We estimate the importance of precautionary saving by using the large-scale reform of state-owned enterprises (SOEs) in China 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. Furthermore, we focus on individuals with government assigned jobs to mitigate 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.
Zhu, Dongming, Feng Huang, Hui He, and Zheng Liu. 2014. “Breaking the “Iron Rice Bowl:” Evidence of Precautionary Savings from the Chinese State-Owned Enterprises Reform,” Federal Reserve Bank of San Francisco Working Paper 2014-04. Available at https://doi.org/10.24148/wp2014-04