Nov 7, 2012

China - China's labour force 'at turning point'

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Shedding of 30 million workers within decade will hit growth, expert says

The number of people of working age in China will decrease by almost 30 million before the end of this decade, posing a serious challenge to economic growth, an expert with a top think tank has predicted.

According to the World Bank, the country's demographic dividend - when the largest section of society is of working age and the dependency ratio is low - has contributed more than 30 per cent to the country's rapid economic growth.

However, Cai Fang, director of the Institute of Population and Labor Economics under the Chinese Academy of Social Sciences, said that the dividend reached its peak in 2010.

"The number of working-age people has already started to fall," he said.

The last census, carried out in 2010, recorded 940 million people of working age - 15 to 59 - against the total population of 1.34 billion.

Cai estimates that by 2020 the number of people of working age will fall by as much as 30 million. He warned that a decrease in the labour force will come with a rising dependency ratio, lower savings ratios and diminishing returns, and eventually, slower economic development.

Cai said that, with the end of the demographic dividend, China's annual economic growth is expected to slow to 7.2 per cent between 2011 and 2015, and 6.1 per cent between 2016 and 2020. GDP grew at an annual pace of more than 10 per cent from 2006 to 2010.

Sectors such as manufacturing have attracted rural labour to urban areas. According to the Ministry of Human Resources and Social Security, there are 253 million migrant workers nationwide, while Cai estimates they occupy more than one-third of jobs in cities and towns.

What's more, he said, nearly 100 million residents still living in rural areas are already absorbed in non-agriculture sectors.

"This means that there's no excess labour force in the countryside," he said. "Although there is room to improve productivity in agriculture, there's no possibility to transfer a large proportion of the labour force from rural areas to cities because we did it in the past."

Businesses, particularly manufacturers in coastal areas, have already felt the pinch of the labour shortage.

This, Cai acknowledged, is another consequence of the end of China's demographic dividend - the drying up of cheap labour.

He said he believes the country reached the "Lewis turning point" in 2004 - the point when a country's excess labour is fully absorbed and further capital accumulation means a subsequent increase in wages.

The average wage increase was 14.3 per cent among workers in the public sector and 18.3 per cent among those in the private sector last year, according to the National Bureau of Statistics.

"The salaries of migrant workers have grown by at least 10 per cent every year for the past decade, and the shortfall in labour will result in more wage increases in the coming years," Cai said.

Zeng Hongwu, general manager of Apples Industrial Co, which makes leather goods in Guangzhou, said his company has been struggling to recruit employees since 2009, despite the fact he has raised the monthly wage from 2,000 yuan to 2,600 yuan (US$320 to US$416).

"Although we have more than 600 workers, we're still short by about 30 per cent," he said.

To offset the problem, Zeng said his company began outsourcing orders to other companies in the city, and is contemplating sending orders further inland, "to Jiangxi, Hunan and Sichuan provinces, where labour is cheaper".

Cai urged authorities to ensure salaries sustain growth by raising the minimum wage and stepping up guideline policies, while trade unions should extend collective bargaining to more enterprises.

Household reform

To offset the effect of a decreasing labour population, Cai said, ultimately, the reform of China's permanent residency system, or hukou system, should be a priority.

Hukou means access for residents to public facilities and services, such as education, subsidized housing, employment and social security, depending on where a person is registered.

Without hukou, migrant workers tend not to stay long in cities and usually return home to rural areas in their 40s, Cai said.

"Giving them hukou at their workplace would help stabilize the nation's labour force and attract more workers from rural areas (to cities)," he said, adding that a redistribution of labour from agriculture to other sectors will also help improve productivity and boost economic growth.

At the same time, giving migrant workers hukou would likely lead to them spending like urban residents, rather than the current situation in which they save money to send back to their hometowns, Cai said.

"A growth model driven by consumption is more sustainable than the current model, which relies intensively on exports and investment," he said.

Meanwhile, he said, China should take the opportunity to upgrade industry and technology faster, as well as eliminate sectors that use a lot of resources but produce little.

"Industrial upgrades will send a signal to workers that they need to receive additional training and education so they match market demand," Cai said. "The government should make vocational and college education more accessible for migrants."

Structural problems

Trying to address a profound structural problem in the labour market, with university graduates having a hard time getting a job, even as businesses have difficulty recruiting workers and technicians, Cai suggests an adjustment to higher education according to the demand of the labour market.

For example, updated manufacturing sectors could provide more knowledge and technology-oriented jobs such as product innovation and design, marketing and technical services that suit university graduates, he said.

More than 10 million jobs were created in China in the first three quarters of this year, surpassing the target of 9 million set for the year, according to the Ministry of Human Resources and Social Security.

The registered unemployment rate in urban areas was 4.1 per cent at the end of September, the same as at the end of 2011, said the ministry.

Chen Xin

China Daily

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