. In a 2018 article, the Oxford economist Gabriel Ulyssearefers to this distinction as between the extensive v. intensive margins of formality. Whereas the decision to register for tax purposes is basically discrete, the decision to hire more or fewer informal workers (or report greater or lesser revenue to the government) is continuous. Many firms that have entered the formal sector may continue to practice labor informality.

Applying this distinction to China, it is possible that China has a level of labor informality that is typical of developing countries and very different from what is observed in developed countries, but, at the same time, has a low level of firm informality. High labor informality is what one tends to experience firsthand in China, whereas low firm informality, being based on discrete decisions, may be less salient. It may be that the estimates of a relatively small underground economy in China are picking up the effects of low firm informality.

Professor Ulyssea’s 2018 article demonstrates that because of the firm v. labor informality distinction, different policies for reducing “the informal sector” may have very different impacts on the levels of output, wages, productivity and welfare in an economy. Reducing the cost of business registration will not have the same effects as enforcing registration requirements more rigorously; the effects of cutting payroll tax rates are not quite the same as enforcing payroll tax compliance. In ongoing research at UBC, we are exploring the application of the distinction to China because of these rich implications.

A second puzzle generated by estimates of China’s small underground economy is the following: How did China achieve this outcome? If cross-country comparisons of informality are rather obscure, explanations of the emerging patterns are even more so. Scholars who offer these comparisons have suggested various possible explanations, but have tested the explanations only in very ad hoc manners.

One such explanation, however, offered by Buehn and Schneider 2012, struck us as being potentially quite relevant in China:

“A closer distance to economic agents and higher frequency of face to face contacts between bureaucrats and economic agents (firms and workers) increase the probability of detection and deter shadow economic activities, all things being equal.”

One of us has written about the very high level of decentralization in law enforcementin China. Tax administration in China, for example, is very much about face-to-face contact. It may be that the structure of the Chinese administrative state is particularly effective at reducing firm informality. Further exploring this possibility is another theme of our current research.

Follow

Written by Wei Cui

Posted on April 7, 2020

Since 2010, an ever-increasing population of Chinese firms has come to enjoy a 10% or even 5% preferential corporate income tax rate. In an earlier blog, I discussed some legal nuances that explain how these rate cuts for “small and micro-profit enterprises” became available, even though the statutory rates under the Enterprise Income Tax Law remain unchanged. It turns out that the Vietnamese government adopted some similar, temporary corporate income tax rate cuts in 2009 and 2011-12 (initially, also in response to the Global Financial Crisis). For smaller Vietnamese firms, the tax rate was reduced from 25% to 17.5%. In a paperpublished in the National Tax Journal last year, Professor Anh Pham from George Mason University presented interesting evidence that about half of Vietnamese firms failed to claim the reduced tax rate during the relevant period.

A general reason why findings of this kind are of interest is that they demonstrate how many tax policies that look good on paper may fail to elicit responses from taxpayers. In a recent study, for example, two Chinese scholars argued that many firms in China may have been unresponsive to a policy of accelerated depreciation introduced in 2014, because these firms already engaged in such high levels of tax avoidance or evasion as to result in little marginal tax benefit from accelerated depreciation. Even in the U.S. and Canada, there have been decades of controversy about whether accelerated depreciation policies are truly effective: a very large proportion of firms in loss positions, for example, gain almost no benefit from claiming additional depreciation deductions.

Professor Pham’s findings from Vietnam, however, are particularly notable in a couple of respects. Most importantly, she suggests a striking reason why Vietnamese firms may have failed to claim the simple tax benefit: the government just neglected to tell taxpayers about it! According to Professor Pham:

“[The] policy was publicized on TV and in major news outlets. The central government     also issued instructions to local tax officials on how to determine eligibility. However, individual firms were not notified about the tax cut, nor was there any notification of the tax cut in the corporate tax forms. To apply for the tax cut, a firm had to fill out a separate one-page form, also used for various other tax policies…Even in this form, the 30-percent temporary tax cut was not listed as a type of reduction. The firm needed to circle ‘Other’ and explain the type of reduction for which it would like to apply.”

“The extra step of filling out a form to claim the tax cut may seem strange at first, but the tax office considered the 30-percent tax cut just another policy among various others that firms could apply for. The majority of taxes in Vietnam are filed on paper. Since the tax cut was temporary, the tax office did not want to change and reprint all the corporate income tax return forms or other tax treatment forms.”

This sounds like a rather abject bureaucratic failure: apparently, TV airtime and newspaper space are viewed as inexpensive, but printing tax returns is considered costly!

While there are probably more charitable contextualizations of this aspect of Vietnamese government failure, there is arguably a generalizable takeaway: the content of tax law needs to be communicated to taxpayers, and the reliability of such channels of communication may be a determinant of the effectiveness of tax incentives.

Professor Pham also studies other possible explanations of firms’ failure to claim the rate cut. She hypothesizes that firms that have a “history of a tax avoidance” are less likely to claim the rate cut, for fear of being audited upon so claiming. This aspect of her paper struck me as quite tentative, however. For one, Professor Pham mentions that aside from awareness of the policy, the cost of claiming the rate cut was low or non-existent. In particular, no one needs to obtain approval from the tax authorities. If the general rate of audits in Vietnam is fairly low (the paper offers no information in this regard), then it is unclear why claiming this tax benefit is more likely to trigger an audit than anything else on tax returns.

Lastly, one surprising aspect of the Vietnam study has to do with a crucial empirical detail. Because her study does not rely on tax returns, Professor Pham has to infer who claimed the rate cut from effective tax rates (ETR) she calculates based on firms’ financial statements. The distribution of ETRs among Vietnamese firms she reports, however, is unusual in the relatively low proportion of firms reporting zero or negative profit. In the histogram below from the paper, for example, one sees that the ETR distribution among Vietnamese firms is tri-modal: it has three peaks at 0%, 17.5%, and 25%. The density for firms in the latter two peaks are higher than the first peak:

This is surprising because in most economies—indeed even in the U.S. and Canada—the largest proportion of firms are loss-making or generate profits close to zero. The highest mode in the ETR distribution, therefore, is expected to be at zero. The following two graphs, for instance, illustrate the ETR distribution for Chinese firms in two of the largest sectors (i.e. wholesale and retail, plus manufacturing) from one province:

Clearly, the concentration of Chinese firms at zero ETR is much larger than that shown for Vietnamese firms. Insofar as the zero ETR is attributable to losses, it would also explain why many Chinese firms may be indifferent to tax incentives that assume positive taxable income.

The unusually low proportion of zero-ETR firms in Professor Pham’s study thus seems like an anomaly. Even though it may not directly affect any of her conclusions, it leaves an open question for further studies of Vietnamese taxpayers.

Follow