CHINA'S LABOR MARKET: SURPLUS OR SHORTAGE?

UNCLAS SECTION 01 OF 06 BEIJING 000800

SIPDIS

SIPDIS
SENSITIVE

DEPT PASS USTR FOR KARESH, ROSENBERG, CELICO, STRATFORD, BLISS
LABOR FOR ILAB
TREAS FOR OASIA/ISA-CUSHMAN
USDOC FOR 4420/ITA/MAC/MCQUEEN AND DAS KASOFF
GENEVA FOR CHAMBERLIN
USDA/FAS/ITP FOR SHEPPARD

E.O. 12958: N/A
TAGS: ELAB ECON EINV PGOV PHUM SOCI CH
SUBJECT: CHINA'S LABOR MARKET: SURPLUS OR SHORTAGE?


1. (SBU) Summary. China simultaneously faces both a large
labor surplus and shortages of labor in certain segments of its
labor market. Workers with skills have ample employment
opportunities, and some industrialized regions are experiencing
shortages of even marginally skilled workers, whose wages are
rising. However, China still faces a challenge creating
employment opportunities for a largely unproductive, surplus
agricultural labor force, and young new entrants to the labor
force, especially those with little education, make up the
majority of China's unemployed. Overall, the under- and
unemployed outnumber job vacancies, but structural problems
prevent the labor market from balancing out. Chinese experts
and other observers see poor workers' rights protection, the
restrictive hukou (household registry) system, and an outdated
education system that does not supply students with the skills
they need as three main factors behind China's labor market
imbalances. Reforms are under way in each of these areas, and
China's economy continues to evolve in market-oriented
directions. But as the Government continues to seek Socialist-
style control over labor organization, migration and the
education system, labor market imbalances are likely to persist.
End summary.

A Changing Labor Market
--------------


2. (U) Depending on whom you ask, China is either facing a
growing labor surplus or a widening labor shortage. Frequent
press reports, academic papers and statements of public
officials comment on China's labor market conditions, some
citing the slow pace of job creation and warning about risks to
social stability, while others maintain that labor shortages
threaten the continued growth and competitiveness of China's
export industries. The truth is that both views are valid, but
apply to different segments of China's complex and changing
labor market. This message is intended to summarize what is
happening in China's labor market, and current thinking about
its implications for economic development.

The supply of labor:


3. (SBU) According to the Ministry of Labor and Social
Security (MOLSS),China's labor force reached 758 million at the
end of 2005, and grew by about 1 percent per year for the
previous five years. MOLSS divides the labor force into 267
million urban and 491 million rural workers, but many workers
classified as rural are engaged in part-time, seasonal or
informal sector work in urban areas. According to Dr. Zhang
Libin, an economist at the MOLSS Institute of Labor Studies,
government labor surveys count workers as "urban" workers if
they have urban hukou (household registration) status, or if
they have rural hukou status but spend more than 6 months living
and working in cities. Rural-urban migrants who spend less than
6 months in cities are counted as part of the rural labor force.
Political and economic reforms over the past two decades have
allowed workers to migrate freely between rural and urban areas,
and work outside their registered home districts, but it is
still very difficult to change one's hukou status. Beijing, for
example, has an estimated population of 15 million, but only
11.5 million have a Beijing hukou. Without urban hukou status,
migrant workers in China's cities generally do not enjoy access
to public education, social welfare insurance and other public
services on an equal basis as registered urban residents.


4. (SBU) Wang Dewen, an associate professor of Population and
Labor Economics at the China Academy of Social Science (CASS)
provided Laboff with a more meaningful estimated breakdown of
the Chinese labor market than available from Government
statistics. According to survey results, Wang said, the labor
force breaks down (roughly) as follows:

Urban residents with urban hukou status 250 million

Rural residents working in urban areas 100 million
(migrant workers)

Rural residents working in non-agricultural 130 million
rural enterprises


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Rural residents engaged in agriculture 320 million
(of which, rural residents needed
for agricultural production) (170-270 m)

TOTAL 800 million


5. (U) Labor supply growth comes primarily from rural areas,
where small land holdings, inefficient agricultural practices
and low incomes encourage underemployed farmers to migrate to
cities or take up non-agricultural employment in township and
village enterprises. Many rural workers do not fall neatly into
one category, but tend to spend part of their time on the farm,
and part of their time in wage labor. The National Bureau of
Statistics reports that for the first 3 quarters of 2006, 34% of
the average farmer's income came from non-farm wages.


6. (U) According to MOLSS, migrant workers now constitute 40%
of the urban workforce, and predominate in low-skill jobs.
Migrants make up 68% of China's workforce in manufacturing, 80%
in construction and 52% in the restaurant and retail industries.
Despite the de facto status of migrant workers as second-class
urban residents,an NBS survey on migrant worker living
conditions published in October 2006 found that 55 percent hoped
to remain permanently in cities. It is common for migrants to
return to thei home districts once a year, usually at harvest
times or during Chinese New Year.


7. (SBU) MOLSS statistics indicate that the (formal sector)
labor force has increased by 6-7 million per year since 2000.
However, Zhang Libin estimates that job growth has been higher:
the working age population, she said, rose by about 14 million
per year between 2001 and 2006, but this rate of growth will
drop to about 8 million per year in 2006-2011. Good statistics
on how many rural workers migrate to take up wage employment
every year are not available, as a large proportion of these
workers end up what MOLSS terms "flexible employment" (informal
or irregular employment relationships). Since 2000, Chinese
government figures for rural net out-migration have fluctuated
between 6.1 and 10.2 million per year. Estimates of workers
engaged in flexible employment range from 40-80 million.


8. (SBU) The rural labor force represents an enormous pool of
underutilized labor. Wang Dewen and Zhang Libin told Laboff
that various economic surveys indicate that the agricultural
sector could shed another 50-150 million workers over time
without harming production. It is for this reason that most
Chinese economists maintain that China has a very large labor
surplus. CASS Economist Qi Jianguo told Laboff that he did not
believe China's industrial and service sectors were sufficiently
developed yet to absorb all these surplus workers, and that it
would take about 25 more years for the urban and rural labor
markets to balance out. The number of under- or unemployed rural
laborers surely exceeds the number of job vacancies in the
economy at any time, but structural problems prevent the labor
market from balancing out quickly.

Demand for Labor:


9. (SBU) Reliable statistics on labor force growth and job
creation are not available, given the blurry status of rural-
urban labor migrants and the growing incidence of informal
sector employment, but wage trends suggest that overall
unemployment is dropping. Wang Dewen told Laboff that CASS
surveys have found wages to be rising faster and in more regions
than official statistics suggest. Wages in China's
industrialized coastal regions have risen steadily since 1998,
and labor shortages there do not yet appear to be abating.
Shortages of even marginally skilled industrial and service
workers are also starting to appear in central and western China.

Labor shortages and wage increases are most intense at the
highly-skilled end of the labor market, as the early 2006
statistics below from Guangzhou suggest. The severe shortage of
highly-skilled labor in Guangzhou track with reports from human
resource consultants that turnover among skilled employees is
high and rising. Wages for the most skilled employees in the
Pearl River Delta region are approaching Hong Kong wages, and
government data suggests that even unskilled jobs are
increasingly hard to fill if they are dangerous or unpleasant.

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Wang Dewen describes the supply of unskilled labor in China's
cities as ample, but no longer unlimited.

Statistics from Guangzhou Labor and Social Security Bureau
(reprinted in "CSR-Asia," 22 February 2006)

Skill Level Ratio of Jobs to Job Applicants
-------------- --------------
no skills 0.78
basic skills 1.87
high skills 3.20


10. (SBU) A commonly cited anomaly in the Chinese labor market
is the high unemployment rate for recent college graduates.
According to Zhang Libin, 30 percent of recent college and
vocational school graduates face difficulty finding work. This
problem has received considerable attention in the press, but
Zhang does not consider it a long-term economic problem.
Although the education system is part of the problem, Zhang and
other labor experts Laboff interviewed believe that many recent
college and vocational school graduates also have over-inflated
expectations about the degree of responsibility for which they
are prepared, or are reluctant to look outside China's major
cities for work. Zhang Libin is more concerned about employment
prospects for high school graduates. Young people now
constitute 60 percent of the unemployed, and in some urban areas,
the unemployment rate for youth is higher than for migrant
workers. Young workers without education often end up in
informal sector employment, where their legal rights are poorly
protected.


11. (U) The profile of employers is also changing, with the
private sector creating an ever greater proportion of new jobs.
According to MOLSS statistics, State-owned enterprises (SOEs),
which once dominated China's urban economy, are declining in
importance, while the number of workers in private enterprises
has risen sharply.

Breakdown of Registered Urban Employees, 1999 and 2005
(Source: Ministry of Labor and Social Security)

Type of enterprise: 1999 2005
-------------- -------------- --------------

Urban SOE 90.6 million 64.8 million
Collective 19.6 million 8.0 million
Domestic Private 32.3 million 62.4 million
Other (foreign-invested) 16.9 million 41.1 million


12. (SBU) In line with this economic transition, the problem
of re-employment for laid-off former SOE workers has
significantly diminished in recent years, according to Zhang
Libin and Qi Jianguo. Zhang told Laboff there have been no new
entrants to government programs for laid-off SOE workers since

2005. Of the 28 million workers laid off since 1998, 20 million
have found new work or have qualified for retirement benefits.
According to Zhang, Government programs are currently only
providing specialized assistance to 600,000 particularly
difficult to employ laid-off former SOE workers. Zhang added
that another 6.6 million SOE workers may be laid off between now
and 2008 as a result of ongoing SOE bankruptcy proceedings.
These workers will be eligible for unemployment benefits, but
will receive no other special assistance from the Government.

Why (part of) the labor market is tightening
--------------


13. (U) Demographics appears to be a major factor behind
China's labor shortages. According to a CASS study, the
population ages 15-65 grew y an average of 12.5 million per
year etween 2000 and 2005, but the rate of growth peaked in
2003 and is now declining. The study also projects that China's
labor force will peak in 2015 at about 1 billion. Young female
workers who predominate in the manufacturing sector, are in
especially short supply, reflecting the one-child family
planning policies adopted in late 1970s. Rural areas can no
longer supply ever-increasing numbers of young workers. Demand
for labor continues to grow, but employers are facing a downward
spike in supply. Employers can no longer rely on the informal

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networks they used in the past to recruit workers. According to
anecdotal reports, the manufacturing sector is responding by
proactively recruiting workers from ever more distant rural
areas, paying bonuses to workers who can introduce friends or,
and accepting older workers than they have in the past.
Employers are also increasing wages.


14. (U) The most severe labor shortages, as well as the
fastest wage increases, are occurring in the Pearl River Delta
(PRD),and investors are responding by looking elsewhere to set
up shop. In a study called "Globalization and the Shortage of
Rural Workers: a Macroeconomic Perspective," Wang Dewen and two
co-authors demonstrated that the concentration in fixed asset
investment in China moved decisively away from the PRD and
toward the Yangtze River region and the northern coastal region
between 2000 and 2004. Some Chinese experts have also observed
that the PRD is declining in popularity as a destination for
migrants compared to the Yangtze River region.


15. (SBU) Conventional wisdom also attributes labor shortages
to Central Government policies designed to increase rural
incomes, such as tax breaks and subsidies, which have diminished
the push factor. Labor experts interviewed by Laboff said they
believe such policies have had some effect in some areas on the
availability of migrants, and further government initiatives
such as improvements to rural health and education systems may
encourage more surplus agricultural workers to stay put.
However, the experts also agreed that the effect of these
policies on the labor market appears to be overstated.
According to Government statistics and other surveys, the
outflow of rural migrants continues.

A labor market imbalance
--------------


16. (SBU) The persistence of labor shortages in China's
fastest growing regions suggests that economic, social or
political impediments limit the labor market's ability to adjust.
China Labor Bulletin (CLB),a Hong Kong NGO, attributes the
imbalance to a "one-sided" labor market. Since workers cannot
freely organize and negotiate with employers, CLB argues, and
the government is ineffective in setting and enforcing wage and
working conditions standards, workers must "take it or leave
it." Many labor market observers have described Chinese
employers as reluctant to raise wages, especially in export-
oriented industries which, due to intense competition, cannot
set the export price of their final products. Labor is the only
input cost some employers can control, and employers fear that
due to other impediments to labor mobility, raising wages will
increase their expenses without attracting more workers. As a
result, employers often try alternatives, such as increasing
hours worked (sometimes in violation of overtime regulations),
changing labor supply contractors, or expanding production to
lower-cost inland cities, before raising wages. In the PRD, the
lag between the emergence of labor shortages and significant
wage increases was about two years. Wang Dewen and other
scholars have called for China to improve labor law legislation
and enforcement, and reform the trade union and wage
determination mechanisms, and a survey report on Labor Law
enforcement published by the National People's Congress in
December 2005 made the same recommendation.


17. (SBU) Reluctance to raise wages, however, does not explain
all the rigidity in China's labor markets. Several political
and social factors also contribute to labor market imbalances.
A CASS study prepared for China's National Development and
Reform Commission (NDRC) attributes the mismatch between the
rural labor surplus and urban labor demand mostly to the hukou
system. While there are still too many surplus workers in rural
areas, the report states, migrants are not sufficient to meet
the needs of non-agricultural production and urbanization
because the hukou system restricts the flow of labor. Migration
only occurs when non-agricultural employment opportunities are
substantially more attractive than staying in rural areas. The
deterrent power of the hukou system is strongest for lower-
skilled workers, whose wages are not high enough for them to
forgo publicly funded housing, health care or education benefits,
however meager. A "hukou-neutral" labor market in which workers
could freely relocate and enjoy the same access to jobs and

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benefits as established residents would be able to respond far
more nimbly to changing conditions than Chinese workers can
today.


18. (SBU) Qi Jianguo told Laboff that he believed
unrealistically high minimum-wage standards and social benefits
for urban residents also contribute to labor shortages. In his
view, industrial and service sector employers turn to migrants
to avoid the relatively high wages and benefits urban employees
have grown accustomed to (pension, medical and other social
insurance program contributions can add 30 percent to the wage
bill),but are finally having trouble recruiting migrants as
well. Qi observed that wages move upwards each year after the
Chinese New Year holiday, depending on how many migrant workers
return to their jobs in the cities.


19. (SBU) The inflexibility of China's education system is
another factor behind China's skill-based labor supply
imbalances. Zhang, Wang and Qi all told Laboff that China's
higher education system is outdated, oriented toward producing
academics rather than skilled workers. Despite the high level
of unemployment among recent university and vocational school
graduates, a recent survey of 80 foreign-invested enterprises in
the PRD revealed that lack of skilled personnel is their top
human resources concern. The Chinese Government is also
concerned about the growing mismatch between supply and demand
for skilled labor. Qi said the Government should also reduce
the red tape associated with setting up a business and encourage
more graduates to create more employment opportunities for
themselves.

The impact on China's future competitiveness
--------------


20. (SBU) While most Chinese labor market experts believe
China will have a labor surplus for years to come, some experts
believe the shortage of skilled workers poses a serious threat
to China's competitiveness and economic development. In their
paper on "Globalization and the Shortage of Rural Workers," Wang
Dewen and his co-authors conclude that labor costs will rise in
China, and that the rise will make China's manufacturing
industries less competitive. Wang told Laboff that the
Government is very mindful of the competitive threat from
Vietnam, India and others whose wage levels are already lower
than China's, but he noted that the Government is already
looking beyond labor-intensive, export-oriented industries to
sustain China's economic development. China has an
underdeveloped services sector, a huge internal market, and lots
of room to improve the skills and productivity of its workers,
Wang said. Wang and his co-authors conclude that China can also
mitigate the threat to its competitiveness by deepening reform
of the hukou and education systems, and by taking other measures
to improve labor mobility and labor market efficiency.

Comment
--------------


21. (SBU) Most of the reforms necessary to reduce China's
labor market imbalances are already underway, but they will not
be politically easy. The Government is slowly making progress
on its legislative agenda to improve labor laws and better
protect workers' rights, which will contribute to correcting the
problem of the "one-sided" labor market. However, improving
enforcement of even existing laws and regulations and bringing
more accountability to often well-connected employers will
likely prove a great challenge, as it has in such areas of
intellectual property rights and environmental enforcement.
Reforms implemented at the local level continue to chip away at
the hukou system. Many small cities have made it easier for
migrants to obtain urban residency status. Large cities,
however, continue to take a piecemeal approach, allowing migrant
workers who pay into social welfare insurance programs, for
example, to receive benefits, but appear reluctant to undertake
obligations to provide migrants with such costly public services
as free public education. MOLSS and the Ministry of Education
are seeking ways to provide more vocational and skills training,
improve the quality of existing education curricula, and
developing mechanisms to help the education system become more
responsive to the laQr market, but to date, this has produced

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few meaningful changes. Although China's economy continues to
evolve toward more market-driven allocation of inputs, the
Government continues to seek Socialist-style control over labor
organization, migration and education. As a result, labor
market imbalances are likely to persist. End comment.


22. (U) Amcongen Guangzhou and Amcongen Shanghai cleared this
message.
RANDT