China’s Delicate Jobs Challenge

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China’s Delicate Jobs Challenge

Beijing will need to balance much-needed economic reforms with continued job creation.

China’s Delicate Jobs Challenge
Credit: REUTERS/Stringer

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.

The implications are clear. There is a major risk for the Chinese government that in the process of upgrading its economy it could stoke large job losses in its traditional industries yet create fewer than expected new jobs to absorb the excess capacity, both for the emerging middle class and for hundreds of millions of low-skill workers. If such a situation arises it could have very serious consequences.

Confidence Is Everything

An analysis of Chinese public opinion reveals an interesting paradox and suggests what a destructive effect rising unemployment could have on the popular mood.

Data from the Pew Research Centre’s Global Attitudes Projects found in 2013 that although a remarkably high 85 percent of the Chinese public were satisfied with the overall direction of the country, in the five years to 2013 the number of people who said issues such as pollution, inequality, corruption and access to high quality healthcare and education were a “very big concern” increased dramatically. For example, while in 2008 just 12 percent of Chinese believed food safety was a very big concern, by 2013 that had jumped to 38 percent. Double digit increases in concern were recorded in no less than 12 of the 17 categories surveyed.

To square the circle of how overall satisfaction can remain so high while worries about a plethora of issues that impact people’s everyday lives are skyrocketing one needs look no further than the public’s response to two questions about China’s economy. When asked by Pew to rate the country’s overall economic performance in 2013, fully 88 percent viewed the situation as good and 80 percent believed it would get even better in the coming year. In effect it seems social tensions are being kept in check by economic optimism.

Therefore the crucial question is if unemployment were to start rising rapidly and people’s economic prospects began to fade would these high levels of overall optimism and satisfaction remain? The strong likelihood is that they would not.

Averting a Crisis

Fortunately for Chinese workers, given the importance the Chinese Communist Party places on high employment for maintaining social stability China’s leaders are likely to do everything they can to stop any rapid rise in unemployment. Given the still considerable economic firepower that remains at the government’s disposal it seems likely, at least in the medium term, it would be able to do so.

However, if the Party were forced to act in such a way there would be serious consequences. Not only would propping up inefficient and outmoded industries to protect jobs be extremely costly; doing so may well also come at the expense of other urgently needed reforms announced at the Third Plenum.

Take for example the interlinked reforms to promote further urbanization, amend rural land ownership and phase out the hukou system of household registration. If unemployment were to rise rapidly all of these policies are likely to be kicked into the long grass. After all, the Communist Party will not want hundreds of millions more people moving to cities if there are no jobs available for them. As keen students of history and international affairs it will not have escaped the notice of China’s leaders that a high level of urban unemployment is often a key trigger for political upheaval. The Arab Spring is only the most recent reminder. It is also unlikely that any real pressure will be placed on SOEs to become more efficient as doing so would only add to the numbers out of work.

Therefore in the years to come the challenge for China’s leaders is to perform a careful balancing act whereby they push ahead with reforms to upgrade the economy but in a way that maintains high employment.

Like all countries, China will have to deal with the challenges that new technology and innovation present to job creation and wages. However, if China wants to ride out this storm it will have to invest heavily in the coming years in the education and skills of hundreds of millions of its citizens to ensure they are able to play a full role in the technology enabled industries of the future.

The danger of failing to do so is that China could face rapidly rising unemployment and plummeting public satisfaction. Such a situation could quickly overturn the social compact the Party has carefully developed over the last thirty years and result in significant social unrest.

John Marshall is a freelance writer focusing on China. Previously he worked at a management consultancy in Beijing advising multinational companies on their China investment strategies and in London for the U.K. government on trade policy.