China’s Delicate Jobs Challenge
Image Credit: REUTERS/Stringer

China’s Delicate Jobs Challenge

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Taken at face value, China’s recent 2013 jobs data present a healthy picture of growing employment. The government reported a “record high” 13.1 million new urban jobs were created and, despite slowing GDP, headline unemployment remained relatively low at 4.1 percent. This led government spokesman Li Zhong to assert that the Chinese economy is “more and more capable of creating jobs.”

Unfortunately, however, there are major reasons to doubt this upbeat assessment. Not only is the urban unemployment rate of 4.1 percent highly questionable, having remained suspiciously constant for many years, but there is also growing cause for concern that the Chinese economy will not be able to continue to create employment as it has done in the past.

Indeed it appears there are a number of factors, both home-grown and international, that risk coming together in the next few years to cause significant unemployment in China. Most worrying for China’s leaders is the fact that the blueprint to restructure the country’s economy, unveiled at last year’s Communist Party Third Plenum, may well exacerbate this risk.

Given that rapid employment growth and its effect of lifting wages and increasing living standards underpins the legitimacy of the entire Chinese political and economic model, the consequences could be extremely serious.

China’s Jobs Engine

Ever since the Communist Party came to power, high employment has been a priority for China’s leaders. Hu Jintao, China’s previous president, famously confided to his U.S. counterpart George W. Bush that employment was the issue, above any other, that kept him awake at night. More recently Li Keqiang, China’s premier, stated “Employment is the biggest thing for well-being. For us, stable growth is mainly for the sake of maintaining employment.”

In the days of the planned economy, achieving full employment was relatively easy. Rural workers were collectivized on state-managed farms and urban workers were assigned to city work units. Following reform and opening up, China’s leaders maintained high employment through annual double-digit GDP growth that became an engine for massive job creation. Such was the effectiveness of this jobs engine that in the late 1990s, when China restructured its vast network of state-owned enterprises (SOEs), making tens of millions of workers redundant, the labor market only briefly flinched before the booming economic quickly picked up the slack.

However, the economic restructuring the current generation of leaders is embarking on is unlikely to offer the same luxury. There are several important reasons for this.

First, the reforms will result in a prolonged period of much slower growth. Speaking last year, Chinese President Xi Jinping said, “China must undergo structural reforms even though it will sacrifice faster growth.” Growth is already half the rate achieved at the height of the mid-2000s boom, with further moderations expected as the adjustment cost of reform becomes increasingly evident.

Yet Xi and his colleagues will be hoping that this growth sacrifice will not undermine job creation. Their plan is for future growth to be increasingly reliant on China’s currently underdeveloped service sector. In theory services are more labor intensive and less productive than manufacturing and can therefore grow at a slower rate but still generate the same number of jobs. For example, while it is estimated China needs annual growth of eight percent to create ten million new manufacturing jobs it is thought expansion of only five percent is needed for ten million new service sector jobs. Authorities also hope shrinking demographics will ease employment pressure.

However, such assumptions do not take into account the second major cause for concern: the increasingly disruptive impact recent technological advances are having on employment and wages. This was one of the most hotly discussed topics at the recent Davos World Economic Forum.

Speaking at Davos, delegates such as Google’s Eric Schmidt and Larry Summers, a former U.S. Treasury Secretary, warned that millions of jobs spanning retail, research, education, healthcare and professional services such as law and accountancy, which once seemed beyond the reach of automation, are at risk of being eliminated by advances in artificial intelligence, big data and improved analytics.

Their warnings are based on the groundbreaking analysis of academics such as Erik Brynjolfsson of MIT, whose work strongly suggests many of the technological advances of the last ten years are destroying a much wider range of jobs and having a more negative impact on median wages than other previous waves of innovation.

Obviously this phenomenon will be felt across the world. However given that China’s leaders have staked much of their continuing legitimacy on being able to reshape the country’s economy to just these sorts of jobs to expand the middle class and narrow the country’s yawning inequality gap, the effects could be particularly destabilizing for China in the course of its economic transition.

The final major reason for concern relates to the skill level of a significant section of China’s workforce. In particular, how will the existing 260 million migrant workers and the further hundreds of millions of typically poorly educated and under-skilled rural residents the Chinese government hopes to attract to China’s cities fit into an increasingly value-added, knowledge-driven economy?

Certainly many of the opportunities open to previous migrants will not be there for future newcomers to China’s cities. Take the example of Foxconn, key supplier to Apple and one of the largest mass employers in China. In 2011, it was announced that the firm was ordering 1 million robots to automate much of its production process. Breaking with tradition, following last year’s Chinese New Year festival, Foxconn failed to take on any new entry-level workers as increased automation began to take effect. As Gordon Orr, chairman of McKinsey Asia, recently wrote, a similar effect is likely to be seen in “industry after industry” as rising input costs force Chinese firms to do more with less and increasingly rely on technology and innovation.

Comments
11
sfphoto
February 16, 2014 at 06:27

This article is a red herring.

Its false premise is that technological innovation and increased automation is bad for China’s ongoing urbanization and industrialization because it would lead unemployment. This is an incorrect assumption because higher productivity leads to higher incomes which allows workers to spend more on consumption. In fact, this is the only way China can move out of the “sweatshop” model of exporting cheap consumer goods to the West.

matt
February 15, 2014 at 17:01

China’s government are making a big mistake thinking economic growth can keep them in power in the future. All the social and cultural problems keep getting thrown aside.

smartiass says
February 14, 2014 at 22:53

The foreign press is always all tied up over china and everything inside it due to the endless non-stop overstretched navel-gazing on that country. China should expand its armed forces for example, its marines corps is pathetically miniscule compared to the size of the U.S. Marines !

This is interesting
February 14, 2014 at 10:25

China you’d better look out. Your enemies are hitting your home front. China should therefore spend her monies wisely. The dividends from economic reforms can be well spent toward more infrastructure development, which drives more economic activities in turn. Don’t be fooled by people who say that creativity can drive economy. That is utterly nonsense.

Free Thinker
February 14, 2014 at 19:43

“Don’t be fooled by people who say that creativity can drive economy. That is utterly nonsense.”
Yeah, just keep stealing American, European and Russian designs. Much better for the economy.

KC
February 14, 2014 at 00:57

Meanwhile I fear that the tensions China is creating in the East and China Seas might be a way of distracting the Chinese population from the problems at home. To galvanize Chinese nationalism against existing imminent foes in its own backyard is the Party’s way of surviving their internal problems. By the way I don’t take credit for this idea. My friend in the Mainland actually pointed this out to me. I just wish the other 1.3 billion would think like him.

Liang1a
February 13, 2014 at 08:03

Bill
February 13, 2014 at 01:25
This “article” is your stereotypical Western “reporting” on the Chinese economy. Which is to say, there isn’t any “news” and there is hardly any “reporting” at all. Worrying that the Chinese economy will crash? Please, it’s more like, praying that the Chinese economy will crash. And there always seem to be some reason that a crash will just be around the corner isn’t it? I wish I was in the 50 cents army so I can get paid, can someone introduce me?

Liang’s comment @ Bill:
I agree with you 100%. This is much more of a covert crocodile prayer of the West that China’s economy will crash. John Marshall talked about moving hundreds of millions of rural people to the urban areas will create joblessness. But the truth is that more jobs will created simply by moving hundreds of millions of jobs to the urban areas. Why? Because these hundreds of millions of people will need services of all kinds such as education, medical services, etc. In the end, the process of urbanization is to create an economic framework wherein the urbanized people can and will produce all the goods and services for themselves to consume thus giving themselves the highest level of standard of living in the world. Since John Marshall doesn’t seem to understand this, he is unfit to comment on the Chinese economic development. But then, he really isn’t giving any good advices to the Chinese government. He is just shedding crocodile tears covertly putting a jinx on the Chinese economic development. Or emphasizing all the potential problems so as to spook the Chinese people and mislead the Chinese government.

panasian
February 13, 2014 at 02:06

The author leaves out the most important part in discussing employment situation in China. Starting in 2012, the number of Chinese workforce has been declining, due to the one-child policy in the urban areas for the past 35 years. Even though the government has relaxed the one-child rule, the experts are divided over whether or not the Chinese fertility rate will increase in the future. Also another very important thing the author didn’t mention is the Chinese government has been increasing the number of vocational schools to up grade the job skills of the Chinese labor force.

Bill
February 13, 2014 at 01:25

This “article” is your stereotypical Western “reporting” on the Chinese economy. Which is to say, there isn’t any “news” and there is hardly any “reporting” at all. Worrying that the Chinese economy will crash? Please, it’s more like, praying that the Chinese economy will crash. And there always seem to be some reason that a crash will just be around the corner isn’t it? I wish I was in the 50 cents army so I can get paid, can someone introduce me?

You should know better
February 13, 2014 at 05:21

American bombing and killing is humanitarian aid, and other’s resistance is aggression against American; American just can’t stand people pointing out their fallacy and fabricating consent on the moral high ground, so they discredit the descending voice with some cold war labelling, Wumao Army is just one of them. The West is still living the old days of colonialism, and constrained by zero-sum Cold War mentality. The have never moved into 21st century.

Bing
February 13, 2014 at 08:41

Bill’s words may be a little harsh, but I agree with him: where is the “new” stuff since this is supposed to be news? If you are a reporter, you main job is to find the facts for us, not some warmed over facts that everyone already knows. I heard stories that some reporters totally base their reports on one photo that the reporter saw on the Internet. I hope this not one of those articles.

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