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Decipher China’s Unemployment Rate

Digest of China's true unemployment rate. Could global recession cause social unrest in China? (source: Economist Magazine)

The great wall of unemployed

Joblessness in China is rising, prompting fears of social unrest. But how high is the true unemployment rate?

THE employment outlook is “grim” according to Yin Weimin, China’s minister of human resources and social security. So grim, in fact, that on November 26th the People’s Bank of China slashed rates by more than a percentage point—the most in 11 years—to boost growth. The slowing economy has led factories to cut jobs, and there are mounting fears that the swelling ranks of the unemployed might one day take to the streets and disrupt China’s economic miracle. To assess such risks one must consider how high unemployment might rise.

The snag is that both the level and trend of China’s official jobless figures are meaningless. Until the 1990s, the government more or less guaranteed full employment by providing every worker with an “iron rice bowl”—a job for life. But when soaring losses at state-owned firms forced the government to lay off about one-third of all state employees between 1996 and 2002, the official unemployment rate rose only slightly. Today it is 4% in urban areas, up from 3% in the mid-1990s.

But the official rate excludes workers laid off by state-owned firms. Thus at the start of this decade, when lay-offs peaked, it hugely understated true unemployment. Over time, as laid-off workers have found jobs or left the labour force, the distortion will have shrunk. Another flaw is that the official unemployment statistics cover only people who are registered as urban dwellers. An estimated 130m migrant workers have moved from the country to the cities, but there is no formal record that they live there, so they are ignored by the statisticians. After adjusting the official figures for these two factors, several studies earlier this decade concluded that the true unemployment rate was above 10%—and might be even as high as 20%.

If unemployment is already so high, it would not take much of an economic slowdown to push it to crisis levels. However, a more recent study suggests that the jobless rate has fallen a lot since the start of this decade. Albert Park, of the University of Oxford, and Cai Fang and Du Yang, of the Chinese Academy of Social Sciences, have analysed China’s 2000 census and 2005 mini-census (covering 1% of the population), which include migrant workers. The raw census data suggest that the total urban jobless rate fell from 8.1% in 2000 to 5.2% in 2005. But when the jobless figures are adjusted to an internationally comparable definition, the rate in 2005 was less than 4%.


As a crosscheck, the economists also used the 2005 Urban Labour Survey of five big cities. This confirmed that the urban unemployment rate, including migrant workers, had indeed fallen—from 7.3% in 2002 to 4.4% in 2005 (see chart). But the rate for migrant workers is lower than for permanent residents because they return home if they cannot find work. As the chart also shows, excluding migrants, the urban unemployment rate fell from 11.1% to 6.7%. And since 2005, unemployment has undoubtedly fallen further. Earlier this year, factory bosses complained that they could not find enough workers; and faster real-wage growth also suggested that demand for labour was outpacing supply. Thus before China’s economy started to sputter this summer, its jobless rate was probably only 3-4%. One important qualification to these numbers is that China’s labour-force participation rate—ie, those in work or seeking it—fell to 65% in 2005 from 69% in 2000. If discouraged workers have left the labour force because they could not find a job, then the unemployment rate may understate the hardship they face.

But the finding that unemployment has fallen sharply in China over the past five years makes sense. The right-hand chart, from the World Bank’s latest China Quarterly Update, shows GDP growth relative to its estimated potential growth rate if the economy operated at full capacity. From 2003 to 2007, actual growth ran ahead of potential, so unemployment should indeed have dropped. However, the bank expects China’s growth to fall below trend in 2008 and 2009, implying that unemployment will climb. The bank forecasts growth of only 7.5% next year, its slowest for almost 20 years and well below its estimated potential growth rate of around 9.5%. Jobs are already disappearing—especially in southern China, where thousands of small exporting firms have closed this year.

Chinese commentators are currently fixated upon whether the economy can continue to grow by at least 8% a year. That was the old rule of thumb for the growth needed to absorb new entrants into the labour market. But that 8% figure has little scientific basis. Over the past decade, the trend growth rate has increased as a result of heavy investment and faster improvements in productivity. Maybe that is why the World Bank reckons that China’s potential growth rate (ie, the rate needed to keep unemployment steady) is now about 9.5%.

For employment, the type of growth matters as much as its pace. China is creating fewer new jobs than it used to. In the 1980s, each 1% increase in GDP led to a 0.3% rise in employment. Over the past decade, 1% GDP growth has yielded, on average, only a 0.1% gain in jobs. Growth has become less job-intensive, so the economy needs to grow faster to hold down unemployment.

One reason for this is that the government has favoured capital-intensive industries, such as steel and machinery, rather than services which create more jobs. Louis Kuijs, the main author of the World Bank’s report, argues that China needs to shift the mix of its growth from industry, investment and exports to services and consumption. To adjust the structure of production requires a further strengthening of the yuan, raising the price of energy, scrapping distortions in the tax system which favour manufacturing, and removing various shackles on the services sector.

More labour-intensive growth would also boost incomes and consumption and so help to reduce China’s embarrassingly large trade surplus. But most important, by allowing more workers to enjoy the rewards of rapid growth, it could help to prevent future social unrest.

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