Published August 2018

China’s Labour Force is, and is not, growing!

 

While the total labour force is projected to decline by 13% over the next two decades, the highly productive urban labour force will continue to grow.

  • The total working age population of China is going to decline.  From 999 million in 2017 to 896 million in 2037.  This is inevitable as most of these people are already alive.
  • As the propensity of these people to be employed is quite stable, this means that the total employed labour force of China will also decline – from 759 million persons in 2017 to 661 million by 2037.  Basically 1 in 8 workers will leave the workforce.
  • However, this decline in number of employed persons is entirely in the rural areas.  There the employed population will effectively halve.
  • In urban areas, because of the current age profile as well as on going rural to urban migration, the total employed labour force will continue to increase in size – from 398 million now to 467 million in 2027 and 485 million by 2037.
  • Urban workers are around 4 times more productive than rural so in terms of total output the increase in them more than offsets the decline of the number rural workers.
  • But, the urban labour force growth slows dramatically after 2027, and that is when growth rates of the Chinese economy might be more subdued.

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Some people have expressed concern about the future growth of China’s economy on the basis that the number of persons of working age (that is, persons aged between 15 and 64 years of age) is declining.  This in turn is expected to result in a reduction of the workforce and would be a drag on the economy despite continued increased productivity per worker.

This is not an unreasonable argument, but it does miss some rather important aspects which suggest it might not be a problem.

To explain, it is best to start with the fundamentals – and the first of these is that there are two workforces- urban and rural.  Based on wages (as an indicator) the urban worker in 2017 was 4 times more productive than the rural worker. 

Second, the decline in total persons aged 15 to 64 is real, as shown in Figure 1.  However, as also shown in Figure 1, the decline is exclusively rural.  The number of urban working age persons is currently estimated at 592 million, (compared to 407 million rural) and is projected to increase to 688 million by 2027 and 703 million by 2037.  This increase is the result of rural to urban migration continuing over that period.  The simple reality is that Working Age persons are the most likely to make the move.  At present, an estimated 20 million move each year but, and this is important, this is projected to decline to about 10 million by 2037 because of ‘supply’ issues – that is the number of persons or working age in the rural area declines and hence fewer are able to migrate.

 

Figure 1:  Trend in number of persons of working age in Urban and Rural Populations

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As a result, the rural working age population reduces significantly – from 407 million in 2017 to 283 million in 2027 and 194 million by 2037.   To put it in stark terms in 20 years’ time the rural working age population will be just under half what it is today.

Both populations (urban and rural) have high propensities to be in work – in the case of urban it is 67% and for rural it is 88% (possibly some overstatement in the official data as the definition of being in employment – 20 hours or more - is more loosely applied) .  However, historically propensity to be employed has not changed and therefore is expected to be stable in the near term as well.   The expectation that it will decline in rural areas because of its older population is probably not valid as there is effectively a shortage of workers in rural areas.

As a result, the trend in working age population carries through to the expected employed population – the workforce.

There is also one other factor to be considered and that is the older worker.  In China the official retirement age is 60 years for males and 55 for females.  However, the reality is that many individuals pursue additional employment after those ages – in the private sector especially.  This is to be expected – better educated persons with better health – typically seek to work longer. (If for no other reason than pension insecurity.  Consider, for example, that 22% of males aged 70 to 74 years of age in the USA are still in full time employment).   It is expected that the urban workforce in China will get a marginal additional boost in terms of older workers.  In the next two decades the impact is very marginal – not even 1% of the labour force, but it will increase rapidly after that.

The net effect of these factors is as shown in Figure 2.  The total employed labour force of China is projected to decline from 759 million to 661 million between 2017 and 2037.  A drop of 13% or 1 in 8 workers leaves today’s workforce.  However, the urban component of it increases from 398 million to 485 million, a 22% increase.

Figure 2:  Historic and Projected Trend in the number of Employed Persons: Urban and Rural

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Given urban workers are estimated to be about 4 times more productive than rural ones (based on relative wages), this increase in the urban workforce bodes well for the overall economy.   Even if there was no increase in productivity of either workforce, there would be no decline in total GDP (i.e. number of workers multiplied by productivity per worker).  In fact, it is estimated that it would grow by just under 1% per annum.  This means the shift from rural to urban and consequent lift in productivity more than off sets the decline in the absolute number of workers.

It also makes the urban labour force very significant to the overall economy.  It is estimated to account for 82% of gross productivity in 2017, and to reach 91% in 2027 and 95% in 2037.

Finally, the above assumed no increase in productivity per worker but the reality is that it is increasing and particularly in the urban areas where the continued fixed capital investment per worker combined with improving education profile facilitates an increase in output per worker  This, rather than an increase in the number of workers is what will define China’s GDP growth in future.  Previously it had the advantage of both increased productivity and an increase total number of workers

But a warning as well.  Growth of the overall economy is strongly indicated for the next decade to 2027, helped by the growth in the urban labour force.  But after that year the growth in the size of the urban labour force slows dramatically.  In the next decade to 2027 in adds 68 million urban workers, for the subsequent decade it adds a more conservative 20 million.

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