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The Truth About Unemployment in China

Feb. 16, 2016 While unemployment looms large right now, the future Chinese labor force will lack enough workers to keep the economy going.

Briefing

|May 16, 2016

By Jacob Shapiro

Since 2002, China’s official unemployment rate has ranged from 4 percent to 4.3 percent.

That statement by itself should be unnerving. Such a steady unemployment rate would be anomalous even for a very stable economy. China, however, has seen its economy transform over the past 15 years. Explaining why the official numbers are so unreflective of this volatility is revealing of China’s economic and political challenges. It is also possible, based on recent studies and anecdotal evidence, to make a fairly substantiated guess that unemployment in China is roughly double the reported rate and is emerging as a major problem. China faces two main challenges when it comes to employment. The first is the short-term problem of lacking jobs, which will worsen in 2016, but which China has managed in the past. The longer-term issue is one of demographics. China’s workforce has shrunk for three consecutive years now. The bigger problem will not be fixing unemployment; it will be finding enough workers for the jobs that are available.

In East Asian countries, including South Korea and Japan as well as China, unemployment is a different issue than it is in the West. Western capitalism insists that the government stay out of private enterprise. But in China, the state’s paramount goal is maintaining social stability, and employment is one of the Communist Party’s most effective ways of ensuring stability. Chinese officials do not track or think about jobs the way the West does. In China, employment is a security issue. The government is not trying to figure out precisely how many jobs it can claim to have created; rather, Beijing worries about the potential security risks posed by layoffs and by workers who exist outside the state system.

Chinese History vs. Official Statistics

Understanding true unemployment in China then is important. But unemployment data is particularly hard to capture. It is somewhat of a cliché to point out that Chinese statistics – and indeed all state-provided “official” data – should be taken with a grain of salt. But that it is cliché does not make it any less true. Unemployment data in China is particularly suspect. China’s National Bureau of Statistics (NBS) calculates unemployment based on the number of registered unemployed workers divided by the total labor force. Huge numbers of Chinese workers are not registered – even a conservative estimate would be that hundreds of millions of Chinese workers are not represented in this data.

There are four key reasons China’s official unemployment data is so skewed. First, to register as unemployed, one must have hukou status. Hukou is a type of local registration that gives Chinese workers permission to work and reside in a particular area. This disqualifies most of China’s estimated 247 million migrant workers – over a quarter of China’s workforce – from being counted in China’s official unemployment figures. Second, unemployment benefits in China are generally not substantial enough to encourage registering. Third, the gray market plays a significant role in China’s economy. A 2008 survey conducted by the Institute of Population and Labor Economics estimated that between 19.9 percent and 37.2 percent of households in China depended on informal jobs that would not be included in official data. And fourth, China does not have a central body responsible for collecting data. The number of registered unemployed are counted by local bureaucracies, which then pass their numbers up the chain of command. Each official in this process may have reason to manipulate the data for reasons ranging from advancement to human error.

At the beginning of the 2000s, the People’s Republic of China (PRC) was in the midst of economic transformation. Though Deng Xiaoping opened China to the world in the late 1970s, convulsions in China’s labor market began in earnest in the mid 1990s. From 1995 to 2002, the urban labor market was reshaped. In 1995, 60 percent of urban jobs were state jobs. Before the PRC’s first labor law came into effect on Jan. 1, 1995, it was very difficult for state-owned enterprises (SOEs) to fire unproductive workers. Having a state job was referred to as having an “iron rice bowl” – meaning lifetime employment, a pension and virtually free healthcare and housing. By 2002, only 30 percent of urban jobs were officially state jobs. Government workers fared better than SOEs, with the latter laying off 35 million workers over seven years. The official unemployment rate however only increased from 2.9 percent to 4 percent in this seven-year period.

The early 2000s also coincided with the zenith of the Chinese growth miracle – preternatural GDP growth rates accompanied a massive rise in exports. In 2011, Chinese exports were worth $266 billion – by 2013, they were worth $2.2 trillion. Today, that process has reached its inevitable conclusion, and China is attempting to maintain social cohesion while transferring large numbers of workers from export-oriented sectors to service sector jobs. The apex of the high-growth, export-driven model was 2008. The 2008 financial crisis hit China hard, as global demand for Chinese exports declined significantly and the central government spent roughly $300 billion to stimulate the economy, according to International Monetary Fund estimates. And yet despite this tumult, the official unemployment figure fluctuated within a range of only three-tenths of a percentage point.

It is clear that China’s official unemployment figures do not accurately reflect reality. For one thing, the figures would make China an outlier compared to other countries in the world, regardless of income level. As the chart below shows, China’s unemployment rates are significantly lower than those of other countries.

There have been serious economic dislocations in China that have not resulted in any spikes or troughs in China’s overall employment picture. The aforementioned 2008 financial crisis’ effect on unemployment figures is case in point. In February 2009, a Chinese official from the Office of Central Rural Work Leading Group indicated that 20 million rural migrant workers had lost their jobs and returned home – contradicting then-Premier Wen Jiabao, who said the figure was 12 million. This also does not factor in the number of unemployed migrant workers who stayed where they were in the hopes of finding new jobs.

A report published by Gavekal Dragonomics notes that since 2013, the coal industry in China has lost 890,000 jobs and the steel industry has lost 550,000, and predicts that the two sectors alone could lay off 1 million workers in 2016. The Purchasing Managers’ Index for last month indicated a contraction in available jobs in both the manufacturing and service sectors. There has also been anecdotal evidence indicating that many Chinese migrant workers were told to leave for the Lunar New Year holiday early because businesses were attempting to cut costs. None of these factors have manifested in the official unemployment data, but all point toward unemployment being on the rise in China.

Toward a More Accurate Number 

Various studies have been published in recent years that attempt to get a more accurate read on the situation. Researchers from Texas A&M and China’s Southwest University of Finance and Economics published a report in 2012 that estimated Chinese urban unemployment at 8.05 percent after surveying 8,000 Chinese households. The Chinese Academy of Social Sciences meanwhile reported in 2008 that the unemployment rate was 9.4 percent.

Perhaps the most detailed study was done in August 2015 by Shuaizhang Feng, Yingyao Hu and Robert Moffitt for the National Bureau of Economic Research. This report used the Urban Household Survey from 1988 to 2009, covering all of China’s provinces, to attempt to get a better picture of unemployment in China. The graphic below summarizes their findings.

Their data ends in 2009, but it still shows that China’s average unemployment rate from 2002 to 2009 was more than double – and at times close to triple – the official reported rate. The report also notes that the two groups with the highest unemployment rates are young men and women without college degrees. Even in this paper, the focus was on those with hukou registration. This suggests that the true figure is even higher than the average estimate of 10.9 percent. It also shows that unemployment spiked to its highest level around 2002 and seemed to decline until the financial crisis in 2008 caused another surge.

This is going to be a difficult year for China’s workforce. Layoffs and a shrinking job market will no doubt exacerbate the high number of strikes and worker protests seen last year. Much has been made, both in the media and here at Geopolitical Futures, of the fact that in 2015, the China Labour Bulletin reported the most incidents of protests and strikes since it began reporting in 2011. But without knowing levels of protests and strikes in 2002 or in 2009, it is hard to establish whether 422 labor protests and 2,774 labor incidents in a country with more than a billion people represents significant unrest or is simply normal during a difficult phase of economic transition. This uncertainty about how the population reacts to unemployment is a real concern for the Communist Party as it attempts to mitigate unrest.

A Looming Crisis 

Despite the immediate concerns over unemployment, China is facing a much bigger crisis on the horizon. In 2015, China’s migrant population declined for the first time in 30 years – falling by 5.68 million according to the National Bureau of Statistics. Also, as the chart below shows, the number of working-age Chinese has been declining since 2013.

china-labor-loss

This is partly because the NBS changed the way it reported that data, narrowing the focus from ages 15 to 64 to ages 15 to 59. But that merely sped up the identification of the problem by a few years. As the labor pool continues to shrink in China, the problem will not be a high jobless rate. The problem instead will be that a lack of qualified workers will start to drive labor costs up – a trend that has already started and has hurt the competitive advantage China depended on for decades to support its manufacturing and export sectors. China phased out its one-child policy in 2015 and raised the age for mandatory retirement, but these are only stop-gap measures to stave off the impact of China’s demographic trends for a few years. Global Demographics estimates that over the course of roughly the next 10 years, the number of 15- to 24-year-olds in China will drop by 38 million, a decrease of just over 20 percent.

chinas-demography-2014

chinas-demography-2025

There is not any one employment problem facing China right now. A number of dynamics are coming to a head. The size of the workforce has begun to shrink at the same time that migrant workers are returning back to their homes and farms for the first time in 30 years because they can’t find jobs. Labor costs have begun to increase, in some areas as much as 10 to 15 percent, which strongly outpaces the official 1.6 percent inflation rate. This means it is harder for Chinese companies to make profits and also makes China a less attractive destination for foreign investment. Some companies are being forced to either reduce staff or cut corners in order to improve the bottom line. Meanwhile, demographic changes will slowly change everything about how the Chinese economy functions.

Conclusion

This promises to be another difficult year for China’s labor market because many jobs in industries tied to low-cost exports are being eliminated. The central government has already indicated it intends to use SOEs to provide jobs for soldiers who will lose their positions as a result of military reforms; it remains to be seen if China has the means to provide jobs for others or if another period like 1995 to 2002 is in the offing. We can guess that unemployment in China is somewhere above 10 percent. But the precise number is less important than that Chinese workers are having trouble finding work and that this will challenge China’s political stability.

The bigger question on the horizon however is how and when the crisis of today will meet the crisis of China’s next decade. We believe China will succeed in maintaining stability in 2016, but that in the long run, China will fragment. Unemployment in China is important – but it has been and can be managed. The effects of demographic trends may not be as immediate an issue, but they are also far less forgiving.

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East Asia

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