Labor and Welfare Policy Reform — The China Dashboard Spring 2018 — Asia Society Policy Institute and Rhodium Group

Overview

China’s long-term GDP growth depends on labor policy reform. From the birth of the People’s Republic of China in 1949 through to 2015, China’s working-age population grew by 600 million people: it is little wonder economic output expanded. Today, the size of the workforce is shrinking, so improving its quality and mobility makes all the difference. Labor policies that facilitate investment in people are needed to sustain growth once nations – like China today – reach middle-income levels. China’s plans call for labor policy reforms to boost job creation and entrepreneurship, discourage discrimination and labor abuse, improve income distribution, fund social security and pensions, and enhance healthcare and education. The share of Chinese people living in cities is slated to rise to 60% by 2020. With a population of 1.38 billion, this means resettling another 100 million rural dwellers in cities (by granting them legal permanent urban residency, known as hukou status, to enjoy full social services) in just a few years (for comparison, the “Great Migration” in the United States from 1910 to 1970 consisted of 6 million African Americans moving north). This brings pressure for social services but also huge additional growth potential.

To assess progress in China’s labor policy reforms, we chart wage growth for the less-empowered segment of China’s workforce, those likely to bottleneck the country’s productivity potential: migrant workers. Working away from home in temporary and low-skilled jobs, and with little access to urban social services, migrant workers supported China’s growth miracle but find themselves increasingly vulnerable to structural changes. Our primary indicator charts the growth rate of migrant worker wages relative to the GDP growth rate. Wage growth below GDP growth suggests falling productivity or inadequate workforce policy support, or both. The wage/GDP growth trend for other segments of the workforce is included. Divergence in income gains among segments can lead to social unrest, as can downward trends impacting all segments simultaneously. Our supplementary indicators look at job creation, labor market demand and supply conditions, urban-rural income gaps, and social spending relevant to labor outcomes.

Quarterly Assessment and Outlook

Beijing’s 2013 Third Plenum reforms recognized the urgent need to strengthen labor productivity as the Chinese population ages and the country’s demographic dividend fades. The government committed to improving social welfare systems, including education; to boosting entrepreneurship; and to promoting equality between urban and rural areas. Such initiatives are critical for China to more equitably distribute the gains of the economy, increase incomes, and transition to a sustainable consumption-led growth model. Our primary indicator of labor and shared welfare reform tracks real growth in migrant worker wages as a ratio of GDP to test whether this vulnerable but critical segment of China’s workforce is fairly compensated and whether reforms are driving productivity gains. The indicator again moved backward this quarter, as migrant worker wages fell further behind headline growth. Migrant worker wages have now lagged behind GDP growth for seven consecutive quarters. This happened despite notable labor shortages as new jobs were created at the fastest rate since 2Q2014, pushing the labor demand-supply ratio to all-time highs in all regions. This should be driving up wages; the fact that it isn’t points to dislocations and inefficiencies in China’s labor market. A push to expel internal migrants from first-tier cities is one culprit, as the urbanization rate slowed to 1.17% in 2017 from 1.3% in each of the past five years. The total workforce also dropped by 0.4% in 2017, reflecting new and worrying demographic realities.

We see limited policy progress reinforcing a negative outlook for future quarters. Beijing revised unemployment insurance regulations in the review period and required state-owned enterprises (SOEs) to transfer equity into social welfare funds to shore up pension assets, but these strategies are piecemeal and limited by tight fiscal conditions. Despite stressing the promise to improve living standards, government actions so far do not realize this commitment.

Annual data released early in 2018 on population growth and birthrates suggest China’s demographic outlook continues to deteriorate and that labor shortages are likely to get worse.

This Quarter’s Numbers

This quarter we update our primary indicator because of the long lag in the availability of wage data for SOE and private sector workers. Our primary indicator now depicts the real growth of migrant wages as a ratio of GDP growth, compared with the same for urban and rural households. The numbers for urban and rural households are not directly comparable to those for SOEs or private employees from previous quarters, but the picture they present is the same: migrant workers, 20% of China’s workforce, are not benefiting as much from economic growth as their peers with permanent residency status.

Our updated indicator shows that migrant workers are not benefiting equally from growth, despite policy commitments to raise wages for labor and promote income equality. The real growth rate for migrant wages grew by only 4.5% year-on-year in 4Q2017, well below 6.8% GDP growth. This is the seventh consecutive quarter that migrant worker wage gains trailed an otherwise strong economy. Real growth in wage income for urban and rural households also decelerated relative to GDP. The only good news in our primary indicator was that rural income still grew slightly faster than urban income – suggesting modest progress on Beijing’s goal to reduce the income gap between urban and rural residents. But if this is the best China can do with an economy that exceeded expectations in 2017, improving the wage outlook will be even more challenging as the economy likely cools in the year ahead.

Our supplemental indicators suggest that weak wage growth was not driven by insufficient job creation but by the fact that many job applicants were forced to accept lower-paying jobs outside of major urban centers – which means that worker mobility is constrained, and thus that China’s labor market is not functioning healthily. Our indicator of New Job Creation actually shows the fastest rate of new job growth since 2Q2014. A total of 13.5 million new jobs were created in 2017; that is 2.8% more than in 2016. In the meantime, job openings per applicant in 111 cities across all regions jumped to the highest level on record, reflecting labor shortages in urban areas (see Labor Demand-Supply Ratio). In 4Q2017 these surveyed cities recorded 156,000 more job openings than in 4Q2016, up 3.9%, but 173,000 fewer applicants, down 4.8%. The situation was particularly concerning in eastern cities where the shortage of job applicants was disruptive to normal business operations. These shortages should be driving up wages relative to GDP – but our primary indicator shows that the transmission mechanism is not functioning properly.

This happened for two reasons. First, big cities took concerted action to reduce their migrant populations by enforcing population caps and, in some cities including Beijing, using evictions to force relocation out of the city. These policies were driven by concerns about rampant population growth and strains on local budgets, infrastructure, and environmental realities. Second, and relatedly, more citizens moved to smaller cities and even more to rural areas. This was in part a response to high city prices and crowded living conditions, and in part a response to the government’s “rural revitalization” initiative approved during the 19th Party Congress in October (see our Land Reform cluster), which encourages citizens to relocate to smaller locales rather than major urban centers.

These policies are not contradictory to the government’s stated goals. In the 2013 Third Plenum Decisions, Beijing signaled that it would restrict migration into the country’s biggest cities and instead encourage workers to resettle into smaller and less crowded areas. But policies to divert migration to smaller locales do create new labor market dislocations and reflect continued need for substantial reform to the country’s household registration (hukou) system. They also contributed to the slowdown in China’s urbanization rate in 2017; by the end of 2017 China’s urbanization rate was 58.2%, up only 1.17% from 2016, as compared with 1.3% growth in each of the past five years.

Other annual data released early in 2018 (not included in our indicators) on population growth and birthrates suggest China’s demographic outlook continues to deteriorate and that labor shortages are likely to get worse. These data reinforce the need for policy urgency to strengthen labor productivity. Annual population data from the National Bureau of Statistics show China’s workforce shrinkage accelerated in 2017: the total population between ages 15 and 64 decreased by 0.4% to 998 million, compared with 0.1% growth between 2013 and 2016. Data from the Ministry of Human Resources and Social Security (MOHRSS) reveal growth in total employment falling to near zero, the first time since 1972. And annual childbirth data from the National Health and Family Planning Commission show that only 17.2 million babies were born in 2017, 15% below its lowest projection for the year.

Increasing spending on social welfare, not least for education, and improving social welfare systems are critical policy steps needed to strengthen labor productivity and enhance China’s shared welfare. As the Chinese population ages, the country’s ability to transition to a lasting phase of consumer-led growth hinges on policy progress in this area – a reality recognized explicitly by Beijing in its 2013 Third Plenum Decisions. To track progress, we also monitor the share of fiscal spending as a percentage of GDP dedicated to social welfare items. That share has not materially improved in recent years. Fiscal spending on social security and employment increased marginally to 3.1% of GDP in 4Q2017 (0.1% up from 4Q2016), as the supply-side structural reform (SSSR) agenda resulted in factory closures and laid-off workers. But spending on education and healthcare as a percentage of GDP was unchanged in the same period (see Social Spending).

Policy Analysis

We note only three modest policy steps in labor and shared welfare reform during the review period. First, in November the Ministry of Finance (MOF) announced that 10% of equity in SOEs would be transferred to social security funds, an attempt to shore up pension assets. SOEs undercompensate the government for the massive financial resources they consume, despite long-running efforts to increase dividend payments. Dividends are now placed in a state capital management fund, and at least 80% is then reinvested back into SOEs themselves. Recognizing this, the government explicitly targeted increasing SOE contributions to social welfare funds as a key reform goal in the 2013 Third Plenum Decisions. But the November directive, issued a full four years after that Third Plenum, still has no clear time line for implementation and does not materially increase required transfers beyond current practice.

Also in November, MOHRSS circulated a revision of “Unemployment Insurance Regulations” for public comment. The update, the first revision to these regulations in 17 years, expands coverage of unemployment insurance to both urban and rural residents and mandates government funding for pension and healthcare insurance for the unemployed. On the surface, this appears to be an important step forward, but local fiscal realities are bleak (see Fiscal Affairs), meaning that local funding shortfalls will constrain actual support levels even if this policy is implemented on paper.

Finally, in December the National Development and Reform Commission (NDRC) took over the China Characteristic Town (CCT) program from the Ministry of Housing and Urban-Rural Development. The CCT was launched in late 2016 and aimed to develop more than a thousand smaller towns into “distinct places” with their own attractions and economic competitiveness. The NDRC was put in charge of the initiative to better utilize it as a mechanism for driving development and employment beyond big cities, consistent with other reform initiatives discussed here and in our Land Reform cluster. So far the CCT has mainly amounted to little more than a justification for another round of massive infrastructure and real estate projects by local government financing vehicles.