A more market-oriented labor market has emerged in China in the past 20 years with growing importance of the urban private sector, as state-owned enterprises have downsized. Despite the progress in reforms, a sizable surplus of labor still exists in the rural sector and state-owned enterprises. The main challenge facing China's labor market in coming years is to absorb the surplus labor into quality jobs while adjusting to WTO accession. This paper estimates that if GDP growth averages 7percent and the employment elasticity is one-half urban unemployment could double over the next three to four years to about 10 percent. These pressures would be limited by stronger economic growth, especially in the private sector and more labor-intensive service industries which have generated the most jobs in recent years. Therefore, policy should focus on encouraging private sector development, while reducing barriers to labor mobility, improving worker skills, upgrading job search services and strengthening the social safety net.
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