China’s Looming Labor Supply Challenge?

China has the largest labor force in the world. In recent years, new strains have emerged in China’s labor supply that raise concerns about the country’s economic growth mode. The shortage of migrant workers that gripped the Pearl River Delta region and the coastal areas of Fujian Province in 2003 gradually seeped its way into the Yangtze River Delta region and other coastal provinces. In 2009, this trend extended to several cities in central China. The wage of migrant workers, which had been stable for more than a decade, also began to see a gradual increase.  From 2005 to 2010, the average wage per month for migrant workers increased 14.1 percent from 875 yuan (about $130) to 1,690 yuan (about $252) (People’s Daily, March 23). These noticeable changes in the Chinese labor supply and market have caught the attention of authorities in Beijing. Indeed, in the Report of the Work of the Government at the Fourth Session of the Eleventh National People’s Congress (NPC) on March 5, Premier Wen Jiabao emphasized the need to accelerate the transformation of the pattern of economic development and economic structure. Some analysts argue that these changes are short-term phenomena brought about by the business cycle. Yet, fundamental shifts in the long-term supply of labor resources have had a profound impact on China’s economic development.

Working Age Population Reaching Tipping Point

China’s working age population (aged from 15 to 64) has experienced steady growth over the past few decades. According to the projection by the Report of China’s Population Development Strategy (2008), this figure increased to 968 million in 2010, occupying more than 71 percent of the total population. While China is currently enjoying the largest scale of working age population and the lowest dependency ratio, new trends have began to emerge in the growth rate of working-age population in China.

First, the average annual growth rate of China’s working-age population is beginning to slow down. The figure decreased from 1.39 percent during the 1990s to 1.28 percent between 2000 and 2005 and further to 0.81 percent between 2005 and 2010 [1]. Yearly increment of working-age population dropped from 10.2 million in 2005 to 8.6 million in 2010, and according to the 2008 Report of China’s Population Development Strategy the percentage will drop to 2.36 million in 2015 [2]. The working-age population will stop increasing in 2017, when it reaches a peak of about 999.6 million, and will reduce gradually from then on [3]. Second, the proportion of working-age population to total population will reach its peak in 2013 (72.14 percent) and then decline slowly while the population dependency ratio will begin to rise [4]. Third, a significant year-on-year reduction of new laborers appeared. The number of 18 year-old new laborers was 27.9 million in 2002, decreased to 22.5 million in 2010, and will decrease to 16.6 million and 14.8 million respectively in 2015 and 2020 [5]. Fourth, trends regarding the aging workforce and the continual decrease of the proportion of young workers to the whole working-age population are emerging. The proportion of workers aged between 15 and 24 will decrease from its peak in 2006 (16.63 percent) to 12.84 percent in 2020; and the proportion of workers aged between 25 and 39 will decrease from 25.95 percent in 2005 down to 22.12 percent in 2020 [6].

Limited Surplus of Rural Labor Force

The demand for labor resulting from rapid economic growth was filled by the steady mobility of a rural surplus labor force. It is estimated that more than 200 million farmers left the agriculture industry since the mid-1990s. According to the statistical bulletin of the PRC Ministry of Human Resources and Social Security, there were totally 229.78 million migrant workers in 2009, of which 145.33 million left their hometown [7].

Presently, two important phenomena are worth noting. First, with the abundant absorption by cities and non-agricultural industries, the number of rural surplus labor has been greatly decreased. It was estimated only about 100 million left at present or even less than that [8]. Second, the supply of young labor force under 30 years old is gradually tightening. The second national agricultural census data showed that nearly 1/4 of the rural labor force went out for employment in 2006, of which 52.6 percent were young workers under 30 years of age. Specifically, more than half of the labor force aged between 21 and 30 went out for employment. In 2009, migrant workers aged from 16 to 25 and from 26 to 30 accounted for 41.6 percent and 20 percent of the total migrant workers respectively [9]. "Labor shortage" and the upward trend in wages for migrant workers indicate that the transfer of rural surplus labor in China may have reached a turning point, changing from an infinite supply to a finite surplus. A shortage of the young labor force is beginning to emerge.

Structural Imbalance between Labor Supply and Demand

Although the long-term trend of labor supply is changing, China is still at the stage with the most abundant labor resources and the lowest dependency ratio. China has not yet entered the era of labor shortage. Rather, the basic causes for the present labor shortage and the rising of labor costs are not caused by the contradiction between the total supply and demand of labor force, but by structural imbalances and changes.

First, the change of the rural labor force from infinite supply to finite surplus, especially the significant reduction in the stock of young workers, essentially reversed the supply and demand system maintained for more than 20 years in the migrant worker market. Second, the cost of living increases and labor supply behavior of the "new generation" of migrant workers are changing. With economic development, living standards of Chinese urban and rural residents have shown a substantial improvement and the cost of living a corresponding increase. Therefore, reservation wages of migrant workers have started to rise. In addition, the new generation of migrant workers, who were born during the mid and late 1980s and 1990s are better educated compared to their fathers and seniors and who pay more attention to their own life experience in the city, require higher reservation wage and a better work environment. So the original wage level has lost its attraction to the new generation of migrant workers.

Third, with the abolition of agricultural taxes, the boost of the prices for farm products and the construction of agricultural infrastructure, agricultural productivity and income showed remarkable improvement in recent years. This change increased the opportunity cost of migrant workers, thereby increasing their reservation wage. Fourth, economic development in the Middle and West Areas aroused growing demand for labor. Since the beginning of this century, the Chinese government formulated a series of development plans to promote economic development of the center and western areas and to narrow the differences in regional development. On the other hand, due to the industrial restructuring of the developed East Area as well as the continual increase of rental, environmental, and labor costs, some companies have begun to move to the center and western areas.

These two changes resulted in rapid growth of the Middle and West Areas in labor demand, forming the competition between these two areas and East Area in labor demand. This can be verified by the changes in direction of labor mobility. In 2004 and 2008, more than 70 percent of migrant workers who left their hometown flowed into the East Area, and 14 percent and 16 percent to the Middle and West Areas respectively. Compared with 2008, the number of migrant workers increased by 4.82 million in 2009, and the regional distribution pattern began to change, with the percentage flowing to the East Area decreasing to 62.5 percent and those to the Middle and West Areas increasing to 17.3 percent and 20.2 percent, respectively [10].

Long-Term Trends of Labor Supply

From a long-term perspective, the turning point of the continuing labor supply trend will bring about a more profound and far-reaching impact on the economic development of China. With the start of the negative growth of the working age population, the aging of the workforce, the substantial decrease of the surplus rural labor force, the improvement of living standards and rising of cost of living, as well as the continual decline of the labor force participation rate (Labor force participation rate was as high as 86 percent in 1995, dropped to 74 percent in 2005 and has now fallen to below 70 percent) [11], long-term supply and demand in the labor market will change gradually from an overall surplus of labor to a structural shortage in the next 10 to 15 years. The comparative advantage of cheap labor, on which China’s economic growth and international competitive power rely on, will gradually be weakened or even lost, severely straining the vigor of economic development. Under these circumstances, the traditional labor-intensive industries will face enormous pressure. The traditional mode of economic growth will face enormous challenges.  In doing so, the Chinese economy will face a major structural adjustment, leading to a transformation of the economic and technological structure.

Conclusion

Faced with these challenges, China appears to be transforming economic development strategies without delay, building new comparative advantages, improving the dynamic structure of economic growth with technological progress and innovation as the main driving force, optimizing the industrial structure and reducing the environmental costs of economic development to enhance the overall quality of economic development. The human resources basis for the realization of this new development strategy is the comprehensive improvement in the quality of workers. In the process of economic development, the shift of the comparative advantage from cheap labor to high quality human capital is the prerequisite for a nation to enter a developed state and maintain international competitiveness. It should be China’s strategic choice to stimulate new impetus for economic growth and sustainable economic development by increasing investment in human capital, improving the efficiency of human resources and building new comparative advantage in human resources on the basis of improving the quality of the labor force.

Notes:

1. It was estimated based on the data of Population Census in 1990, 2000 and 1 percent Population Sample Survey in 1995 and 2005.
2. Report of China’s Population Development Strategy, National Population and Family Planning Commission of P.R. China, 2008.
3. Report of China’s Population Development Strategy, National Population and Family Planning Commission of P.R. China, 2008.
4. Report of China’s Population Development Strategy, National Population and Family Planning Commission of P.R. China, 2008.
5. It was estimated based on the data of 1 percent Population Sample Survey in 2005, National Statistics Bureau of P.R. China, 2006.
6. Report of China’s Population Development Strategy, National Population and Family Planning Commission of P.R. China, 2008.
7. Statistical bulletin for human resource and social security 2009, Ministry of Human Resources and Social Security of P.R. China, 2010.
8. Du Yang and Wang Meiyan, New estimate of surplus rural labor force and its implications, Journal of Zhuangzhou University (Social Science Edition), Vol. 9, No. 4, April 2010.
9. Report of monitoring on migrant workers 2009. National Statistics Bureau of P. R. China, March 2010.
10. Zhang Juwei，Study on Floating Population of China, Research report, National Population and Family Planning Commission of P.R. China, October 2010.
11. Wang Jinying. Labor Supply and Economic Growth, Research Report, National Population and Family Planning Commission of P.R. China, July 2010.