China needs 11.8m workers. Here's how to close its labour gap

The seventh national population census of the People’s Republic of China suggests a potential Chinese labour force gap for the next decade and beyond. In fact, we calculate the projected annual labour force gap to be around 11.8 million.

The gap can be separated into two components: a “demographic gap” and an “educational gap”. The former means the labour shortage arising from demographic changes, like the aging population, low birth rate and low level of immigration. The latter means the labour shortage arising from the mismatch between what the workers can offer and what jobs require, also known as structural unemployment.

Owing to China’s status as the world’s second-largest economy, worsening conditions in China’s labour market will have a huge impact on the world’s economic development prospects. This makes it necessary to address this issue well in advance.

Will the new three-child policy of the Chinese government help close the demographic gap? The Jinan survey team of the National Bureau of Statistics once randomly selected 366 households in suitable age groups in the city. Among the surveyed subjects, respondents in the 20-25 age group do not have any willingness to have three children and just 6.5% of respondents in the 25-30 age group are willing to have three children. In the 30-40-year-old age group, this drops to 6.1% of respondents, while 7.0% of the respondents over the age of 40 are willing to have three children. The statistics suggest that families with a relatively stable economic foundation can and are willing to bear the costs of child-rearing. However, the overall proportion of families welcoming the three-child policy is still low.

The immediate impact of the three-child policy is likely to be positive, but still small on the macro level. Suppose, optimistically, around 6.5% percent of couples in the 25-49 age group have three children. We estimate that this may result in a net increase of 6.68% in terms of the birth rate. This would reduce the labour force gap by 7.15 million with a gap remaining of 4.65 million.

As one respondent mentions: “[I]f relaxing the birth policy was effective, the current two-child policy should have proven to be effective too (...) The fundamental issue is living costs are too high and life pressures are too huge.” The success of loosening the birth policy and further closing the demographic gap depends on whether the government can effectively provide better services in healthcare, education and housing. Those measures may also lead to a decrease in the mortality rate, thus making it feasible to postpone retirement age, as in Japan, and increase immigration.

In the Chinese labour market, the demand has consistently exceeded supply for the last 10 years, which means increasing wages may not automatically sufficiently restore the labour supply to balance out the labour demand. Worse still, the commodity prices may increase due to rising wages, thus deepening the inflation that is already surging during the pandemic. Structural unemployment, most prevalent in China's high-skilled sector, has a lot to do with an educational gap in the economy: China has 170 million skilled workers but, among the total employed population, only 7% are high-skilled personnel (about 48 million) deemed capable of performing complicated tasks and able to adapt quickly to technology changes.

The Chinese Ministry of Education has recently emphasized the importance of expanding the ratio of vocational education schools relative to high schools. However, the effects of encouraging vocational training have been modest: many Chinese people believe vocational education to be inferior to and of lower social prestige than traditional high school education. However, in the era of the “new economy” and its high growth, cutting-edge-tech industries, the need for more vocational training has been more urgent than ever. It is important to encourage individuals to engage in lifelong learning of skills required by the “new economy”, especially digital skills, through online learning and short-course qualifications, in response to the growing demand for democratized learning and reskilling.

The Singaporean experience suggests another way of closing the educational gap, which is to facilitate immigration for industries facing the most severe labour shortages. By our formula, if 20% of the remaining 4.65 million gap can be filled through vocational training, 4.95 million immigrants at least would be needed annually. Under a reformed, tiered immigration system, more temporary work visas, permanent residences, and citizenship can be issued to foreigners with particular skill sets, relevant experiences and educational backgrounds to fill specific industry needs. Besides, a more open immigration policy could help redress China's negative net immigrant inflow of the past five decades and make Chinese society more multicultural and diverse.

The Chinese labour force shortage is far from a new problem for Chinese policy-makers. In the next 10 years, China’s population is expected to reach its peak with its average age rising further. The three-child policy may not be as sufficient as its makers expect. China should learn from the past experiences of countries like Japan and Singapore and make reforms in policy areas including health care, retirement, immigration and vocational training alongside loosening the birth restrictions.

The formula used to calculate the labour force gap by the authors is as follows: projected yearly labour force gap = the number of jobs - ((1 + birth rate - mortality rate) * total population + immigrant workers) * labour force participation rate* (1 - unemployment rate). For more details, please contact the authors.