Approaching a neoclassical scenario: the labor market in China after the Lewis turning point

Cai, Fang Article Approaching a neoclassical scenario: the labor market in China after the Lewis turning point China Finance and Economic Review Provided in Cooperation with: Springer Nature Suggested Citation: Cai, Fang (2013) : Approaching a neoclassical scenario: the labor market in China after the Lewis turning point, China Finance and Economic Review, ISSN 2196-5633, Springer, Heidelberg, Vol. 1, Iss. 1, pp. 1-15, https://doi.org/10.1186/2196-5633-1-1 This Version is available at: https://hdl.handle.net/10419/162009 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/2.0/ RESEARCH Open Access Approaching a neoclassical scenario: the labor market in China after the Lewis turning point Fang Cai Correspondence: [email protected] Institute of Population and Labor Economics, Chinese Academy of Social Sciences, Beijing 100732, China Abstract As China passes through its Lewis turning point characterized first by the appearance of a labor shortage and a constant increase in wages, its labor market shows both features of the dual economy and neoclassical growth. This paper first depicts the trend of population as a root cause of the labor market transition from dual economy to neoclassical scenario. It then reveals the changed labor market profile - the labor shortage and wage increase. By examining three major groups of employment, namely, migrant workers, university graduates, and urban vulnerable workers, it tries to explore those unique characteristics of the labor market in such a transitional period and draws policy implications. Keywords: Demographic transition; Lewis turning point; Labor market institutions Introduction The three chief characteristics of a neoclassical scenario of the labor market, which I contrast with a dualistic scenario of the labor market such as described by Lewis (1954), are (1) wage is determined by marginal productivity of labor, (2) the labor market can correct its own disequilibrium in labor supply and demand over the long run, and (3) there are only three basic types of unemployment - cyclical, frictional, and structural - all of which need to be addressed with macroeconomic and labor market policies. For some time, the Chinese economy has exemplified a dual economy characterized by unlimited labor supply, subsistence wages, and the existence of institutional barriers to labor mobility, as well as the resultant difficulty in labor market clearing. Consequently, employment issues in China were understood exclusively in Lewisian, and never in neoclassical terms. Since the implementation of reform and opening, and in particular China's entry into the WTO in the new millennium, an enormous number of surplus laborers from rural areas have migrated to coastal cities to take up nonagricultural jobs. It was not until very recently that the Lewis turning point arrived, signaled by widespread labor shortage and constant wage increases, particularly for unskilled workers, and facilitated by both demand and supply factors, such as demographic trends and strong growth of employment in urban areas. While China is moving away from an unlimited supply of labor and toward a neoclassical labor market scenario, today's employment problems show both neoclassical and dual economy characteristics. Some of the more prominent of these problems are (1) underemployment in the agricultural sectors has yet to be alleviated, (2) the © 2013 Cai; licensee Springer. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. Cai China Finance and Economic Review 2013, 1:1 http://www.chinafinanceandeconomicreview.com/content/1/1/1 worsening of cyclical unemployment, especially among migrant workers, (3) a higher degree of vulnerability among young people and older workers in urban areas than other groups to forms of natural unemployment, including structural and frictional unemployment, and (4) inadequate protection for workers' rights, including those relating to wage negotiation and labor disputes. This paper illustrates how China's recent demographic trends, together with fast economic growth and employment expansion, have reshaped the country's employment landscape, which is characterized no longer by unlimited supply but by a nearequilibrium one. In response to this shift, we must also fundamentally change the way we understand China's employment problems and the challenges policy-makers face. In addition to promoting employment, increasingly, policies must try to address problems of cyclical and natural unemployment, particularly among those who have been hardest hit by the transition and as such are especially vulnerable. In this paper we highlight key employment issues in China by looking closely at three distinct groups: migrant workers, college graduates, and the urban working vulnerable. Each of these groups faces its own set of employment-related difficulties. Migrant workers are prone to be affected by cyclical unemployment because when the urban labor markets tighten due to economic slowdowns, many of them end up returning to agriculture work, which is a form of underemployment. College graduates are most vulnerable to structural and frictional unemployment, which partly explains why unemployment rates are often higher among this group than among some other groups. Thirdly, the vulnerability of vulnerable workers in urban areas is due largely to inadequate education and skill, a situation for which there are deep historical reasons. This last problem points toward major challenges in institution building, and we will discuss it in some detail in this paper. As a result of the widespread awakening to their rights and entitlements among ordinary workers, brought about by the arrival of the Lewis turning point and the continuing stress the labor market is under, labor disputes have been on the rise. The government has been quick to respond to this trend by passing legislations and implementing policies. This is in fact yet another sign that China's labor market is on track to turn from Lewisian, where it has been to some time, to neoclassical. The demographic trend and its impacts on labor supply Thanks to its strict implementation of the one-child policy, China has been able to complete in a very short time a demographic transition that took most developed countries much longer to complete. Since reform began, China's demographic profile has gone through the following stages: a sharp decline in fertility rate, then in the number of young people as a percentage of the total population, a decreasing growth rate for people of working age, and then the rapid aging of the Chinese population. When the percentage of young people contracted at a higher rate than the growth rate of the percentage of elderly people, China began to see a sufficient labor supply, a result of productive population structure. As these demographic trends continue, the working age population will grow more slowly, while the aging process will pick up speed. These trends will surely raise many challenges. Despite the dramatic decline in the total fertility rate (TFR) in China throughout the 1970s from 5.8 to 2.3, by the early 1980s, China's TFR was still above the replacement Cai China Finance and Economic Review 2013, 1:1 Page 2 of 15 http://www.chinafinanceandeconomicreview.com/content/1/1/1 level. The drastic reduction in the fertility rate that China has been able to achieve owes very much to socioeconomic development on one hand and wide adoption of family planning on the other during the reform period. These circumstances were highly effective in arresting high fertility rates. By the dawn of the twenty-first century, not only had China successfully carried out the transition toward a modern population growth pattern, but it was also able to be in less than 30 years. By comparison, it took many industrialized countries of comparable income levels almost a century to do the same. There have long been disagreements among scholars and official authorities about China's TFR. Figure 1 shows China's TFR from 1950 to 2009. All of the pre-1998 figures had government sources and were as such ‘official’, but scholars treat only those for the years after 1998 to be genuinely trustworthy. In Figure 1, one can see that the TFR in China has been below 1.5 for many years, which is quite low by international comparison (Gu and Li 2010). As the Chinese government gradually began to distance itself from this position, i.e., that TFR in China has been below 1.5 for many years according to census data from the National Bureau of Statistics, the United Nations put China's TFR for 2006 at 1.4 in its newly published World Fertility Pattern, 2009, thereby placing the country among those with low fertility rates (United Nations 2010). We may yet be hit by a consequent decline in labor supply, which will happen quite unannounced. One repercussion of persistently low fertility rates is a change in the age composition of a population. Since about 1980, the growth of the elderly population has accelerated, while that of the population of people of working age has decelerated, and the population of young people has shrunk altogether. We can conclude that under the condition of persistently low fertility rates, the growth of the working age population will slow before stopping altogether. These trends will eventually lead to labor shortages. According to one forecast based on the latest available statistics (United Nations Department of Economic and Social Affairs, Population Division 2011), the number of 0 1 2 3 4 5 6 7 8 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Year TFR National Urban Rural Figure 1 Reduction in total fertility rates: aggregate, rural, and urban. Source: Regional TFR for the period before 1998 was calculated using data from the China Center for Population Information database; national TFR post-1998 is calculated on the basis of various population surveys and/or census data. Cai China Finance and Economic Review 2013, 1:1 Page 3 of 15 http://www.chinafinanceandeconomicreview.com/content/1/1/1 Chinese between the ages of 15 and 64 will peak in 2015, after which it will begin to decrease (Figure 2). Trends such as those just described will lead to concomitant changes to the age structure of China's population. Our argument is based on two assumptions. First, we assume continual rise in enrollment in higher education and have left those aged 15 to 19 outside the purview of these analyses. Second, we assume that there will be little or no increase in the rate of labor force participation for people 65 or older and have included in our analysis only people between the ages of 20 and 64. In the next decade, we expect to see a rise in the average age of people of working age, a slight decrease in the population size of the very young, a more significant decrease in the population size of people of ages between those of the previous two groups, and the elderly to account for 32% of the nation's total population by 2020. As many previous studies have shown, among rural laborers, those with a more favorable demographic profile, e.g., those who are better educated and younger, are more likely to migrate and to settle in places farther from home and for longer periods (Du and Wang 2010). Since non-agricultural labor supply is closely linked to rural–urban labor migration, and except in cases where sufficiently strong incentives intrinsic to the labor market or the prospects for professional growth exist, people of working age tend to become less mobile as they get older. Moreover, since older urban workers tend to face greater risks for structural and frictional unemployment, and the enrollment rate in higher education has continued to rise, an older labor force also means a reduction in labor force participation rates. Consequences for the labor market An aging population presents two huge challenges to any society. On one hand, it poses a threat to the sustainability of the pension system and elderly care infrastructure, and on the other hand, it reduces labor supply. In the period of reform, when there existed underemployment in both rural and urban sectors, the Chinese government has actively helped promote employment by developing the labor market and reallocating 0 200 400 600 800 1000 1200 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Working age population (mil.) 15-24 25-34 35-44 45-54 55-64 Figure 2 Changing age composition of working age population. Source: United Nations Department of Economic and Social Affairs, Population Division (2011). Cai China Finance and Economic Review 2013, 1:1 Page 4 of 15 http://www.chinafinanceandeconomicreview.com/content/1/1/1 people among different sectors and between rural and urban areas. Therefore, China's economic growth is on one hand partly attributable to the massive supply of labor and on the other the reallocative efficiency gained by labor mobility from agricultural to non-agricultural sectors, which constitutes the demographic dividend of total factor productivity growth (World Bank 1997; Cai and Wang 1999, 2005). As China enters a new demographic era, the impact on the labor market will be enormous. These changes will shape the course of China's future development. Labor supply and demand: basic characteristics Even though past forecasts for the annual increase in the number of new entrants to the nation's workforce never put the number above 20 million, official figures for the number of new jobs needed each year to absorb the addition workers have been consistently larger. According to calculations from the Ministry of Human Resources and Social Security, there are a total of more than 24 million people in the labor reserve. They arrive at this number by adding up the numbers for three groups of people: more than ten million new entrants to the labor market, each year; more than eight million people currently unemployed who are looking for work; and over six million laid-off workers who need work (Zhang 2008). This calculation method is problematic, however. First of all, it is missing a temporal dimension and creates the false impression of timelessness. While the landscape of China's labor demand and supply has changed significantly in recent years, some of the basic categories assumed in this calculation no longer exist. For example, what used to be called ‘laid-off workers’were renamed in 2005 and are now referred to as the ‘registered unemployed’. This means that, at least officially, there were no longer any laid-off workers in China but a total of 80 million registered unemployed in 2008. The second problem with this calculation is that it is based on the questionable assumption that all of the unemployed must be absorbed. But this intention is neither necessary nor feasible. According to mainstream theories of employment, insofar as there is such a thing as natural unemployment rate, it tends to stay fairly stable over the long run. The demographic and economic trends described above have led to a changed relationship between labor supply and demand. Take the annual increase in the number of people between the ages of 16 and 64 on the supply side and the annual increase in the number of urban workers on the demand side. When the two trends are examined together, the changing dynamics of the labor market become obvious. Since the number of agricultural workers has been falling while that of non-agricultural workers in rural areas is not expected to expand, we may treat the increases in the number of urban workers, migrant workers included, as representative of the magnitude of the overall labor demand of the Chinese economy. In what follows, we take a closer look at the general employment situation in China by comparing the demand and the supply of labor for urban sectors. There are two parts to the statistical data on urban employment in China. The first includes the total number of urban employees, which is published by the National Bureau of Statistics (NBS). This number does not, however, cover most migrant workers in urban areas. According to estimation on the basis of microdata from 2009, only 12.5% of the total of 310 million urban employees were migrant workers. The second part includes the total Cai China Finance and Economic Review 2013, 1:1 Page 5 of 15 http://www.chinafinanceandeconomicreview.com/content/1/1/1 number of people classifiable as migrant workers according to the NBS official definition. According to that definition, an individual qualifies as a ‘migrant worker’if s/he has been away from the town or township of their household registration for 6 months or more. Surveys have shown that of all migrant workers, 95.6% work and live in cities of varying sizes. Factoring in the overlap between these two numbers, we can calculate the actual number of urban workers inclusive of both registered urban residents and migrant workers. We can then compare this number with the total number of people of working age in the country (Table 1). Between 2001 and 2011, labor demand of urban sectors, which encompasses employment among both urban residents and the migrants, grew at an annual rate of 3.2%. During the same period, labor supply, measured by the number of people of working age, grew by an annual rate of only 1.1%. For the purpose of this study, we have excluded people older than 60 from working age population because, given China's retirement age - 60 for men and 55 for women - they by default stand little chance of finding a job in the present labor market. A look at people between the ages of 15 and 59 shows that this population had begun to shrink by 2010. This suggests, among other things, that the problem of high rates of underemployment in both the rural and the urban labor markets was finally easing. As such, constant surplus of supply relative to demand no longer accurately describes China's labor market after the arrival of the Lewis turning point. Wage increases for unskilled workers Wages have been growing continuously in China since the late 1990s, when a huge number of workers were laid off in urban areas and labor productivity increased as a consequence. Since the beginning of this century, the average wage in major urban sectors has been rising at an annual rate of over 8%, which is unrivaled by any group anywhere in the world. However, understanding China's official statistical data on wages can be a challenge because of the complex ways in which they are collected and calculated. For example, data on urban wage cover only workers formally employed in Table 1 Increases in demand for and supply of labor force (million, %) Urban resident workers Migrant workers Working age population Numbers Growth rate Numbers Growth rate Numbers Growth rate 2001 236 - 80 - 885 - 2002 241 2.1 100 24.7 901 1.7 2003 246 2.0 109 8.8 914 1.5 2004 250 1.8 113 3.8 929 1.6 2005 254 1.7 120 6.4 944 1.6 2006 259 2.0 126 5.0 952 0.9 2007 265 2.1 131 3.7 960 0.8 2008 268 1.3 134 2.5 968 0.8 2009 272 1.4 139 3.5 974 0.7 2010 277 1.6 146 5.3 981 0.7 2011 280 1.0 152 3.7 986 0.6 Source: Authors' own calculations based on China Statistical Yearbook (various years), China Yearbook of Rural Household Survey (various years), and China Population Yearbook (various years), and Du and Hu (unpublished memo). Cai China Finance and Economic Review 2013, 1:1 Page 6 of 15 http://www.chinafinanceandeconomicreview.com/content/1/1/1 formal sectors and leave out information on temporary workers and those who work in informal sectors; therefore, such data cannot be relied upon completely if one wants to understand the dynamics of the situation in China with respect to wages. However, wage increases for migrant workers warrant close examination since they not only make up one third of urban employment but also account for a large percentage of informal workers in non-agricultural sectors, Until 2004, wages for migrant workers had shown little growth even though wages for urban workers who are local residents had begun to rise. In 2004, the country was hit by the first migrant labor shortage, which triggered a rapid increase in wages. As can be seen in Figure 3, wages for all sectors, including those dominated by migrant workers (such as manufacturing and construction), have been increasing constantly, while the wage increase for migrant workers has been particularly impressive. We conclude, therefore, that observed wage increases are mainly attributable to changes in labor demand and supply. We have included here the figures for wage increases in select agricultural sectors as further evidence for the validity of this claim. Indeed, strong wage growth in agricultural sectors signals the decline of the dual economy, which, according to Lewis, is an economy characterized by surplus labor in agriculture. Wages for migrant workers have been rising continuously since 2004, as a result of migrant labor shortages. Even the global financial crisis did not interrupt this trend. A survey done by the NBS shows that the average real monthly wage of migrant workers was 1,221 yuan in 2009, which was 90% higher than what it was in 2001. The real wage of migrant workers increased by 19% in 2010 and further increased by 21% in 2011. Other surveys and reports besides the one by NBS have put the figures for migrant labor wage increases even higher. For example, according to a survey conducted in early 2010 by the People's Bank of China, China's central bank, the average wage for migrant workers was 1,783.2 yuan in 2009, 17.8% higher than the year before (Department of Survey and Statistics, People's Bank of China (DSS-PBC) 2010). In fact, because urban local workers and migrant workers tend to differ considerably with respect to their hours and pay structures, a comparative analysis of the wages for 0 5 10 15 20 25 30 35 40 45 50 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Daily farm wages (yuan) 0 200 400 600 800 1000 1200 1400 1600 1800 2000 Monthly non-a g r wa g es (yuan) Grain Pig farm Coton Manuf. Constr Mi g rants Figure 3 Wage increases in select sectors. Source: Data on the daily wages for workers in grain and cotton production and on hog farms with more than 50 hogs are from Compilation of national farm product cost-benefit data, monthly wages of manufacturing and construction are from China Labor Statistics (various years), and monthly wages of migrant workers are from NBS Statistical Report (various years). Cai China Finance and Economic Review 2013, 1:1 Page 7 of 15 http://www.chinafinanceandeconomicreview.com/content/1/1/1 the two groups must factor in both wage rates and working hours. According to a 2010 survey (‘China Urban Labor Survey’or CULS a ), migrant workers work for an average of 27% longer than do urban local workers per week, and their hourly wage rates were on average 88.2% of the average wage rate for local urban workers. This means that the reason the average monthly earning for migrant workers was higher (by 5.6% higher) than the number for urban local workers was that the former make up for lower hourly wage rates with longer hours worked. Moreover, as the demographic profile of this population evolves, so do working habits. For example, younger workers today tend to work fewer hours than their older counterparts used to previously. Findings from CULS show that in 2010, migrant workers worked an average of almost 12.4 h less than did migrant workers in 2005. This means that the increase in total monthly earning for migrant workers is a reflection of substantial surge in wage rate (i.e., hourly rate). Rise in labor disputes In recent years, particularly after 2008, the year in which several labor-related laws were passed or updated, heightening workers' awareness of rights and entitlements b , the incidence of labor disputes in China has increased sharply. According to official records, the total number of labor disputes in 2010 was twice what it was in 2003. Moreover, the number of incidents of severe unrest triggered by conflicts in labor relations has grown too. That is not necessarily a sign of worsening trend in labor relations, but may be more of an indication of stronger demand for labor market institutions. In his seminal work, Hirschman (1970) named three mechanisms, namely, exit, voice, and loyalty, by which citizens, consumers, and workers can express their dissatisfaction with conditions in the market. Here, we borrow those expressions to describe changed labor relations in China after the arrival of the Lewis turning point. As laborers in general and migrant workers in particular (especially in China) enjoy more employment opportunities, there has also been greater room for them to exercise their rights by ‘voting with their feet’, i.e., by choosing ‘exit’. How individual migrant workers use their power of choice depends on what jobs they hold. For example, workers who are dissatisfied with their jobs in small companies with poor growth prospects may simply quit since the odds are fairly good that they can find a better job elsewhere. But for workers who are dissatisfied with but reluctant to leave their jobs in sizable companies with some industry recognition and growth potential, efforts to seek higher pay and better working conditions may take the form of overt actions such as vocal complaints, collective bargaining, and, in more extreme cases, strikes. Figure 4 shows the level of labor dispute in different provinces such as measured by the ratio between the number of reported cases and total employment. We can see that they happen more often in the more developed coastal regions than they do elsewhere. Of the total number of labor disputes in China in 2008, a vast majority, or 74.8%, took place in eastern provinces. There are several reasons for these regional variations in the occurrence of labor disputes. They are (1) the Lewis turning point came to the more developed region earlier than it did elsewhere, (2) the more developed region is also where migrant workers are most concentrated c , and (3) since migrant workers are more vulnerable to abuse, they Cai China Finance and Economic Review 2013, 1:1 Page 8 of 15 http://www.chinafinanceandeconomicreview.com/content/1/1/1 Wang D, Cai F (2009) The education and employment of rural and urban youth in China. 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