Working Papers

2014-04 | February 2017

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

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We estimate the importance of precautionary saving by using China's large-scale reform of state-owned enterprises (SOEs) in the late 1990s as a natural experiment to identify changes in income uncertainty. Before the reform, SOE workers enjoyed similar job security as government employees. The reform caused massive layoffs in the SOEs, but government employees kept their “iron rice bowl.” The changes in the relative unemployment risks for SOE workers after the reform provide a clean identification of income uncertainty. We exploit the evolution of China's labor market reform and use information about when and how a worker obtained his job for identifying potential self-selection biases. We estimate that precautionary savings account for about 40 percent of SOE household wealth accumulation between 1995 and 2002. We also find evidence that demographic groups more vulnerable to unemployment risks accumulated more precautionary wealth in response to the reform.

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