Since we talked about low fertility rate and labor shortage that China is likely to experience, I wanted to follow up with more details regarding China’s future of labor market.
Recent studies show that surplus labor from rural sector is no longer available that there is now a labor shortage. China is about to enter a serious demographic shift in a few years, driven by declining fertility and aging. Due to the enactment of “one-child policy” in 1979, China’s total fertility rate fell sharply from 6 births per woman in 1970 to 1.4 in 2010. The United Nations predict that China’s population will decrease from its current level to 1.1 billion by 2050 and the working population will decrease from one billion to 690 million. Shrinking Workforce chart provided by the UN indicates that the working age population will fall in less than a decade. The growth in the workforce has slowed and the population will begin to shrink in a few years.
The projected shrinking workforce can be explained by the problem of population aging (see chart on the burden of ageing). About 8.5% of the current population is over 65, and it will likely to rise to about 25% by 2050 (UN), whereas the population for 20-24 will fall due to the declining fertility rate. The problem can also be observed in chart 3, which shows that the core group of industrial workers (age 25-39) is shrinking while the non-working-age population is growing. These findings suggest that China is on its path to the labor-short economy.
The Brookings Institutions: Baily, M., 1982, Workers, Jobs and Inflation (Washington, DC: The Brookings Institution).
Perhaps a labor shortage, over time, will have positive effects on the typical city structure in China. It seems that a labor shortage might eventually lead to less of an influx of laborers into megacities to fill open spots. Instead, already established workers within megacities may decide to move outside the megacity to pursue a more pleasant lifestyle and over time we could see the development of more suburbs.
Because of labor shortage, China will reach the so-called Lewis Turning Point, a point at which the excess labor in a low-productivity rural sector (agriculture, in China’s case) is fully absorbed by a high-productivity modern sector (manufacturing in China). This will lead to higher wages, which may be a positive impact for Chinese workers.
Ideally this will happen, but not without Hukou reform!
Or more precisely: more aggressive Hukou reform.
well hukou reform can actually delay the onset of the Lewis turning point.
By raising the labor force participation rates.
In the short run, won’t a shrinking LF be a positive – it should force firms to pay better wages, tied to their own productivity rather than to the wages that a would-be migrant might earn in a rural area overflowing with workers thanks to rising agricultural productivity. On the face of it, firms in China are unreasonably profitable, and can thus be sloppy in their investment, what they do with retained earnings. Passing more on to workers has all sorts of benefits. And after all, isn’t the goal of growth to improve the welfare of the people, and not allow the few to become rich by underpaying the many?
I agree that rise in wages means there will be more money in people’s pockets, which is in everyone’s best interest.
However, there are some negative consequences as well.
The cost of doing business in China has been rising steadily.
China has also lost its competitive advantage in the global economy because of rising production costs and rising prices of consumer goods for exports.
Also, as Paul Krugman puts it, it also means that the Chinese economy is suddenly faced with the need for drastic “rebalancing.”
China needs to plan carefully on its reforms for the better future.
As an economist I don’t know what “competitive advantage” means. Comparative advantage of course shifts as wages rise – it doesn’t disappear.
By having a policy like the one child policy in place, China has an ability to control the population to some extent. By relaxing this policy, as they have been, or getting rid of it, China would see a population boom. This could possibly solve the problem they are currently seeing.
“Controlling” population is illusory if our analysis of the incentives of families to have multiple children is accurate. In any case, even if the government could get women to start popping out babies (and men to work like slaves to pay for them), it wouldn’t be until 2040 before we’d see a significant shift in the labor force, because those babies will have to age 18 years before they enter the labor market, and you have to add a few more years before they’re a big enough slice of the working age population to cause change.