China continues to suffer a labor shortage in its key coastal manufacturing regions. This, no doubt, is impacting U.S. and other foreign companies operating in China. But the labor shortage is not due to a lack of available workers. Instead, it is prompted by Chinese government policies, as well as prevailing work and living conditions in affected regions.

The Alienation of Migrant Workers

During the last two decades of China’s development, rural workers migrating to urban manufacturing regions have been the chief source of labor in coastal cities. According to the Chinese government’s, own statistics, migrant workers have increased to more than 250 million from just over 60 million in the last 20 years. Many non-government organizations place this number at a more realistic 350 to 400 million.

Even with a massive number of workers available nationally, China Daily recently reported that labor shortages are growing worse in cities like Guangzhou and Shanghai. In these areas, there is an estimated 30 to 70 percent gap between the number of workers demanded and the number available. Chinese news reports also reiterate that an increasing number of workers previously employed on the coast are now actively seeking work in interior provinces closer to their birth counties.

The hard truth: most migrant workers are no longer incentivized to travel to these cities for employment when they can achieve equal or better results working closer to home.

In urban areas, workers from the countryside are not afforded legal protection. An antiquated Hukou (household registration) system bars outsiders from taking part in a city’s basic social infrastructure. Migrants cannot utilize local childcare, education, housing, medical, or unemployment benefits. To take advantage of urban benefits such as accredited schools or proper hospitals, migrants must pay “usage fees” often equal to more than a year’s worth of wages.

Foreign firms operating in China can play a positive role in improving the situation.

According to both UN and Chinese studies, the cost of living is generally two times higher in coastal urban areas in comparison to China’s interior. These studies also demonstrate wages for factory workers are, on average, nearly 50 percent higher in coastal cities (not including mandatory overtime) and fail to compensate for living expenses.

The low wage to cost of living ratio combined with the lack of legal status makes it extremely difficult to live and work in coastal cities for extended periods of time. This is especially true if workers wish to move their families to these high-cost metropolitan areas in hopes of achieving a higher standard of living. Unfortunately, migrant worker ghettos, where families live outside of the regular chain of existence, are the tragic norm in many urban regions.

Flaws in IMF Reporting

A new report by the International Monetary Fund (IMF) predicts China will endure a full-scale nationwide labor shortage by 2025. While the report identifies the current Hukou system as a key issue in labor reform, it relies far too heavily on official Chinese government statistics many Chinese government officials themselves question.

New premier Li Keqiang is quoted in a leaked 2007 U.S. diplomatic cable as calling China’s official statistics “man-made.” Reliance on suspect data casts the IMF’s empirically based study in doubt. Although many coastal cities have high employment rates, evidence on the ground suggests China does not have a “national” labor shortage and will not have one in fifteen years’ time.

Four key factors overlooked by the IMF report identify issues the international business community should be aware of. These include the following:

  1. The popular belief that there is a near equilibrium between Chinese labor supply and demand is inaccurate. China does not really have the official 87 percent employment rate. Any report utilizing this figure at the root of its calculations will be misleading.
  2. In reality, a large portion of China’s population remains either vastly underemployed or untracked for employment statistics. A significant sector of the population holds multiple jobs, works in completely unreported industries, and/or is paid off the books.
  3. The IMF study also underestimates the impact of changes to the Chinese retirement age. Many workers who are forced to retire in their late forties and early fifties generally continue to work after retiring, especially in urban areas. These retirees typically work off the books and are statistically untracked. Given this consideration, changing the retirement age may not fill as much of the labor demand as the report estimates.
  4. There has been a massive spike in unemployment and underemployment in Chinese university graduates. By some estimates, at least half of all university graduates in China over the past three years are unemployed or underemployed.

Addressing Labor Concerns

Issues currently facing China are due more to bureaucracy than to decreased birth rates or forecasted decreases in population. Reforming the Hukou system and guaranteeing workers basic rights in urban areas will likely provide fast and immediate alleviation of any current labor shortages facing coastal areas.

As the Chinese population inevitably declines due to the one child policy, the retirement age also may be adjusted in accordance with economic need. Additionally, proper statistics that better reflect the on-the-ground employment situation will foster an improved understanding of China’s future labor trends.

Foreign firms operating in China can play a positive role in improving this situation as well. While firms can provide higher pay or missing societal infrastructure to workers, these alone will not overcome the problem. Foreign companies in China would be wise to work with their respective chambers of commerce to advocate changes and improvements to the outdated Hukou system.

The IMF and other international organizations also could actively encourage China to amend the Hukou system. Additionally, instead of creating unnecessary alarm over current or forecasted labor shortages, the IMF could concentrate on partnering with China to align its educational system with the skill sets required for success in the 21st century. Tomorrow’s employees are being trained for the last decade’s marketplace rather than the marketplace of the future. This is a problem China is not alone in facing.

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Shawn Mahoney
About The Author Shawn Mahoney [Full Bio]
Shawn Mahoney is the Managing Director of EP Consulting Group and Board President of EMC2 the World. Fluent in Mandarin Chinese, Shawn is focused on China business consulting, China trade compliance and global competence development and training.




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