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Saturday, November 25, 2006

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Does China have a slack labor market?

There are many questions that flummox me about China's economy (when will the central bank diversify its holdings? Are nonperforming loans a real problem or not? Why has Chinese saving increased just when Beijing took steps to boost consumption? Just how efficient is foreign and domestic Chinese investment?) In the Washington Post, Edward Cody suggests a new empirical puzzle -- how can I reconcile reports about the dearth of skilled labor in China with this one from Cody?

An open-ended rise in living standards, particularly for the educated middle class, has been part of an unspoken pact under which the party retains a monopoly on political power despite the country's turn away from socialism.

So far, the party has delivered on its part of the bargain: The economy has grown by more than 9 percent a year recently, and the main beneficiaries have been educated urbanites. Content to claim their share in the prosperity, most students have shown little interest in politics since the Tiananmen Square protests of 1989.

But a large pool of unemployed or underemployed university graduates, some analysts have suggested, could become a new breeding ground for opposition. An educated opposition, they said, would have far more organizational and ideological ability -- and present a greater threat to the government -- than the left-behind farmers who have been the main source of unrest in recent years.

The Labor and Social Security Ministry estimated recently that as many as 4.9 million youths will graduate from universities by the end of 2007, up by nearly 20 percent over 2006. Another 49.5 million will graduate from high school, also a 20 percent increase. The sharp climb in graduation rates represents a dramatic improvement in the lives of many Chinese, made possible by the economic transformation that has taken place here over the past quarter-century.

But indications have emerged that, booming as it is, the economy may not be able to absorb that many degree-holders into the jobs for which they are being trained. "The fact is that it's very hard for college students to get the right job these days," said Zhang Xuxin, a Zhengzhou student with close-cropped hair and plastic-rimmed glasses who plans to pursue postgraduate studies next year. "You may have a job, but it's very hard to have an ideal one."

A waitress in a German restaurant near Beijing's Ritan Park, for instance, said she has been looking for work in the computer industry since graduating last summer, but in the meantime, she has to serve sausages and beer to pay the rent because nothing is available in her field.

Tian Chengping, the labor and social security minister, predicted that about 1.2 million of the 2007 university graduates will have similar trouble finding employment. As a result, his ministry announced Tuesday, colleges will be forced to restrict admissions into study programs with low postgraduate employment rates. At a conference in Beijing, ministry officials said they also are seeking to improve employment counseling for high school graduates who do not plan to attend college.

Tensions over employment after graduation have exploded repeatedly in recent months, betraying the pressure students say they feel. Students at Shengda Economics, Trade and Management College, affiliated with Zhengzhou University, rioted in June when they discovered that their diplomas would not be the same as those from the university itself, putting them at a disadvantage in job hunting. A similar riot erupted last month at the Ganjiang Vocational and Technical Institute in Jiangxi province south of here. The Hong Kong-based Information Center for Human Rights and Democracy has recorded 10 such disturbances since summer.

The article suggests that a slackening economy is the culprit. Another possible explanation is that as labor productivity increases from the high rate of investment in capital stock, job growth in China will no longer keep pace with growth in GDP. Another, more quirky hypothesis is that the market for English students -- who disproportionately show up in western press reports -- is particularly bad.

But I'd be curious to hear other hypotheses.

posted by Dan on 11.25.06 at 02:46 PM

Comments:

Last year, a number of graduates I knew in Beijing had a tough time finding jobs, and they a) had a Beijing hukou (residency card), b) had a degree from a mid-range university (places like Minorities University and Beijing Finance and Econ). These tended to be engineering and finance grads as well.

In the end, I think all of them found a job, but there's certainly nothing along the lines of a salary negotiation or a signing bonus that is common for those fields in the US.

There has been an enormous increase in the number of degree holders in China over the last few years; good in the long run, but it will definitely take some time for the economy to adjust. As far as technical skills are concerned, the students I knew tended to seem as qualified as US graduates from mid-level universities here, so I don't think it's a quality of education problem as is seen in some other poorer countries.

posted by: cure on 11.25.06 at 02:46 PM [permalink]

Also, remember that China's 'labor advantage' is more properly spelled 'extremely cheap labor'. If these people wanted a (very dirty and dangerous) factory job, which paid $1/hr, they could probably get one.

posted by: Barry on 11.25.06 at 02:46 PM [permalink]

I think Barry's onto it. When the economic strategy is geared towards creating low-end jobs, should we be surprised that the creation of higher-level jobs is slower? Does this sound at all familiar?

posted by: Dave Schuler on 11.25.06 at 02:46 PM [permalink]

China's recent development actually hasn't been all that labor intensive. It has been very capital intensive. Read the IMF's latest Asian regional outlook for all the details. Labor income is actually declining as a share of Chinese GDP ... and wage growth has lagged productivity growth. So the fact that some skilled labor is now facing a bit of slack in the labor market isn't a total surprise.

Here is another possibility --

Interest rates in China are very low -- both because of high savings and because of government policy. (State) Firms can get outside capital for say 6% nominal, and firms with retained earnings should invest if they earn more than they get on bank deposits (something like 2.5%), absent a more developed policy for distributing dividends. That has created incentives to substitute capital for labor (think importing western auto technology that was designed to minimize the use of expensive German/ UAW labor ... to a country with much lower labor costs) and kept overall job creation subdued during China's recent boom.

China's government also clamped down on investment growth toward the middle of the year, so there may be a cyclical component as well. China may be growing at 10% rather than 15% ... or something like that. My numbers are made up, but there presumably has been a bit more volatility in China's growth during its boom than appears in the official data.

posted by: brad setser on 11.25.06 at 02:46 PM [permalink]

I should have added that the low interest rates encourage the substitution of capital for labor argument is consistent with Dr. Drezner's hypothesis arguing that productivity gains from past capital investment is reducing labor demand.

posted by: brad setser on 11.25.06 at 02:46 PM [permalink]

Hmm ... I doubt whether the solution would work:

"Tian Chengping, the labor and social security minister, predicted that about 1.2 million of the 2007 university graduates will have similar trouble finding employment. As a result, his ministry announced Tuesday, colleges will be forced to restrict admissions into study programs with low postgraduate employment rates."

So a government official is going to guess for which sort of graduates there will or will not be demand in five years time? All the best wishes for that man, he'll need it.

posted by: Harmen Breedeveld on 11.25.06 at 02:46 PM [permalink]

"You may have a job, but it's very hard to have an ideal one." Who does?

"...she has been looking for work in the computer industry since graduating last summer, but in the meantime, she has to serve sausages and beer to pay the rent because nothing is available in her field." Welcome to capitalist realities.

Who in the US could get a computer job after the dot-bomb blew up? "All high tech jobs were out-sourced to India..." This year, computer seniors from reputable colleges, such as UI-Champaign, have already had jobs lined up before they graduate in May 2007. The pay for a programmer is $78,000 in the West coast, $65,000 in the East, $55,000 in the Midwest.

posted by: ic on 11.25.06 at 02:46 PM [permalink]