A stochastic frontier production function approach on enterprise inefficiency and disguised unemployment in urban China

Thesis (Ph. D.)--University of Hawaii at Manoa, 1992.Includes bibliographical references (leaves 129-138).Microfiche.x, 138 leaves, bound ill. 29 cmEnterprise inefficiency and disguised unemployment are major concerns of the Chinese government and have motivated economic reform policies. It has been argued that the Chinese urban industrial enterprises and workers have few incentives to be productive. The major objectives of this study are; (1) to determine the extent of industrial enterprise inefficiency and disguised unemployment, (2) to relate these to government policies of state ownership, full employment and egalitarian wages, and (3) to make feasible suggestions concerning further economic reform. The methodology of this study, which combines a stochastic frontier production function and efficiency wage theory into a Zellner-Revankar generalized production function framework, is innovative, especially for analysis of the Chinese economy. Micro enterprise-level data from the 1985 Chinese Industrial Census were employed. This study found that there are substantial enterprise inefficiency and disguised unemployment within the Chinese urban industrial sector. On average, enterprise efficiency is approximately 20 percent below the best-practiced production frontier, and about 22 percent of the employees in the Chinese large and medium urban industrial enterprises are redundant. This study found two stylized facts about the Chinese urban industrial sector. First, within a specific industry, medium collective-owned enterprises exhibit the best performance, having the lowest enterprise inefficiency rates, lowest disguised unemployment rates and highest elasticities of returns to scale. Large collective-owned enterprises are second best, followed by medium state-owned enterprises. Large state-owned enterprises operate most inefficiently. Secondly, across industries, on average, the labor-intensive industries have better performances than the capital-intensive industries. The major cause of these stylized facts is the existence and intensity of the Chinese government's centrally planned economic policies of state ownership, full employment and egalitarian wages. This study also found that efficiency wage theory can play an important role in stimulating labor productivity growth and overall economic development on the "average" production technology. It does not always provide guidance for improving enterprise efficiency, especially on the best-practiced production frontier