Sunday, September 9, 2012

No worries about unemployment in China

In late July Wen Jiabao called expanding employment a top priority and urged local authorities to create more jobs. “The current and future employment situation in China will become more complex and severe. We must make greater efforts,” Wen told members of the State Council. This and the unreliable Chinese employment statistics have sent alarming messages of rising unemployment in China.

However, China’s unemployment situation is something of a conundrum. Despite rising unemployment and anecdotal reports of layoffs, some entrepreneurs are still struggling to find and retain qualified people, and wages continue to skyrocket. As unemployment rises, wage growth should flatten and then fall, but analysts still expect nominal wage growth of more than 10% this year and even faster growth in China’s interior.

One theory is that wages are rising because China’s pool of excess labor is drying up. That would indicate that the country is nearing the Lewis Turning Point: an economic milestone at which a modernizing country shifts from a labor surplus to a labor shortage. But this seems unlikely. The IMF estimated in July that China has a surplus of around 150 million workers, and that it will continue to have excess labor until sometime between 2020 and 2025. Instead, the IMF attributed the rise in wages to increases in the minimum wage, efforts to limit overtime hours and improve working conditions, and mismatches of labor demand and supply.

Many job shortages occur because labor isn’t perfectly fluid, especially in a country like China where the hukou system restricts worker movement. Rising wages are encouraging manufacturers on China’s east coast to move low-end production to cheaper places such as central and western China and Southeast Asia, and China’s economy is moving up the value chain, meaning laborers may not possess newly demanded skills. As a result, coastal factories are laying off unskilled workers while also experiencing shortages of skilled technicians. Another mismatch occurs among the 6 or 7 million college graduates who often fail to find adequate jobs each year. A 2012 Tsinghua University study found its graduates earned less in their first year out of school than the average migrant laborer.

But since 2008 and 2009, efforts to promote balanced development have cultivated several new sources of job demand for college graduates and migrant workers. Economic development and reforms have encouraged the growth of the services sector on the coast, which is absorbing more recent college graduates. Meanwhile, manufacturing and construction have quickened in China’s interior, and government subsidies to rural areas have made farming a more viable economic option. Chinese media report that unskilled migrant workers who have lost manufacturing and construction jobs on the coast are returning to jobs and farms in central and western China. The number of workers in and around the export center of Guangdong fell on an annual basis in the first half of the year, for example, whereas job numbers climbed in interior regions such as Chongqing and Guizhou. Demographic trends put in motion by the one-child policy also work in the government’s favor. The population of 15-34 year-olds has fallen 17% since peaking in 2000, reducing the pressure for new jobs.

The events of the second half of the year are far from certain, but the situation for job seekers does not appear nearly as dire as in 2008. Among other things, entrepreneurs may be reluctant to lay off workers after their experience in 2008, when they paid a premium to rehire people after the market rebounded. Many economists predict just such an upturn in the second half of 2012. And while companies are seeing sales slow, pressure from other costs has eased considerably. China’s Producer Price Index has been negative since March, unlike last summer when materials costs surged, and surveys show that wage growth has been rising only slightly faster than productivity.

All this shows that there is still not much to worry about unemployment in China and that Chinese entrepreneurs are finding ways to accomodate to the labour market trends.

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