Jobs report

Is labour shortage imminent?

A retiree watches others play a game of Chinese chess in a Beijing park

Worries about an aging workforce

China’s national census was published last week and showed that the population had increased 7.1 million to 1.36 billion. But the figure that Chinese media focused on was the country’s gender imbalance. There are now 33 million more men than women, a situation that could increase social unrest as young men find it tougher to find brides. As WiC has pointed out many times before, this skewed ratio is largely due to a Chinese cultural preference for sons, and the gender choices – i.e. aborting female foetuses – thrown up because of the one-child policy.

However, in a report by HSBC’s China economics team – led by Qu Hongbin – the focus was on another demographic problem: the extent to which an aging population is shrinking China’s labour force.

It began by noting that last year China met its jobs target easily. By the end of the year 13 million jobs were created (versus a target of 10 million). “However, that provides us with only a single snapshot of China’s vast but poorly understood labour market, which is undergoing many structural changes. Understanding these changes is key to understanding the multitude of challenges facing China’s economy,” wrote Qu, who then set out to measure China’s labour supply.

“We believe one misperception is that the labour market is shrinking rapidly due to an aging population,” the HSBC report stated. “We think this analysis is factually incorrect.”

Looking at the 16-64 age group as the best gauge of the working age population, HSBC calculates there are 998 million Chinese in this bracket. This number will grow till next year and then will marginally decline by 0.19% for the next five years. Qu put that into practical terms: roughly 1 million fewer workers per year between 2015 and 2025. So yes, a decline but “a mild rate of change out tof a population of 998 million people”. The report added that it wasn’t trying to ignore a longer term problem: “Further down the road, an older population will translate into a slightly faster pace of decline. However, we are not there yet.”

In the short term, the number of workers might shrink slightly faster if the labour force’s participation rate continues to decline. If the current rate is maintained then the workforce will shrink by 2 million per year through 2015 – again not a huge number.

Other demographic trends are highlighted too. As of today, 46% of the working age population is below the age of 40. In a decade that drops to 40%. However, Qu and the HSBC team reckon a positive counterbalancing factor is that “China’s workforce is becoming increasingly better educated” and therefore more able to cope with more skilled occupations.

Another key question for the labour force is the rural population – traditionally a big driver of growth because of migrant workers. Many think this supply of migrants is dwindling. HSBC disagrees.

A total of 414 million workers are still in rural areas – albeit only 190 million are younger than 40. Qu views urbanisation as a convergence process, whereby labour moves from the less efficient rural sector to more efficient city jobs. Potential migration is not determined by the age of workers, therefore, but by “how many farmers are needed to maintain food production”. Based on the current productivity gap between farming and urban jobs, HSBC calculates that between 70-90 million will move to cities before 2020.

The upshot of this continued urbanisation? “Our findings reject the claim that an aging population means China’s economy no longer needs to create as many jobs as before. Although the pace of expansion of the overall labour market will slow, the non-farm labour market will still add an average of 14 million new workers every year.”

HSBC’s conclusion is that – contrary to the view that China will face a shortage of workers in the next five years – it will face an surplus. If real GDP growth is 7%, Qu’s team estimates that there will be average demand for 8 million new jobs per year. This suggests that at this growth rate around 6 million workers will struggle to find employment annually. If these calculations are born out, it implies that job creation and steady growth will continue to be priorities for Beijing policymakers in the coming years. Balancing that with a reform agenda will be a challenging juggling act.

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