China’s Delicate Jobs Challenge
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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.

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