Organizational uncertainty and labor contracts in China's economic transition

Lifetime employment was a cornerstone of the Chinese socialist system constructed under Mao. In this system, organizations served the function of social security, and as a result, many organizations were overburdened with bloated work forces and retirees that drew from organizational coffers well into old age. Labor contracts fundamentally alter this system, as they allow firms to end the socialist institution of lifetime employment. Yet there is significant variation on the institutionalization of labor contracts in organizations. Based on a sample of 81 firms in industrial Shanghai, I show that organizations that are experiencing uncertainty in the economic transition are more likely to institutionalize labor contracts on an organizationwide basis. There are two types of organizational uncertainty in the economic transition: economic uncertainty and administrative uncertainty. In cases of economic uncertainty, firms that lost money in 1990 and firms that are burdened by large forces of retired workers are more likely to place their workers on labor contracts. In the case of administrative uncertainty, firms that are at the highest levels of the industrial hierarchy are also significantly more likely to place their workers on labor contracts. Although these upper level firms were the most protected under the command economy, they are being forced to handle the greatest among the responsibilities in the economic transition, and as a result, they experience the greatest sense of being set adrift by the state.