China economy

China could be facing a hard choice over painful job losses

Zhang Jun says with the state sector expected to shed more jobs, the government will be under pressure to intervene – to the detriment of the economy’s long-term prospects

PUBLISHED : Friday, 15 April, 2016, 2:04pm
UPDATED : Monday, 30 May, 2016, 5:11pm

Since 2002, China’s economy has undergone significant changes, including a shift from acceleration to deceleration of growth in gross domestic product. Yet the official urban unemployment rate, jointly issued by the National Bureau of Statistics and the Ministry of Labour and Social Security, has remained remarkably steady, at around 4-4.1 per cent. Since 2010, it has stood at precisely 4.1 per cent. This is surprising, to say the least – and has led some to ask whether the bureau could be fudging the numbers.

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The bureau is not lying; it simply lacks data. The unemployment rate provided reflects how many members of the registered urban population have reported to the government to receive unemployment benefits. But, unlike in developed countries, China’s piecemeal unemployment insurance and underdeveloped re-employment programmes weaken the incentive for people to seek assistance.

The bureau is not lying; it simply lacks data

As a result, the bureau’s unemployment figures are far from accurate.

China’s government has moved to remedy this, by carrying out urban unemployment surveys. But, despite having been collected a decade ago, those statistics have yet to be released.

In lieu of convincing official figures, some economists have taken matters into their own hands, using data from the urban household survey to estimate the real unemployment rate. Extrapolating from such data gathered in six provinces, Han Jun and Zhang Junsen, for example, concluded that, in 2005-2006, Chinese unemployment stood at around 10 per cent. Using urban household survey data from almost all of China, Feng Shuaizhang, Hu Yingyao, and Robert Moffitt calculated an average urban unemployment rate of 10.9 per cent from 2002 to 2009 – the highest estimate ever produced.

But these estimates are just that – estimates. Because urban household survey data is not freely available, different people obtain results for different years and provinces from the various sources they could access. This has caused considerable frustration for researchers, and has resulted in estimates with ranges so wide as to be statistically insignificant.

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In our own research at Fudan University in Shanghai, my two PhD students, Xu Liheng and Zhang Huihui, and I managed to obtain a reasonably broad supply of official statistics: the 2005-2012 data for four provinces, the 2005-2009 data for three provinces, and monthly data for 2010-2012 for four of these seven provinces. While the sample is technically small, the provinces for which we acquired data represent the coastal, inland, and northeast regions. With the right adjustments and processing, we were able to infer the unemployment rates in different kinds of provinces and municipalities, thereby estimating the real nationwide unemployment rate.

China’s employment growth has accelerated in recent years, even as GDP growth has slowed

We found that, although China’s urban unemployment rate was probably quite high in 2005, standing at 10.7 per cent, it has most likely dropped over the past decade, reaching 7 per cent in 2012. That puts the annual average for the 2005-2012 period at 8.5 per cent.

Moreover, while rapid GDP growth contributed to falling unemployment in, say, 2007, unemployment continued to decline even after the global financial crisis of 2008 began to weaken economic performance. Most economists would assume that declining unemployment amid falling GDP growth is related to a decline in labour force participation.

But our calculations, based on the urban household survey data, show that labour-force participation in China actually increased slightly after 2008, as the proportion of workers exiting the labour market decreased. In other words, China’s employment growth has accelerated in recent years, even as GDP growth has slowed.

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This can be explained partly by an ongoing structural shift in the Chinese economy, from a manufacturing-driven growth model to a services-led model that empowers private innovators. And, indeed, as urban household survey data shows, this shift led to continuous job creation in the services sector from 2005 to 2012.

What has not happened is significant destruction of jobs in the state sector and manufacturing industries, especially since 2009. As the urban household survey data suggests, the average time it takes an unemployed worker to find a new job in the services and non-state sectors is shorter than in the manufacturing and state sectors. If the manufacturing and state sectors do begin to lay off more employees, urban unemployment rates are bound to rise.

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The reason that this hasn’t already happened is that the government has, to some extent, been propping up these sectors since the global financial crisis, by implementing massive stimulus packages focused on investment in infrastructure and real-estate development. This has sustained the rapid growth of the secondary sector (especially manufacturing and construction), which has thus been absorbing large numbers of low-skilled workers.

In fact, upon closer examination of the urban household survey data, we found that the least-educated workers largely accounted for the decline in overall unemployment.

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This stimulated infrastructure and real-estate construction boom has also led to the expansion of heavy industry, including state-owned steel, cement, chemicals, glass, and other enterprises, causing employment growth to accelerate from 2005 onward.

The National Bureau of Statistics data shows that the employment growth rate in the state sector was negative before 2009, when it turned positive.

The fact that the unemployment rate is declining while gross domestic product growth slows suggests that China’s labour productivity is actually worsening – a trend that is likely to lower China’s long-term potential growth rate.

Since the effects of the stimulus obviously cannot last, the sectors that were being propped up will soon begin to shed more workers, causing the unemployment rate to rise. Only further government intervention could prevent this outcome; but that might mean delaying structural reforms that are needed to sustain productivity growth. China’s leaders are thus being confronted with a difficult choice: higher near-term unemployment or slower long-term growth.

Zhang Jun is professor of economics and director of the China Centre for Economic Studies at Fudan University. Copyright: Project Syndicate.