More than two decades into an era of sustained reform, China's labor force has experienced fundamental transformations. At the inception of the reform in 1978, an overwhelming majority of the labor force was either employed in urban state-owned enterprises (SOE) or as agricultural workers in rural communes. The reform has led to dramatic changes in the distribution of jobs. Prior to reform, job changes were either prohibited or controlled by responsible government agencies. The fundamental shifts in the distribution of employment across sectors and ownership categories that have occurred under reform require an allocative mechanism for labor far more flexible and sensitive than nations have ever achieved with administrative controls. The emergence of a functioning labor market has been essential to this transformation, a fact that the Chinese Government recognizes. Dealing with this labor-market transformation is one of the most challenging tasks facing the Government and the Chinese Communist Party, and the ways in which laws, regulations, and institutions evolve in response to this challenge raise a series of questions of great academic and policy interest. We address the following two main questions that China's ongoing economic reform raise for the labor force and labor markets: (1) what are the implications of economic reform in general for labor-market institutions, and (2) what are the current conditions of the labor markets and what are the major challenges for further reform? We examine the progress of economic reform to date and how it has led to the need for radical changes in labor-market laws and regulations; and, most important, how have these laws and regulations been applied and what are the implications for the allocation of labor? We also discuss continuing labor-market problems and the policy choices confronting policy makers today.