China’s emerging two-tier labour market

China is at that turning point in all developing economies when the labour supply changes from virtually unlimited to scarce. But it us not facing a classic Lewisian turning point.

Wrenching dislocations from abrupt population U-turns in its history have produced a sharply-defined two-tier labour market where shortages exist alongside oversupply.

At one end of the demographic spectrum is the rapidly dwindling pool of workers aged 15 to 34 who make up the labour backbone of Chinese export manufacturing. At the other end are the swelling ranks of older workers born in an era of big families before the controversial one-child restriction was imposed in 1979.

Labour shortfalls are now common in manufacturing hubs along the coast – especially in factories relying on young unskilled workers. But the services and high-end industries enjoy a surfeit of job-seekers especially in the older age groups and in the inland areas competing for employment.

Demographics are not just redrawing China’s labour landscape but reshaping and constraining government policies.

Re-balancing the economy away from export manufacturing to value-added industries is a shift in strategy driven as much by the emergence of a two-tier workforce as by slowing demand in external markets and the wish to lift the economy out of the middle-income trap. The shortage of young workers constrains growth in manufacturing. And the rising numbers of older workers and ambitious university graduates put pressure on the government to support sectors that generate high-end and age-friendly employment.

The numbers tell the story. In 1982, when China held its first full census, the younger end of the labour pool had outnumbered older workers five to three. But by 2010, the balance had tilted sharply the other way. Older workers aged 35 to 60 outnumbered younger workers five to four, which translates into an actual gap of 83 million people.

This gap will further widen. The 2010 census revealed precipitous drops in the population pool available to replenish the workforce:

• Age 20-24: 127 million
• Age 15-19: 100 million
• Age 10-14: 75 million
• Age 5-9: 71 million

Chinese think-tanks have been saying for years that the cascading effect of the one-child policy – fewer babies growing up to make fewer babies still – will shake up China’s labour landscape.

But their warnings were mostly ignored in the boom years following China’s accession to the World Trade Organisation. Robust demand for Chinese goods had fuelled perceptions that it was demand-pull that skewed the labour picture. When the financial crisis hit in 2008, media focus switched to the threat of unemployment. Warnings of a worker shortfall again failed to make the headlines in the face of the then slack labour market nationwide.

But by 2012, demographic reality could no longer be pushed into the background. The government broke the news that the ratio of working people (aged 15 – 59) to the overall population had declined. Then in 2013 came the bigger bombshell: China’s working-age population shrank for the first time.

Perhaps more surprising is that the shortage of young factory workers has not eased despite the recent slowdown in the economy. Government data shows that there were 11 urban jobs for every 10 applicants at end-2013. Even in the boom years from 2002 to 2008, the ratio was nine urban jobs for every 10 applicants. And the most compelling evidence of a tight labour market: migrant worker wages rose by a hefty 13.9 per cent in 2013 against 2.6 per cent inflation.

Less in the public eye but also changing dramatically is supply and demand at the older end of the labour pool. These are workers aged between 35 and 59 who were born before the one-child policy was imposed in 1979. Their numbers have more than doubled since 1982 when the first national census was held and have likely exceeded 519 million in 2012 when the latest population sample survey was held.

As societies become richer, birth rates tend to decline naturally. But what makes the decline in China’s workforce so challenging for current policymaking is the lopsided impact of the 1979 decision on the population structure. It is often forgotten that couples in the Mao era were officially encouraged to have large families – further adding to the population gap between those born before and after 1979.

But numbers are only part of the labour scarcity/surplus story.

Missing from spreadsheets are the changing aspirations of Generation Y, the first generation of the one-child family to reach working age. These are workers aged 16 to 35 who make up the labour backbone of export manufacturing. Unlike the first migrants who took up factory work in the early years, this younger wave of migrant workers expects more from life than mere survival, as the headline-grabbing waves of suicides at Foxconn in 2010 have told the world.

This new generation is much less compliant, much less willing to chiku or “eat bitterness”, and much more willing to fight atrocious working conditions. And as the only child in their families, they are under immense pressure to achieve. Their aspirations are much higher. Dead-end jobs far from home have little appeal even with a substantial wage premium. In a little-noticed interview after the unemployment numbers were announced last month, the Labour Minister bemoaned the unrealistic job expectations of new graduates.

With the college-educated talent pool forecast to outstrip the entire 160m-strong labour force of the United States and top 195 million by 2020, Beijing needs to keep its eye on unemployment levels in a group with the potential to organize protests and de-stabilize society.

Whatever the economic and political pressures on the government in the coming years, demographics will play a lead role in policymaking.