Dibao and informal economy in China

Confronted with ‘new urban poverty’ caused by socioeconomic transformation, the Chinese government started to reform its traditional residual SA program in the 1990s. In 1999, the State Council formally issued the Regulation on Assuring Urban Residents’ Minimum Standard of Living to implement Dibao. Since then, all poverty-stricken people, including not only traditional recipients known as the ‘three nos,’Footnote ¹ but also low-income, able-bodied, unemployed individuals, have been entitled to Dibao benefits. Between 1999 and 2014, with the increase in central government transfers, the recipient population has rapidly climbed from 2.7 million to 18.8 million. Meanwhile, the national average Dibao level rose from 147 yuan to 373 yuan. Of note, although the absolute level of Dibao has increased, Dibao payment has clearly been insufficient in relative terms (Kongshøj, Reference Kongshøj2017). Between 1999 and 2014, the ratio of the Dibao level to average per capita disposable income only averaged 18.6% (Ministry of Civil Affairs, various years).

With the marketization of the economy, the employment structure of China has undergone a dramatic transformation. Under planning, informal employment had a minimal existence because most urban laborers were employed by state-owned or collective enterprises and enjoyed lifetime job security. Since the economic reform, however, the rise of a dynamic but relatively unregulated private sector, the restructuring of state-owned enterprises that led to massive layoffs, and the unprecedented rural-to-urban migration all have driven rapid expansion of the informal economy (Huang, Reference Huang2009). In 1978, only 0.16% of urban workers were employed outside the formal sector. By 1985 and 1995, that figure had increased to 3.5% and 19.7%, respectively (Hu and Zhao, Reference Hu and Zhao2006). Around 2000, at the height of layoff phenomenon (xiagang, 下岗), the share of informal employment in the total urban workforce hit 65.2% (Gao, Reference Gao2015). Thereafter, owing to the expansion of social insurance coverage and strengthening of labor market regulations, the proportion of informal employment has declined slowly. Nonetheless, informal employment still represents a high proportion of urban employment (Jiang et al., Reference Jiang, Qian and Wen2018). In 2005, the proportion of informal employment relative to urban employment ranged from 49.6% (Xue et al., Reference Xue, Gao and Guo2014) to 58.6% (Hu and Zhao, Reference Hu and Zhao2006). In 2016, the share of informal employment was estimated to range from 33.6% (Chen et al., Reference Chen, Huang and Huang2021) to 57.4% (He and Zhou, Reference He and Zhou2019).Footnote ²

Although the informal economy has boosted employment growth, it has simultaneously posed serious challenges to SA administration. Due to the prevalent hidden employment of Dibao claimants, it is rather difficult for Dibao agencies to conduct means tests and adjust eligibility according to the recipients’ changing conditions. In a nationwide survey, frontline Dibao cadres indicated that ‘once Dibao entry occurs, exit would be difficult’ and ‘inaccurate assessment of income and assets of Dibao households’ were the top two difficulties in Dibao administration (Ministry of Civil Affairs, various years).

Literature review

Previous studies on the dynamics of SA tended to analyze the mechanisms underlying welfare exit from the following three perspectives: characteristics and agency of individual recipients, active measures, and conditions of the macro labor market.

From the micro perspective, many studies have identified individual characteristics as important predictors of the likelihood of welfare exit. More human capital, such as higher educational attainment and better health condition, was consistently found to have a positive impact on the exit rate (Barret, Reference Barret2000; Taylor, Reference Taylor1999). Younger age predicted shorter duration of SA (Ayala and Rodríguez, Reference Ayala and Rodríguez2007). Employment was found to be the most common way to end SA (Blank, Reference Blank1989; Dahl and Lorentzen, Reference Dahl and Lorentzen2003). Given these identified effects of individual factors, we assumed that some would also apply to exit from Dibao. For example, more education and better health could also be expected to increase the Dibao exit rate. However, given the informal employment environment in China, we expected that employment would have different effects relative to Western findings. As some research suggested, Dibao beneficiaries often take odd jobs that are hard to track (Guo et al., Reference Guo, Fu, Chui and Xue2017), and Dibao exit rarely takes place through employment (Gao, Reference Gao2009). Rather, receipt of Dibao usually terminates when certain demographic changes such as reaching retirement age, children’s reaching adulthood or graduation, and death occur (Wong et al., Reference Wong, Chen and Zeng2014). This led us to propose the following hypothesis:

At the micro level, another important question that has received attention involves duration dependence; that is, whether time spent receiving benefits negatively affects individual agency and likelihood of exit. Some evidence has shown that the likelihood of exiting SA is declining over time (Bane and Ellwood, Reference Bane and Ellwood1994; Murray, Reference Murray1984). This is sometimes referred to as the welfare trap – a decreasing probability of exit due to degradation of self-efficacy as time in welfare passes (Cooke, Reference Cooke2009). Regarding time’s effect on Dibao dependence, we expected that the working mobility of Dibao beneficiaries would not be negatively affected by the duration of receipt due to the payment structure of Dibao. Confronted with hidden employment and difficulty in means tests, Dibao agencies have widely used ‘assumed income,’ which supposes that able-bodied applicants have an income at the minimum wage or locally defined level rather than what they actually earn. In practice, the Dibao allowance usually functions as living support for a child alone in a poor household (Wong et al., Reference Wong, Chen and Zeng2014). Accordingly, the likelihood of weakening motivation would be rather low. Thus, the following hypothesis was proposed:

At the policy level, the impact of active measures on employment and welfare exit have been extensively discussed. It has been noted that a drift toward ‘work-first’ workfare schemes, a feature of which is compelling welfare recipients into employment immediately, regardless of job quality, has occurred in neoliberal countries (Daguerre, Reference Daguerre2008; Handler, Reference Handler2003; Karger, Reference Karger2003). In contrast, in social democratic countries, workfare schemes give high priority to long-term skill accumulation, with the goal of helping welfare recipients gain employment in the primary labor market (Dostal, Reference Dostal2008; Torfing, Reference Torfing1999).Footnote ³

The labor market structure has been identified as an important factor that led to this divergence in workfare orientations. For example, Peck and Theodore (Reference Peck and Theodore2000) contended that the attractiveness of the work-first approach to neoliberal regimes could be functionally explained by the ‘fit’ of work-first programs with the segmented, flexible labor market. Based on the principle of work compulsion, work-first programs produce a continuously ‘forced’ labor supply for the bottom-level labor market (Daguerre, Reference Daguerre2008; Karger, Reference Karger2003). In this sense, a work-first program can be seen as a social policy complement to the aggressive orthodoxy of neoliberal labor market policy and laissez-faire macroeconomic management. Compared with neoliberal countries, where the secondary market functions as an important sector for maintaining the flexibility and vitality of the national economy, social democratic countries lack the competitive advantage in low-wage, low-skill employment (Torfing, Reference Torfing1999). The labor market structure of the latter features low skill dispersion and a high degree of wage equality. Accordingly, social democratic countries have pursued the ‘human capital development approach,’ which aims to promote mainstream employment and reduce labor market segmentation (Dostal, Reference Dostal2008). Regarding the effects of these two workfare strategies, the mainstream view holds that compared with work-focused programs, training-focused programs tend to perform better in promoting employment and welfare exit in the long run (Dengler, Reference Dengler2019).

In China, training services, which are representative of the human capital approach, and job referral services, which are consistent with the goals of a work-first approach, have both been notionally introduced in Dibao policies. In practice, however, job referral services have not been strictly implemented by Dibao departments as the policy requires (Lin, Reference Lin2012). Meanwhile, training services were widely found to be ineffective for upgrading skills due to the rather limited training duration and content (Gao, Reference Gao2009).

This overall underdevelopment of employment services should be viewed in the context of the informal employment structure and Dibao payment arrangements. As noted, since the reform, an apparent trend of informalization has occurred in China. Informal employment has not only become the main engine of employment growth (Hu and Zhao, Reference Hu and Zhao2006; Xue et al., Reference Xue, Gao and Guo2014),Footnote ⁴ but also has been regarded as beneficial for maintaining China’s low labor cost advantage in the global competition for capital (Chen et al., Reference Chen, Huang and Huang2021). In this context, informality has been embraced, whereas the high-cost human capital approach that would facilitate formal employment has been overlooked. From the perspective of labor market structure, the Chinese workfare scheme would more likely move toward a work-first approach than a human capital approach, considering the former’s advantage in inserting welfare recipients into secondary employment rapidly. Of note is that because Dibao benefits payment has long been set at an extremely limited level (Wang et al., Reference Wang, Cai and Gao2021), Dibao recipients have kept strong working motivation and presented high acceptance of employment, even precarious jobs in the secondary labor market. Hence, the development of work-first programs is not assumed to be imperative either.Footnote ⁵ The following hypothesis was proposed:

From the macro perspective, scholars have noted the effect of labor market conditions on the duration of SA. Existing research tended to use the unemployment rate as a proxy of labor market performance, and the conclusions drawn so far have been fairly similar; that is, the exit rate could be negatively affected by the unemployment rate (Bergmark and Bäckman, Reference Bergmark and Bäckman2004; Dahl and Lorentzen, Reference Dahl and Lorentzen2003; Taylor, Reference Taylor1999).

Although the literature has examined macro labor market determinants, the predominant focus on the effect of general employment rather than employment structure did not address the research question we raise in this paper: Does an informal employment structure affect the duration of receipt? In fact, the negative impact of the informal economy on SA administration, the effectiveness of which is based on means testing, has been noted (Hutton and Redmond, Reference Hutton and Redmond2000). Statistics provided by OECD (2004) demonstrated that countries in which the informal economy was less than 5% of GDP seemed able to administer SA effectively, with means testing based on declared incomes; countries with informal economy shares between 5% and 10% of GDP established national schemes but faced difficulties in administration; and countries with informal economy shares greater than 10% of GDP rarely implemented a national minimum income scheme. However, until now, no studies have directly addressed the informal economy’s effect on the exit rate.

As a middle-income country that has undergone a phenomenal transformation in its employment structure, China is an interesting case for investigating this question. In the late 1990s, due to the acceleration of rural-to-urban migration and the intensification of layoff arrangements, the Chinese informal economy saw the most prominent expansion in the reform era. In 1999, 2000, and 2001, the informal economy production’s share of GDP hit 31.9%, 33.5%, and 34.0%, respectively (Wong and Jing, Reference Wong and Jing2010), which was an extremely high rate relative to the findings of OECD (2004). Since 2002, especially after 2008,Footnote ⁶ the scale of the informal economy has declined. From 2002 to 2007, the informal economy’s share of GDP gradually decreased from 27.3% to 13% (Wong and Jing, Reference Wong and Jing2010). From 2008 to 2013, the average share of the informal economy in GDP per annum was estimated to be around 12.04% (Chen, Reference Chen2020). The informal economy’s overall contraction from 1999 to 2013 can also be reflected approximately by the decline of the share of informal employment relative to total employment. In 2000, the proportion of informal employment to total urban workforce was 65.2% (Gao, Reference Gao2015). Then, this figure dropped to 49.6% in 2005, 40.3% in 2010 (Xue et al., Reference Xue, Gao and Guo2014), and finally reached 36.2% in 2013 (Chen et al., Reference Chen, Huang and Huang2021). To test the influence of the evolution of this employment structure on Dibao dynamics, the following hypothesis was proposed:

Based on the above hypotheses, the theoretical model of this study was constructed as follows (Figure 1).

Data and method

Length of SA

Figure 2 demonstrates the frequency distribution of time spent receiving Dibao. The distribution of ongoing spells shows that more than 70% lasted more than 3 years. Previous recipients who exited the program tended to have shorter spells than those who were still receiving Dibao benefits. Nevertheless, almost 60% of previous recipients spent more than 3 years in the program, also suggesting an obvious pattern of prolonged receipt. For all recipients, the proportion of long-term claims and very long-term claims was 21.42% and 47.96%, respectively.Footnote ⁷ Results indicate a high risk of long-term receipt among Dibao beneficiaries.

FIGURE 1. Multidimensional analysis model regarding SA dynamics in China.

FIGURE 2. Frequency distribution of Dibao spells.

Predictors of SA exit

Figure 3 to Figure 7 present the hazard rate curves for Dibao recipients. The hazard functions for different age groups show that the exit rates kept growing as age increased (Figure 3). The likelihood of exiting was generally higher for people with more education (Figure 4). The hazard rate for people in good health was greater than that of people in poor health (Figure 5). The exit rate grew consistently by child age until children reached 22 years old (college graduation age); then the exit rate dropped sharply for recipients with children older than 22 (Figure 6). Figure 7 shows that the lowest likelihood of exit occurred among recipients who entered Dibao between 1999 and 2001. The 2002–2007 entry cohort had a higher likelihood of exit than the 1999–2001 entry cohort. The likelihood of exit was highest for recipients in the 2008–2013 cohort.

FIGURE 3. Hazard estimates by age.

FIGURE 4. Hazard estimates by education.

FIGURE 5. Hazard estimates by health status.

FIGURE 6. Hazard estimates by child’s age.

FIGURE 7. Hazard estimates by entry cohort.

Model results

The results of Weibull models of time spent receiving Dibao is presented in Table 2 (Model 1 to 3). As expected, groups with better health conditions and higher education tended to leave Dibao faster. Gender and political status had no significant effect on the exit rate.

TABLE 1. Descriptive statistics.

TABLE 2. Determinants of exits from urban Dibao.

Notes: Standard errors in parentheses. ⁺ p < .10. *p < .05. **p < .01. ***p < .001.

Controlling for other variables, age significantly increased the probability of exit. This result markedly contrasts with previous studies (Ayala and Rodríguez, Reference Ayala and Rodríguez2007; Bergmark and Bäckman, Reference Bergmark and Bäckman2004), in which age was found to exert a negative effect on the exit rate. Normally, the probability of exit might be expected to decrease as age increases, because younger people are more likely to find opportunities in the labor market. For Dibao recipients, although being young may imply more employment chances, the jobs they find are usually casual ones that are difficult to check, so the positive impact of younger age on Dibao exit is likely limited. In contrast, reaching retirement age and obtaining a pension is decisive and can be easily observed by Dibao administrators. Therefore, the probability of leaving Dibao is more likely to increase rather than decrease with age.

Compared with unemployed participants, employed respondents did not leave Dibao significantly faster. Although employment status has been widely identified by Western researchers as a decisive predictor of leaving SA (Blank, Reference Blank1989; Dahl and Lorentzen, Reference Dahl and Lorentzen2003), employment might exert few effects on Dibao exit, considering that most employed recipients are engaged in informal employment that is hard for Dibao agencies to detect. Hypothesis 1 was supported.

Child age was significantly associated with the exit rate. The hazard rate was highest for recipients with children between 19 and 22 years old and second highest for those with children between 16 and 18. Dibao recipients whose children were older than 22 did not have a higher likelihood of exiting than the reference group. Hypothesis 1 was further supported. As mentioned, confronted with hidden employment, Dibao agencies flexibly use ‘assumed income’ and provide Dibao benefits only for the children of recipients. Thereby, changes in children’s age and education would decisively influence the likelihood of Dibao exit.

Both job referral and training programs had no significant effects on exit rate. Hypothesis 3 was supported. This result mirrors previous findings, which showed that the effects of employment services for Dibao recipients were limited (Gao, Reference Gao2009; Lin, Reference Lin2012).

Unemployment rate had no significant effect on the length of receipt, which is at odds with findings indicating the important effect of unemployment rate on welfare exit (Hansen, Reference Hansen2009; Taylor, Reference Taylor1999). In contrast, the entry cohort variable, which reflected the evolution of the informal employment structure, was found to predict exit from Dibao. The hazard of leaving Dibao for the 2002–2007 entry cohort and 2008–2013 entry cohort was 57.1% and 185.5% higher, respectively, relative to the 1999–2001 entry cohort (Model 3), indicating that shrinking informal employment exerted a positive effect on Dibao exit. Hypothesis 4 was supported.

These findings suggest that the duration of receipt may not be best regarded as a simple consequence of aggregate labor market demand and that employment structure may be more important than employment level in terms of affecting the probability of exit. Theoretically, there is reason to think that a declining unemployment rate or increasing employment level, which imply stronger labor market demand, might lead to shorter SA spells. In China, however, even though the general employment level has been increasing during economic reforms – considering that its growth has been primarily stimulated by informal employment (Xue et al., Reference Xue, Gao and Guo2014), which has a relatively small effect on Dibao exit as previously discussed – a change in total employment level or the unemployment rate is unlikely to exert a significant effect on leaving Dibao.

The results of Cox models (Model 4 to 6) were fairly similar to those in the Weibull models. Appendix 1 presents the results of tests of the proportional-hazards assumption. All PH values were larger than .05, suggesting that the proportional-hazards assumption was not violated.

Shape of hazard function: Changing likelihood of exit over time

To address our major interest in how Dibao exit depends on time, we examined the hazard rates from the Weibull regression model and Cox regression model. Both hazards were calculated after fixing the values of all other independent variables at their means. As Figure 8 and Figure 9 show, there was no negative time dependence as hypothesized by time dependence theory. On the contrary, the hazard rate steeply increased, indicating that the conditional probability of leaving Dibao increased with the duration of receipt. Hypothesis 2 was supported.

FIGURE 8. Hazard rate plot for Weibull regression model at the mean of all covariates.

FIGURE 9. Hazard rate plot for Cox PH model at the mean of all covariates.