Unemployment, Growth and Speed of Transition in China

We investigate the relationship between unemployment and growth in China. We find considerable differences in the nature of this relationship across Chinese regions. We argue that this may reflect the different progress in transition across regions, in line with the Aghion-Blanchard model of optimal speed of transition. When we test this model, we indeed find a hump-shaped relationship between unemployment and our proxy for the speed of reform. The current unemployment in China, furthermore, appears to be close to the level associated with optimal speed of transition.