Breaking the “Iron Rice Bowl” and Precautionary Swings: Evidence from Chinese State-Owned Enterprises Reform

Hui He (), Feng Huang, Zheng Liu and Dongming Zhu

No 2014-4, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We use China?s large-scale reform of state-owned enterprises (SOE) in the late 1990s as a natural experiment to identify and quantify the importance of precautionary savings for wealth accumulation. Before the reform, SOE workers enjoyed the same job security as government employees. After the reform, a cumulative of over 35 million SOE workers have been laid off, although government employees kept their ?iron rice bowl.? The change in unemployment risks for SOE workers relative to that of government employees before and after the reform provides a clean identification of income uncertainty that helps us estimate the importance of precautionary savings. In our estimation, we correct a self-selection bias in occupational choices and we disentangle the effects of uncertainty from pessimistic outlook. We obtain evidence that precautionary savings contribute to about one-third of the wealth accumulations for SOE workers between 1995 and 2002. Precautionary savings motive is thus an important factor that drives the observed rising Chinese saving rate.

Keywords: precautionary savings; uncertainty; structural changes; self-selection bias; permanent income hypothesis; difference-in-difference methods (search for similar items in EconPapers)
JEL-codes: C20 E21 P31 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2014-01
New Economics Papers: this item is included in nep-mac, nep-sog and nep-tra
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Citations: View citations in EconPapers (1)

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Working Paper: Breaking the "Iron Rice Bowl" and Precautionary Savings: Evidence from Chinese State-Owned Enterprises Reform (2014)
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DOI: 10.24148/wp2014-04

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