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
This quarter we modestly upgrade our assessment of labor and shared welfare reform for the first time since the project’s fall 2017 inception; however, we remain negative overall – just less so. In the 2013 Third Plenum Decisions, Beijing pledged to improve labor productivity and shared welfare by reforming the hukou household registration system, expanding employment opportunities, and delivering adequate social services. These reforms would directly benefit China’s workforce. Our primary indicator of migrant worker wage growth relative to GDP shows positive gains in 1Q2018 and 2Q2018. Supplemental indicators suggest that a favorable job market drove this improvement, including sustained job creation over the past six quarters and a high level of unfilled job openings. When labor reforms accelerate, we expect migrant worker wages to correlate more closely with GDP – meaning that workers are benefiting from growth. However, wage growth for urban and migrant workers still lags GDP growth, and rural wage growth fell behind GDP growth this quarter as well.
We are less than optimistic that this edition’s improvements can be sustained. If consumer price inflation rebounds in the coming months – a likely scenario, based on food price pressure – real wage growth (adjusted for inflation) for all worker categories would decelerate again.
On the policy side, tax changes were a major development this quarter as China’s tax bureau assumed responsibility for collecting social security payments. This change should improve corporate compliance with mandated social security payments. However, it will also raise costs for private enterprises, which provide the majority of employment growth. Private enterprises have long circumvented mandated social security payments to reduce expenses, and with tighter rules some will shut down. Beijing also centralized pension fund management this quarter, which may improve social welfare in the long run but is unlikely to change welfare conditions today.
Migrant workers’ wages showed modest improvement in 2Q2018. This marks the second consecutive quarter of improvement and convergence with GDP growth. If these trends persist, migrant wage growth will outpace GDP growth again, consistent with 2013 Third Plenum goals.
This Quarter’s Numbers
Our labor and shared welfare indicator uses migrant workers’ wages as a proxy for broader conditions. Migrant workers’ wages showed modest improvement in 2Q2018, growing 5.6% year-on-year (yoy), faster than the same period in 2017 (see Wage Growth). This marks the second consecutive quarter of improvement and convergence with GDP growth. Urban wages rose, too, increasing modestly by 5.9% yoy. If these trends persist, migrant wage growth will outpace GDP growth again, consistent with 2013 Third Plenum goals, as it did until three years ago.
This improvement resulted mostly from weak inflation. Consumer prices (CPI) increased only 1.8%, down from 2.2% in 1Q2018. If CPI had grown at last quarter’s pace, migrant and urban wage growth would have improved by just 0.2 and 0.1 percentage points, respectively. We believe CPI inflation is unlikely to remain at such low levels: July statistics already show a CPI increase of 2.1%. More upward price pressure is likely in coming months given a recent outbreak of African swine fever affecting pork supply and floods that are hurting vegetable production in the northeast.
New Job Creation rebounded from 1Q2018, increasing 1.4 percentage points to 2.7% yoy. This is the sixth consecutive quarter of positive job growth and is a driver for wage gains. Officials point to a strong quarter for business starts to explain this trend, reported at a historic high of 1.8 million in 2Q2018. This is consistent with the 2013 Third Plenum goal of driving employment by encouraging entrepreneurship, although job growth remained well below GDP growth (6.7%). Such strong job creation drove labor demand in cities across the country. Demand for workers remained strong despite typical second-quarter dynamics, when the Labor Demand-Supply Ratio usually drops because of school graduation.
The National Bureau of Statistics’ (NBS) latest labor market report depicts some warning signs. Published in May, the annual report provides wage growth numbers for different enterprise categories. For 2017, the gap between wages paid by “non-private” (state-owned and foreign) and private enterprises widened. While non-private wages grew 10% yoy, up from 8.9% in 2016, private wages grew only 6.8% yoy, down from 8.2% in 2016. This phenomenon is related to deleveraging, which disproportionately hits private firm access to financing (see State-Owned Enterprise and Competition). This divergent wage picture is indicative of the larger debate over the outlook for the state and private sectors, and the need for a more level playing field.
The underpayment of social security obligations by private companies presents a serious challenge for our assessments. The Ministry of Human Resources and Social Security (MOHRSS) does not collect private wage data directly: instead, it uses social security statistics to back-calculate estimated wages. If social security underpayment is widespread, actual private wages could be higher than reported. New measures to improve tax and social security collection (see below) may correct this problem. However, tightly enforcing this could further raise costs for private employers, potentially weakening private sector job creation. Finally, our Social Spending indicator shows no major change in government welfare spending as a share of GDP. China should be investing more in education to encourage long-term productivity growth as well as in welfare to free up disposable income.
Policy Analysis
This quarter’s most important policy development came in late August, when officials confirmed that China’s tax bureau would take over the collection of social security contributions from the MOHRSS. The change was initially proposed under the National People’s Congress March government restructuring plan (see Summer 2018 edition) and will take full effect on January 1, 2019. MOHRSS was previously responsible for social security fund collection, but it lacks access to company tax filings and wage expenses. As a result, enforcement is difficult and private sector firms commonly underpay employee contributions to reduce costs. Transferring collection powers to the tax bureau, which has access to such records, should improve compliance – a net positive for building up needed social security funds. But as Beijing strengthens compliance, it will also squeeze private firms that have become accustomed to circumventing social security rules. The net effect will likely be more available social security funds but a slower pace of employment growth from the private sector.
The government is also centralizing pension management. In May, the State Council published a new rule, effective July 1, under which local governments must submit approximately 3% of local pension contributions to the central government for redistribution. This is an effort to alleviate short-term pension shortfalls and better coordinate pension efforts across provinces. In addition, six new provinces – joining eight from 2017 – signed contracts with the Council of the National Social Security Fund (NSSF) to manage provincial pensions. Both developments will help professionalize management and improve returns for an aging population. However, the NSSF is still relatively small and its ability to cover pension shortfalls is limited. Though it generated an 8.4% annual return in 2017, actual revenue was only RMB 185 billion ($26.7 billion), less than 40% of the RMB 443 billion ($63.9 billion) pension shortfall in 2016.
Finally, in July the State Council published new “Human Resources Market Provisional Regulations,” which increase oversight of the job-hunting services market, which caused some public outcry last year over the death of a graduate student. The new policies call for all governments at the county level and above to establish human resources information systems and better facilitate job seeking. It also states that no local government or agency “should set unlawful restrictions on the movement of human resources.” However, given that the draft makes no reference to the hukou, or household registration, system – which is the enduring and lawful constraint on Chinese labor mobility – its declarations will have little practical impact.