In Defence of 8 Per Cent

Job Creation is a Top Priority for China’s Leaders

By Dr. Günter Schucher

 

Contrary to rather pessimistic prognoses for 2009 by international financial institutions, Premier Wen Jiabao has assured people that China will be able to reach an economic growth rate of 8 per cent in this the “toughest year since 2000” (China Daily, 20 January 2008). “8 per cent” is said to guarantee sufficient job growth to absorb the nine million new entrants to the Chinese labour market – equating one per cent of GDP growth with the creation of around one million jobs. With an economy slowing below this “red line” and the number of jobless growing, the spectre of unrest might not be kept at bay.

 

Gauging the scale of factory closures and lay offs remains difficult. For four consecutive years, the urban jobless rate has fallen: from a high of 4.3 per cent in 2003 to four per cent in 2007. (All figures are taken from the official China Statistical Yearbook 2008 and China Daily.) Although the increase of 0.2 percentage points that the Ministry of Human Resources and Social Security (MOHRSS) announced on 20 January 2009 is much lower than the 4.5 per cent that even officials had expected by year-end, it marks a sharp turn. As of 31 December 2008, there were 8.86 million urban residents registered as jobless, jumping up by 560,000 only in the fourth quarter. The real situation, however, is much grimmer than these figures show. China’s official unemployment rate does not take into account the unregistered, highly mobile migrant labourers, newly graduated college students, as well as laid-off workers from state-owned enterprises.

 

The Forgotten Unemployed

Migrant Workers

According to a survey carried out by China’s Central Rural Work Leading Group, 20 million migrant workers had lost their jobs by January this year. This leaves a huge percentage of the migrating workforce unemployed after the Chinese New Year Festivities at the end of January. Unemployment is most severe in China’s southern manufacturing and export hub where thousands of labour-intensive firms collapsed due to weakening foreign demand. However, the return of these migrant workers to their homes might not provide a solution for the contracting labour market. Most rural returnees would rather look for jobs in the cities than stay jobless in the countryside. Surveys reveal that only about half of the jobless migrants have returned to their native villages.

 

So-called “second generation” peasant workers have aspirations – to find work in the cities. About 60 to 70 per cent of migrants are below 28 years old and actually lack basic agricultural skills. They constitute a new social group who are separated from urban workers by the invisible wall of household registration, and are without privilege in terms of income, social security, health insurance, or access to education. China’s floating population is estimated at more than 230 million workers, with about half working away from their native provinces. The percentage of the migrant population of the total population in urban areas is close to being 20 per cent – in cities such as Dongguan, Shunde and Nanhai in the Pearl River Delta, the size of the migrant population is even larger than that of locally registered residents.

 

College Graduates

The second group with massive job problems that is not included in statistics is that of college graduates. In 2008, 1.5 million graduates were unable to find jobs for various reasons – ranging from unrealistic expectations of high salaries, privileged work units, and a preference for big coastal cities, to a generalised supply-demand mismatch, and now even shrinking demand. This year, 6.1 million college graduates will enter the job market, and of these some 30 to 40 per cent (approximately two million) are not expected to find work.

 

Laid-off Workers at State-owned Enterprises

The third group is so-called laid-off workers. Due to painful restructuring of state-owned enterprises (SOEs) in order to raise their competitiveness in domestic and international markets, around 30 million redundant workers have been retrenched from SOEs since the late 1990s (and for which a specific term has been coined in Chinese: “xiagang”). Because they maintained a labour relationship with their work unit and received a basic living allowance, they never were integrated into the official unemployment insurance framework. As restructuring has come to an interim end the xiagang-method has been gradually phased out. But there were still up to two million laid off and the financial crisis seems to be encouraging companies to revert to the method, now called an “unpaid break”.

 

More realistic estimates for urban unemployed by government research agencies top out at 18 million[1] – the latter two groups of the “forgotten” jobless could possibly be referenced in these estimates. Zhou Tianyong, researcher at the Central Party School in Beijing, even estimates that the real rate of urban joblessness grew to 12 per cent in 2008, and warns that it could climb to 14 per cent in 2009[2]. That would be 35 to 40 million without jobs.

 

Job Development and Employment

That does not mean that China’s labour market policy has not been successful. Actually, job development has kept track with population growth for the last 30 years – despite far-reaching processes of industrialisation, urbanisation and privatisation. The number of employed persons rose by 182 per cent between 1978 and 2007 and reached 769.9 million. In the same period, ratios in the agricultural, industrial and service sectors changed from 70.5 per cent to 40.9 per cent (agriculture), 17.3 per cent to 26.8 per cent (industry) and 12.2 per cent to 32.4 per cent (services); urban employment grew to 293.5 million or 38.1 per cent of the total workforce; and the percentage of workers in state- and collective-owned units decreased from 99.8 per cent to 24.3 per cent.

 

Over the years, however, the link between growth and jobs has weakened and employment elasticity (the ratio between economic and employment growth) has declined. In the 1980s, each per cent increase in GDP led to a rise of 0.3 per cent in employment. This has dropped to a mere 0.1 per cent in job gains at the end of the 1990s as Chinese economists Hu Angang and Yang Yunxin have calculated. They characterise China’s development path as “high growth, low employment”, a result of striving to move up the value chain. With the expansion of capital-intensive industries, more and more economic growth was needed to create the same number of jobs.

 

According to the International Labour Organization (ILO), employment growth during the period 1990-2002 is entirely accounted for by the growth of urban employment which in turn is wholly attributable to the rapid growth of irregular employment of migrant workers and laid-off urban workers. Chinese labour statistics excluding rural migrants reflect this only partially, however. Nevertheless, they show a share of 11.6 per cent for unclassified labourers in urban areas in 1995 that rose to 38.3 per cent in 2007. A survey presented by Hou Baoqin and Chen Lan reveals that “all types of enterprises have increased their hires of rural migrant workers, agency workers and temporary labourers which displays enterprises’ choice of employment flexibility in coping with reforms and economic globalisation”.[3]

 

Informality is deliberately used to make the most of China’s labour cost advantage. It is not a transitory, but rather a persisting phenomenon. The Chinese government promotes informal – ‘flexible’ – employment as a way of reducing unemployment, alleviating poverty, and even ‘breeding’ new entrepreneurs. This large chunk of flexible employment explains the still rather partial coverage rates of social security as well as reduced rights and wage arrears for rural migrants. For this group, employment contracts are either non-existent or non-enforced. Even though the Labour Contract Law, effective on 1 January 2008 and part of the most substantial labour law offensive since the 1980s, was a reaction to reports about worker abuse through non-enforcement of workers’ rights and was meant to protect migrant workers, recent mass lay offs do not seem to have been heavily obstructed by this law.

 

In late 2005, news reports of unfilled job vacancies in southern China cropped up, leading to growing competition between firms for workers. Initially thought to be temporary, the labour shortage phenomenon was underlined by indications that wage costs and turnover rates among unskilled workers and migrants have surged. What could be a shimmer of hope in view of easing employment pressure is rather worrisome as long as the reservoir of cheap labour remains decisive for China’s competitiveness. But it still seems debatable whether China really has reached the end of its labour surplus phase – the more so in the light of recent developments.

 

Future Labour Supply

Future labour supply will be determined by a combination of demographic, behavioural and policy factors. The working age population is projected to peak in around 2015 at roughly one billion, after which cohorts of new entrants will gradually shrink. Moreover, higher enrolment rates in education are going to reduce supply since young adults – in the already shrinking 15-24 age cohort – will delay their entry into the labour market. Policy could contribute to ease this trend by, for example, reducing regulatory barriers between rural areas and cities, promoting vocational skills training in rural areas and creating incentives for late retirement.

 

The phasing out of the “demographic dividend” that helped China to grow with double-digit rates had added fuel to the fire of those who are in favour of a modernising and innovative China. But the menace of mass layoffs becoming more frequent and rising labour disputes that emerged in 2008 might change priorities. In November 2008, MOHRSS urged local authorities to bring their best efforts to bear at maintaining a stable employment market. State-owned enterprises are being encouraged to minimise the number of lay offs and companies have to ask local labour bureaus for permission before enacting mass lay offs or stopping recruitment. While reinstituted controls and subsidies for hiring were labelled by some foreign commentators as turning back the clock to the ‘iron rice bowl’ era, the remnants of the command economy might actually turn out to be favourable since banks and state-owned enterprises will follow Beijing’s order.

 

Public work projects are part of the massive USD 586 billion stimulus plan pronounced in early November 2008. Chinese economist Cai Fang states that a number of jobs would be created by the massive infrastructure projects and a large number of migrant workers would return to constructions sites, but reminded the government to pay equal attention to export-oriented enterprises. Since the November package, the Chinese leadership has turned its attention to managing the more intractable social fallout from the downturn. The Economic Work Conference in early December 2008 decided to increase domestic demand by rising budgetary spending on social expenditures and to improve job creation through infrastructural construction, as well as tax and fee reduction for most firms and reduced claims on the profits of state-owned enterprises.

 

The new measures are aimed at easing labour disputes and job losses. In 2009, the government aims to keep its registered jobless rate below 4.6 per cent and provide jobs for nine million new urban labourers, five million laid-off workers, and one million people who are facing difficulties finding work. In total, however, 24 million are expected to compete for these jobs according to the MOHRSS. To ease this pressure all of the government’s attention will be focused on the vigorous “defence of the 8” (per cent growth – a pace considered necessary to absorb the unemployed). To be successful, it should also consider investing more in labour-intensive sectors.