Research and analysis

China: labour market remains tight: April 2014

Published 1 May 2014

0.1 Summary

The strength of the labour market is the most important factor determining Chinese policy response to slowing economic data. Publicly available data isn’t great but all indicators suggest it is currently tight, supported by a structural shift towards services industry and by demographic factors. This provides a favourable context for ongoing efforts at structural economic reform.

0.2 Detail

China’s new leadership has made economic rebalancing top of its agenda. Inside and outside of government there is an acceptance of economic reform leading to significant slowing in growth. How much of a slow-down China’s policy makers can bear may largely depend on the performance of its labour market. In his press conference after the meeting of the National People’s Congress in March, Chinese Premier Li Keqiang said that people’s livelihoods are the government’s key priority and economic growth is important for its impact on employment. The reason for this concern is not hard to understand: mass unemployment would threaten social stability.

Worries about employment rose as the HSBC Manufacturing Purchasing Managers’ Index (PMI) for China throughout the first quarter read below 50, a sign of contraction. The manufacturing sector still employs the majority of China’s labour force in relatively unskilled jobs.

Caution should be used when assessing PMI figures, since they can be volatile in the first quarter that contains a long festive period. Official quarterly statistics on industrial output show growth of 8.7 per cent, 0.8 per cent slower than in the previous year. However, China’s Ministry of Human Resources reports a quarterly ratio of job vacancies to job applicants going up to 1.11 (for 100 applicants there are 111 vacancies available to be filled).

In Guangdong Province, China’s major magnet for migrant workers, the tight labour market is vividly illustrated. The Provincial government reported a labour shortage of 500,000 after Chinese New Year; a Standard Chartered survey in March of 375 manufacturers suggests a strong expectation to increase wages to retain workers; and in a February survey 80 per cent of migrant workers indicated no difficulty in landing a job.

These indicators fit with what we hear on the ground. Our contacts in labour organisations consistently say that workers have no difficulty finding jobs. Employers, particularly those in the manufacturing sector, continue to see retention as their top challenge.

0.3 Comment

A tight labour market and rising wage rates are partly explained by demographic and economic changes in China. The Chinese workforce has already begun to shrink. In 2013 the number of new migrants was 6.3 million (2.4% Y.o.Y. growth), the lowest growth since the financial crisis. Furthermore the process of economic rebalancing is expanding the more employment-intensive service sector. China’s service PMI readings consistently stay well above 50, indication of its growing demand for manpower. These changes will help to address the inequality issue that concerns policy makers. For many years China’s GDP grew faster than migrant wage growth, but over the last five years labour shortages mean there has been a reverse trend. Rising wage costs also encourage employers to care more for employee well-being and rights. In a Standard Chartered survey 24 per cent of employers say they have had formal wage negotiations with labour unions or worker representatives in the past six months, up from 19 per cent in 2013 and 9 per cent in 2012. We should continue to watch the labour market closely. Economic restructuring and demographic change should help the economy to accommodate slower growth without significant unemployment. Signs of persistent slow-down could provoke government stimulus which might offset policy efforts towards economic reforms. Implementation of economic reforms is essential for maintaining China’s medium term economic health.

0.4 Disclaimer

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