# China's Challenge: Employment and unemployment

Date April 5, 2002 MENG Jianjun(Faculty Fellow, RIETI) C. H. KWAN(Senior Fellow, RIETI)

## Summary

Meng Jianjun

Today, I would like to talk about population and workforces in China. China has 711.5 million workforces, 11.5 of Japan's workforces. When we look at the Chinese population curve in the recent years, natural increase rate, which stood at 1.04% in 1990, came down to 0.77% in 1999, a level equivalent to those in industrialized nations. China's population pyramids indicate that China will become an aged society in 20 years from now. Such a process normally takes more than 50 years but it will happen far more quickly because of the one-child policy. The policy has also brought some distortion in male-to-female ratios in the Chinese population: the ratio now stands 51.1 to 48.9. The latest census was carried out in 2000 but it takes about three years before the latest figures are announced.

Tsinghua University's Center for China Study calculated where China stands in the world in terms of major economic resources. According to the 1996 data, China, which occupies 7% of the world land areas, had 21.2% of worldwide population and had to provide jobs to 26.3% of the world workforces. The presence of ample workforces does give China comparative advantage over the rest of the world. When we compare growth rates of Chinese population and workforces, we can see that employment problem becomes most serious in a period between 1997 and 2007. This is because we expect that massive layoffs in the urban areas and the peak in surplus labor in the countryside will simultaneously take place in this period. The situation will somewhat improve afterwards as the effect of the one-child policy begins to emerge.

Let's take a look at relations between economic development and employment structure. Despite a series of challenges, China achieved high economic growth of average 9.5% per annum during the period between 1978 and 2000. In the same period, the ratio of primary sector workers dropped from 70.7% to 50.0%, while the ratio in the secondary sector rose from 17.6% to 22.5%, and from 11.7% to 27.5% in the tertiary sector. The growth in the secondary sector subsequently slowed down to peak at 23% in 1995, then turned down.

When we focus on demographic shift by regions, Guangdong, Shanghai, Beijing and Xinjiang recorded big inflows in 1995, while those with big outflows include Sichuan, Anhui and Henan. Xinjian had a substantial population inflow thanks to boosted trades between the peripheral China and its neighboring countries. Regions with large population outflows are characteristically losing their population to their neighboring big cities. The Guangdong area, which has the largest inflow, borders on Hunan, Guangxi and Jiangxi, and the Shanghai area on Anuhi and Zhejiang, and the Beijing area on Henan and Hebei.

Then, what is behind such massive workforce migration? Per capita GDP is a key factor. More precisely, because of the disparity between rural and urban income, disposable income per farmer is slightly more than one third of that for an urban resident. Although China has "hukou" residence registration system, it does not pose obstacle for "qianyi" migration involving the transfer of non-agriculture type hukou, which is less restricted than agriculture type hukou. This kind of migration is especially conspicuous in Sichuan, which is the center of culture and education. But things are different about workforce migration. If we look at the impact of migratory workforce in Sichuan Province excluding Chongqing, estimated 5 million or more migratory workers made remittance worth 4,700 yuan per person and this amount is roughly equivalent to per capita earning in the province.

Up until 1994, the very concept of unemployment was non-existent in China. The idea came into being with a shift to market economy. To work in an area other than where they originate, people need three kinds of certificates: a certificate of original region, a certificate of residence, and a work certificate. Their registered residence (hukou), however, does not move.

In 1999 and 2000, state-owned companies were the greatest provider of jobs in China. In rural areas, group-owned companies were also a major employer but the number of workers at "xiangzhen" companies - local-oriented group-owned companies - has hit the ceiling. Restructuring accompanied by substantial payroll reductions is being carried out both in state-owned and group-owned companies. In the past five years, a total of 50 million workers lost their job in restructuring and this means that roughly one third of overall restructuring has been completed. Structural adjustment from planned economy to market economy is proceeding. The number of employees at private or foreign companies and the number of those self-employed quadrupled in the past 10 years.

It is said that China has surplus workforce of 120 million to 150 million. When they lose their jobs, farmer still have means of production but urban workers are left with no means of production. There are three kinds of urban unemployment data in China: jobless rates for registered workers, survey-based jobless rates (results of sampling surveys that include restructured workforce), and estimated rate of actual unemployment. Although the jobless rate for registered workers now stands at 3.1 percent, it is reasonable to assume the actual jobless rate is much higher than this.

Tsinghua University's Center for China Study estimates urban jobless rate is 8.3% in nationwide average and 13.0% in Heilongjiang Province where an unemployment rate is the highest. Beijing, which lags behind the nationwide wave of restructuring by two year, has a relatively low jobless rate. The delay was implemented because government officials did not want anything go wrong in Beijing in 1999, the 50th anniversary of the foundation of the People's Republic of China. But the transition to market economy is now rapidly proceeding.

By sector, the wholesale, retail and food service industries posted the largest ratios of restructured workforce - 32.1% - in 2000. These industries, in which restructuring can be carried out without incurring sunk cost, should embark on drastic restructuring and provide job opportunities to all the people. The manufacturing and mining industries have the second largest ratio of restructured workforce. To further promote market economy, it is important to carry out restructuring for the sake of generating new employment opportunities rather than implementing the work-sharing scheme. Job retraining is also being provided as a temporary measure for a fixed-period of time.

When we look at ratios of unemployment insurance coverage in a 1994-2000 period, the coverage ratio has been on the rise for those working at state-owned companies, especially under the tenure of Premier Zu Rongi, to reach 91.7% in2000. On the other hand, the coverage ratio remains 48.7 percent for overall urban workers. Those uncovered by unemployment insurance have no insurance or pension unless they pay premiums on their own. Also, only 10 percent of workers are covered by insurance for job-related injuries, and only one third are subjected to medical insurance.

Basic living costs are smaller in provinces with massive restructuring such as Liaoning and Heilongjiang provinces. People in Tibet are guaranteed for 95% of the standard living costs and those in Beijing also receive substantial living allowances from the government.

When we compare indices for changes in the number of regular and non-regular workers, index for regular workers landing on traditional work peaked out in 1995 and is now declining. Those obtaining a regular position in a new type of work as well as those attaining a non-regular position are increasing in proportion. We have been proposing to the government that those who earn enough to provide for his or her family should be considered to have landed on a job. Otherwise, China will never be able to solve this unemployment problem. Non-regular works, including those by individual entrepreneurs, are being promoted. People working at home should be counted as employed if they earn enough to pay taxes.

In lower-level estimates, China's population is expected to peak out in 2030. And around this time, urban and rural populations will be balanced. But China has to quicken up urbanization to create cities of half a million or one million populations, or it will run out of time. We also expect to see the rapid aging of the population with a rapid increase in the ratio of elderly population aged 65 or older.

The impact of the one child policy will begin to emerge in 2007. This is expected to be a turning point to mark the beginning of the rapid aging of population. The one-child policy will be modified some day to allow a second child for a couple, should both the husband and wife be the only child for their parents. In the rural areas, it is already allowed for a couple to have a second child six years after the birth of the first child if the first child is a girl.

China will continue to face the endless challenge of labor problem in the future.

Commentator: C. H. Kwan

Listening about reforms at state-owned companies in China, I believe the dissolution of the work sharing would be effective. Ten people used to share the work that can be done by five people. The situation is opposite in Japan where people are beginning to call for the introduction of work sharing. Japan seems to be adding more to its socialistic features. The introduction of such a scheme would be inevitable for a short term but it will push Japan further away from market economy. If a company introduces such a scheme, the company will lose its competitiveness against its rivals. Thus, the government may step in to guide others to do the same.

Eventually, China will have to pay the costs of its one-child policy and this will lead to the lowering of savings rate. In terms of implications to economic development, we will see a negative growth in labor force from around 2020. So, the next 20 years would be the last chance for China to achieve economic development. In a short term, we have serious unemployment problem. In a sense, however, it is a plus to China that wages remain same even if productivity goes up.

We see highly concentrated population inflow into Shanghai and its nearby coastal areas. Although it has been announced that GDP per capita in Shanghai is $4,500, I think this is a bit exaggerated because figures for registered population do not reflect the reality. Shanghai's registered population is 13 million but actual population based on informal census is as high as 17 million. If we use this informal figure, Shanghai's GDP per capita would come down to$3,500. Also, although we have so far discussed about untrained labor, it is said that we have some 400,000 highly educated elites overseas. The timing at which those foreign trained people with expertise will return is a very important factor. Even in case of those in Taiwan, when income disparity between inside and outside mainland China shrinks, it will give them greater incentives to come back. It is expected that those people will be playing an active role not only in China but also in a broad range of area.

A: Abundant labor force is one of the important power sources for China. Is there any language problem in China when people migrate from one place to another?

Meng: No, migration is quite free. Thanks to efforts to teach simplified Chinese characters in the past 50 year, most people are now familiar with Mandarin. Young people who have attended junior high or high school are especially capable of speaking Mandarin.

B: You said labor survey is conducted as part of census. But how frequently and extensively is such a survey carried out?

Meng: One million population cities are subjected to unemployment surveys. So, those cities are excluded in labor surveys. In case of Shanghai, the flow of migratory workers is orderly because such migration takes place in accordance with collective contracts between Shanghai and inland villages. Some migratory workers go on their own with a help of their relatives. But Chinese people have a tendency to return to their home for the Chinese New Year. Exit poll has found that 15 percent of migratory workers return to their home and stay there for some time. There is no integrated unemployment rate.

C: Do certificates for migration have any expiration date? What kinds of jobs do those 80 million migratory workers?

Meng: Certificates are valid for one to three years. A certificate with the longest remaining validity period becomes the basis for a duration for which a worker can stay at one workplace. Some trained workers continue to live there. In Shenzhen, for instance, a trained worker can buy a hukou residential status for 5,000 yuan. It is impossible to absorb all the 80 million workers in the high-tech industry. In 1996, the government proposed to increase the number of enrollment in universities to 960,000 in 1998, 2.5 million in 2002, and 3.5 million in 2010. A total of 200 private universities were opened as well. Moves are emerging to privatize two thirds of national universities, leaving only 100 or so major national universities. Some 7 million take a university entrance exam every year. This is partly a government policy to postpone the release of workforce into labor market and retrain workers. This year, some 630,000 candidates applied for the fixed capacity of 190,000 for master's programs. This reflects the government's will to change the structure of the nation's education system. Also, greater investment has been made for the implementation of mandatory education in inland areas.

Kwan: Good universities concentrate in Beijing and it has been criticized that those universities set much lower hurdles for students from Beijing than for those from outside. A girl from Qingtao brought up the case but those from Beijing surely get 100 points padded.

Meng: Minorities are accorded with even more favorable treatment. If the acceptance line for those from Beijing is 400 points, those from minority groups can get in with 350 points.

D: I understand that retirement age in China is 50. When working population decreases in the future, isn't it necessary to postpone retirement age to allow greater service period.

Meng: Generally speaking, people retire at the age of 60. As a short-term policy for three to four years, state-owned companies are adopting 50 or 45 as a retirement age. There is also a case in which service period at a single company is limited to maximum 30 years. Many cases of hidden employment exist in Beijing, Shanghai and Tianjin. In the long-term, retirement ages are set to be 60 for men and 55 for women. But this is because the Constitution says so. Now that China entered the World Trade Organization, there have been calls for setting 65 as a retirement age, following the global standard.

E: You said working population in the secondary industry has not increased proportionately. Could you elaborate more on changes in China's employment structure.

Meng: It is said that more and more jobs are transferred from Japan to China. But this will provide no meaningful solution to China's employment problem. Compared to 60 million working population in Japan, China has 700 million. Unemployment rate in Hong Kong hit 7 percent and many blame the transfer of jobs to mainland China. But this, too, is just a drop in the ocean. State-owned companies got rid of one third of their workforce in the past five years and it is impossible for the secondary industry alone to create enough many jobs to absorb all the laid-off workers.

F: China seems to be making certain concession to ASEAN countries in the agricultural products. What about the manufacturing sector?

Meng: I don't expect any compromise in the labor-intensive industries. The government has been promoting well-to-do state-owned companies and private enterprises to advance into ASEAN countries.

E: To what extent, are new job opportunities increasing? Are there any new employment data available?

Meng: University graduates used to be allocated jobs by the government. Unlike how things used to be for my generation, job markets in Beijing are divided into "labor market" for blue-collar workers, "human resources market" for white-collar workers, and "manager market" for corporate managers. Today, students chose their jobs.

A: Is the one-child policy still there? If the situation is left unattended, I am afraid men-to-women ratio in the rural areas would become three to one. Wouldn't the government scrap the policy?

Meng: Yes. We may have three to one. There are 20 million men who remain throughout their life and problems such as trafficking of women are arising. Thanks to the easing of tension between China and Vietnam, 20,000 to 30,000 Vietnamese women cross border to marry Chinese men. Rather than simply scrapping the one-child policy, the government needs to change ways of doing things.

F: I heard the problem of AIDS is beginning to emerge in China. Is that true?

Meng: Yes, it is. Problems concerning blood donation and drugs are becoming serious.

G: Does China aims to promote an American-style go-west policy as a means to create jobs?

Meng: That's not the case. Rather, China's go-west policy is intended for infrastructure development, not migration under population policy. In case of the Sanxia Dam (Three Gorges Dam) project on the Yangtze River, 1.5 million people were relocated. Out of this number, however, only 300,000 represent the relocation from the coastal area. The rest were originally living in the mountain and they simply relocated to somewhat deeper into the mountain.

Kwan: The purpose of the go-west policy is the transfer of money.

H: You said roughly half the working population is in the primary industry and I find the ratio quite big. China did enter the WTO. But this also means that the U.S. expects its agricultural products have an access to the Chinese market and China will inevitably have to increase grain imports. Then, I'm afraid that the number of farms in China will have to be reduced substantially.

Meng: I do expect a sharp decrease. Large-scale urban developments have been taking place, promoting urban-style allocation of works. For the moment, the urban population is rising by 10 million annually, but we will have to urbanize 30 million people per year. In Zhejiang province, each municipal government created a city of 500,000 population. Rural villages may dilapidate. In some cases, three farmers cultivate a 50-hectare land to produce vegetables just enough to provide for themselves, instead of double cropping. The remaining land is rented out to those from even poorer areas.

I: I have had a chance to look at data on the number of Communist Party members by class. According to that data, the number of party members is relatively large in the rural areas and small in the manufacturing sector. Will urbanization bring any influence on the power of the Communist Party?

Meng: All of my students were party members. I don't think there will be any big influence.

*This summary was compiled by RIETI Editorial staff.