Amid slowdown, the challenge is to keep the jobless rate low

Just as people were getting used to the co-existence of economic slowdown and high employment growth that marked the past decade in China, the monthly surveyed jobless rate at the national level rose twice this year, only to retreat later－but that was enough to spark discussions over the health of the labor market.

In February, the surveyed unemployment rate in urban areas rose to 5.3 percent, the first time since the National Bureau of Statistics started the record in January last year. The rate dropped to 5.0 percent in April and May, and then peaked at 5.3 percent again in July.

We (the China Macroeconomy Forum) believe that China’s labor market will remain stable as adequate employment is being generated nationwide. Structural employment pressures, meanwhile, have surfaced and should be addressed.

On the one hand, despite the rises in the surveyed unemployment rate, it has stayed below the government’s 5.5 percent annual upper-limit target over the first 10 months of this year. Over the same period, some 11.93 million people were newly employed in urban areas nationwide, achieving the annual goal of 11 million ahead of schedule, indicating an overall stability of the labor market.

On the other hand, some industrial businesses accelerated to cut payrolls this year. Each of the sectors of auto, electronic communications, six traditional manufacturing industries including textiles, construction, real estate and information services is estimated to have cut about 500,000 job positions or more so far this year.

The loss in job positions in industrial businesses has been made up mostly by the services sector, whose contribution to the country’s total employment rose to 46.3 percent last year from 38.5 percent five years ago.

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The above developments indicate that the principal contradiction in China’s labor market is transiting from a quantity-focused past to a quality-focused future. Or, looking ahead, it is very unlikely that any massive unemployment would burst out nationwide, while more efforts should be made to avoid the quality of employment from worsening.

The total amount of employment generated nationwide is expected to stay on a steady footing partly because adequate job positions can be created even with slower economic growth, considering that the economy has grown to its current huge size.

Also, the size of labor force is shrinking as the country is aging: China’s population aged 15-64 declined constantly after peaking at 996 million in 2014, according to the World Bank.

In other words, the jobless rate is becoming less sensitive to changes in economic growth, a new feature that will give the employment situation adequate resilience.

Meanwhile, employment in some industrial sectors may continue to shrink amid the prolonged trade tensions with the United States and accelerating technological progress. Though new technologies replace some job positions but create others, the impact of replacement may dominate in some industrial sectors in the next few years, as these businesses have been investing actively in robotics as wages rose.

Labor forces laid off by those sectors may be re-employed in the services sector, especially some traditional industries with lower wages and slower productivity improvement. This restructuring could impair the quality of employment.

Also, the weakness of industrial firms－partly due to rising operating costs and sluggish demand amid the trade tensions－may weigh on the businesses that provide services for them, or the producer services sector. Any contraction in employment by the producer services sector would add drag on employment quality as well, as the sector hires labor with higher wages than other players in the services sector.

For instance, if the Chinese economy expands at 6.2 percent year-on-year in 2020, nationwide nonagricultural employment is forecast to grow by 7 million people year-on-year, up from about 6.3 million for 2018 and an estimated 4 million for 2019. This recovery would be achieved at the expense of a decrease in employment quality.

While employment is expected to shrink by 9.35 million jobs in industrial businesses next year, that number may expand to 14.04 million including services like wholesale and retail, education, accommodation and catering, and leasing and business services, where each will account for more than 1 million people. These services-related sectors, however, are industries where labor productivity rises slowly and the problem of low wage is palpable.

To enhance the quality of employment will be a long-term task the authorities need to complete, which is critical for the nation to cross the middle-income trap and achieve high-quality development.

We at the CMF suggest that the government ramp up efforts to enhance the skill-set of labor force and build human capital. Amid the wave of technological progress, the authorities could provide more training for workers in industrial sectors, which market entities are reluctant to offer, to avoid large-scale unemployment.

The government could also grant subsidies to industrial enterprises that increase employment, to buffer the impact of technology progress on employment.

In the short term, the policymakers also should closely monitor and deal with the impact of the Sino-US trade friction on employment. The trade friction is not likely to cause any major unemployment concerns at the national level, but some industries and regions may see sourer labor market conditions.

If additional tariffs imposed on businesses in some labor-intensive industries surpass a certain threshold, they would face losses and even shut down, leading to a wave of payroll cuts.

General-purpose equipment manufacturing, as well as electric equipment and machinery manufacturing, are among the most risky industries. These industries cluster in coastal areas of Jiangsu, Shandong, Zhejiang and Guangdong provinces, making it necessary for authorities to formulate measures preventing unemployment risks in these industries and regions.

The authorities could extend financing support, export subsidies and tax benefits to the affected enterprises, as well as introduce new clients or sales channels, helping them to overcome the short-term difficulty.

In short, a new trend is beckoning the country’s labor market, in which the jobless rate at the national level could maintain at low levels despite slower economic growth.

Meanwhile, enough actions should be taken to improve employment quality and deal with possible structural employment pressure, with enhancing human capital as a focus area.

The article is based on a report published by the China Macroeconomy Forum, a think tank affiliated to the Renmin University of China in Beijing. Ding Shouhai, one of the authors of the report, is a professor of applied economics with the RUC and a research fellow of the CMF.