VZCZCXRO5722
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0800/01 0330252
ZNR UUUUU ZZH
P 020252Z FEB 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 4423
RUEHC/DEPT OF LABOR WASHDC PRIORITY
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC
RUEHOO/CHINA POSTS COLLECTIVE
RUEHGV/USMISSION GENEVA 1611

UNCLAS SECTION 01 OF 06 BEIJING 000800 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT PASS USTR FOR KARESH, ROSENBERG, CELICO, STRATFORD, BLISS 
LABOR FOR ILAB 
TREAS FOR OASIA/ISA-CUSHMAN 
USDOC FOR 4420/ITA/MAC/MCQUEEN AND DAS KASOFF 
GENEVA FOR CHAMBERLIN 
USDA/FAS/ITP FOR SHEPPARD 
 
E.O. 12958: N/A 
TAGS: ELAB ECON EINV PGOV PHUM SOCI CH
SUBJECT:  CHINA'S LABOR MARKET: SURPLUS OR SHORTAGE? 
 
¶1.  (SBU)  Summary.  China simultaneously faces both a large 
labor surplus and shortages of labor in certain segments of its 
labor market.   Workers with skills have ample employment 
opportunities, and some industrialized regions are experiencing 
shortages of even marginally skilled workers, whose wages are 
rising.  However, China still faces a challenge creating 
employment opportunities for a largely unproductive, surplus 
agricultural labor force, and young new entrants to the labor 
force, especially those with little education, make up the 
majority of China's unemployed. Overall, the under- and 
unemployed outnumber job vacancies, but structural problems 
prevent the labor market from balancing out.  Chinese experts 
and other observers see poor workers' rights protection, the 
restrictive hukou (household registry) system, and an outdated 
education system that does not supply students with the skills 
they need as three main factors behind China's labor market 
imbalances.  Reforms are under way in each of these areas, and 
China's economy continues to evolve in market-oriented 
directions.  But as the Government continues to seek Socialist- 
style control over labor organization, migration and the 
education system, labor market imbalances are likely to persist. 
End summary. 
 
A Changing Labor Market 
----------------------- 
 
¶2.  (U)  Depending on whom you ask, China is either facing a 
growing labor surplus or a widening labor shortage.  Frequent 
press reports, academic papers and statements of public 
officials comment on China's labor market conditions, some 
citing the slow pace of job creation and warning about risks to 
social stability, while others maintain that labor shortages 
threaten the continued growth and competitiveness of China's 
export industries.  The truth is that both views are valid, but 
apply to different segments of China's complex and changing 
labor market.  This message is intended to summarize what is 
happening in China's labor market, and current thinking about 
its implications for economic development. 
 
The supply of labor: 
 
¶3.  (SBU)  According to the Ministry of Labor and Social 
Security (MOLSS), China's labor force reached 758 million at the 
end of 2005, and grew by about 1 percent per year for the 
previous five years.  MOLSS divides the labor force into 267 
million urban and 491 million rural workers, but many workers 
classified as rural are engaged in part-time, seasonal or 
informal sector work in urban areas.  According to Dr. Zhang 
Libin, an economist at the MOLSS Institute of Labor Studies, 
government labor surveys count workers as "urban" workers if 
they have urban hukou (household registration) status, or if 
they have rural hukou status but spend more than 6 months living 
and working in cities.  Rural-urban migrants who spend less than 
6 months in cities are counted as part of the rural labor force. 
Political and economic reforms over the past two decades have 
allowed workers to migrate freely between rural and urban areas, 
and work outside their registered home districts, but it is 
still very difficult to change one's hukou status.  Beijing, for 
example, has an estimated population of 15 million, but only 
11.5 million have a Beijing hukou. Without urban hukou status, 
migrant workers in China's cities generally do not enjoy access 
to public education, social welfare insurance and other public 
services on an equal basis as registered urban residents. 
 
¶4.  (SBU)  Wang Dewen, an associate professor of Population and 
Labor Economics at the China Academy of Social Science (CASS) 
provided Laboff with a more meaningful estimated breakdown of 
the Chinese labor market than available from Government 
statistics.  According to survey results, Wang said, the labor 
force breaks down (roughly) as follows: 
 
Urban residents with urban hukou status  250 million 
 
Rural residents working in urban areas   100 million 
 (migrant workers) 
 
Rural residents working in non-agricultural 130 million 
 rural enterprises 
 
 
BEIJING 00000800  002 OF 006 
 
 
Rural residents engaged in agriculture   320 million 
 (of which, rural residents needed 
 for agricultural production)   (170-270 m) 
 
TOTAL        800 million 
 
¶5.  (U)  Labor supply growth comes primarily from rural areas, 
where small land holdings, inefficient agricultural practices 
and low incomes encourage underemployed farmers to migrate to 
cities or take up non-agricultural employment in township and 
village enterprises.  Many rural workers do not fall neatly into 
one category, but tend to spend part of their time on the farm, 
and part of their time in wage labor.  The National Bureau of 
Statistics reports that for the first 3 quarters of 2006, 34% of 
the average farmer's income came from non-farm wages. 
 
¶6.  (U)  According to MOLSS, migrant workers now constitute 40% 
of the urban workforce, and predominate in low-skill jobs. 
Migrants make up 68% of China's workforce in manufacturing, 80% 
in construction and 52% in the restaurant and retail industries. 
Despite the de facto status of migrant workers as second-class 
urban residents,an NBS survey on migrant worker living 
conditions published in October 2006 found that 55 percent hoped 
to remain permanently in cities.  It is common for migrants to 
return to thei home districts once a year, usually at harvest 
times or during Chinese New Year. 
 
¶7.  (SBU)  MOLSS statistics indicate that the (formal sector) 
labor force has increased by 6-7 million per year since 2000. 
However, Zhang Libin estimates that job growth has been higher: 
the working age population, she said, rose by about 14 million 
per year between 2001 and 2006, but this rate of growth will 
drop to about 8 million per year in 2006-2011.  Good statistics 
on how many rural workers migrate to take up wage employment 
every year are not available, as a large proportion of these 
workers end up what MOLSS terms "flexible employment" (informal 
or irregular employment relationships).  Since 2000, Chinese 
government figures for rural net out-migration have fluctuated 
between 6.1 and 10.2 million per year.  Estimates of workers 
engaged in flexible employment range from 40-80 million. 
 
¶8.  (SBU)  The rural labor force represents an enormous pool of 
underutilized labor.  Wang Dewen and Zhang Libin told Laboff 
that various economic surveys indicate that the agricultural 
sector could shed another 50-150 million workers over time 
without harming production.  It is for this reason that most 
Chinese economists maintain that China has a very large labor 
surplus.  CASS Economist Qi Jianguo told Laboff that he did not 
believe China's industrial and service sectors were sufficiently 
developed yet to absorb all these surplus workers, and that it 
would take about 25 more years for the urban and rural labor 
markets to balance out. The number of under- or unemployed rural 
laborers surely exceeds the number of job vacancies in the 
economy at any time, but structural problems prevent the labor 
market from balancing out quickly. 
 
Demand for Labor: 
 
¶9.  (SBU)  Reliable statistics on labor force growth and job 
creation are not available, given the blurry status of rural- 
urban labor migrants and the growing incidence of informal 
sector employment, but wage trends suggest that overall 
unemployment is dropping.   Wang Dewen told Laboff that CASS 
surveys have found wages to be rising faster and in more regions 
than official statistics suggest.  Wages in China's 
industrialized coastal regions have risen steadily since 1998, 
and labor shortages there do not yet appear to be abating. 
Shortages of even marginally skilled industrial and service 
workers are also starting to appear in central and western China. 
 
Labor shortages and wage increases are most intense at the 
highly-skilled end of the labor market, as the early 2006 
statistics below from Guangzhou suggest.  The severe shortage of 
highly-skilled labor in Guangzhou track with reports from human 
resource consultants that turnover among skilled employees is 
high and rising.  Wages for the most skilled employees in the 
Pearl River Delta region are approaching Hong Kong wages, and 
government data suggests that even unskilled jobs are 
increasingly hard to fill if they are dangerous or unpleasant. 
 
BEIJING 00000800  003 OF 006 
 
 
Wang Dewen describes the supply of unskilled labor in China's 
cities as ample, but no longer unlimited. 
 
Statistics from Guangzhou Labor and Social Security Bureau 
(reprinted in "CSR-Asia," 22 February 2006) 
 
Skill Level   Ratio of Jobs to Job Applicants 
-----------              ------------------------------- 
no skills    0.78 
basic skills   1.87 
high skills   3.20 
 
¶10.  (SBU)  A commonly cited anomaly in the Chinese labor market 
is the high unemployment rate for recent college graduates. 
According to Zhang Libin, 30 percent of recent college and 
vocational school graduates face difficulty finding work.  This 
problem has received considerable attention in the press, but 
Zhang does not consider it a long-term economic problem. 
Although the education system is part of the problem, Zhang and 
other labor experts Laboff interviewed believe that many recent 
college and vocational school graduates also have over-inflated 
expectations about the degree of responsibility for which they 
are prepared, or are reluctant to look outside China's major 
cities for work. Zhang Libin is more concerned about employment 
prospects for high school graduates.  Young people now 
constitute 60 percent of the unemployed, and in some urban areas, 
the unemployment rate for youth is higher than for migrant 
workers.  Young workers without education often end up in 
informal sector employment, where their legal rights are poorly 
protected. 
 
¶11.  (U)  The profile of employers is also changing, with the 
private sector creating an ever greater proportion of new jobs. 
According to MOLSS statistics, State-owned enterprises (SOEs), 
which once dominated China's urban economy, are declining in 
importance, while the number of workers in private enterprises 
has risen sharply. 
 
Breakdown of Registered Urban Employees, 1999 and 2005 
(Source: Ministry of Labor and Social Security) 
 
Type of enterprise:   1999    2005 
------------------   ----    ---- 
 
Urban SOE     90.6 million    64.8 million 
Collective     19.6 million    8.0 million 
Domestic Private    32.3 million   62.4 million 
Other (foreign-invested)  16.9 million  41.1 million 
 
¶12.  (SBU)  In line with this economic transition, the problem 
of re-employment for laid-off former SOE workers has 
significantly diminished in recent years, according to Zhang 
Libin and Qi Jianguo.  Zhang told Laboff there have been no new 
entrants to government programs for laid-off SOE workers since 
¶2005.  Of the 28 million workers laid off since 1998, 20 million 
have found new work or have qualified for retirement benefits. 
According to Zhang, Government programs are currently only 
providing specialized assistance to 600,000 particularly 
difficult to employ laid-off former SOE workers.  Zhang added 
that another 6.6 million SOE workers may be laid off between now 
and 2008 as a result of ongoing SOE bankruptcy proceedings. 
These workers will be eligible for unemployment benefits, but 
will receive no other special assistance from the Government. 
 
Why (part of) the labor market is tightening 
-------------------------------------------- 
 
¶13.  (U)  Demographics appears to be a major factor behind 
China's labor shortages.  According to a CASS study, the 
population ages 15-65 grew y an average of 12.5 million per 
year etween 2000 and 2005, but the rate of growth peaked in 
2003 and is now declining.  The study also projects that China's 
labor force will peak in 2015 at about 1 billion.  Young female 
workers who predominate in the manufacturing sector, are in 
especially short supply, reflecting the one-child family 
planning policies adopted in late 1970s.  Rural areas can no 
longer supply ever-increasing numbers of young workers.  Demand 
for labor continues to grow, but employers are facing a downward 
spike in supply.  Employers can no longer rely on the informal 
 
BEIJING 00000800  004 OF 006 
 
 
networks they used in the past to recruit workers.  According to 
anecdotal reports, the manufacturing sector is responding by 
proactively recruiting workers from ever more distant rural 
areas, paying bonuses to workers who can introduce friends or, 
and accepting older workers than they have in the past. 
Employers are also increasing wages. 
 
¶14.  (U)  The most severe labor shortages, as well as the 
fastest wage increases, are occurring in the Pearl River Delta 
(PRD), and investors are responding by looking elsewhere to set 
up shop.  In a study called "Globalization and the Shortage of 
Rural Workers: a Macroeconomic Perspective," Wang Dewen and two 
co-authors demonstrated that the concentration in fixed asset 
investment in China moved decisively away from the PRD and 
toward the Yangtze River region and the northern coastal region 
between 2000 and 2004.  Some Chinese experts have also observed 
that the PRD is declining in popularity as a destination for 
migrants compared to the Yangtze River region. 
 
¶15.  (SBU)  Conventional wisdom also attributes labor shortages 
to Central Government policies designed to increase rural 
incomes, such as tax breaks and subsidies, which have diminished 
the push factor.  Labor experts interviewed by Laboff said they 
believe such policies have had some effect in some areas on the 
availability of migrants, and further government initiatives 
such as improvements to rural health and education systems may 
encourage more surplus agricultural workers to stay put. 
However, the experts also agreed that the effect of these 
policies on the labor market appears to be overstated. 
According to Government statistics and other surveys, the 
outflow of rural migrants continues. 
 
A labor market imbalance 
------------------------ 
 
¶16.  (SBU)  The persistence of labor shortages in China's 
fastest growing regions suggests that economic, social or 
political impediments limit the labor market's ability to adjust. 
China Labor Bulletin (CLB), a Hong Kong NGO, attributes the 
imbalance to a "one-sided" labor market.  Since workers cannot 
freely organize and negotiate with employers, CLB argues, and 
the government is ineffective in setting and enforcing wage and 
working conditions standards, workers must "take it or leave 
it."  Many labor market observers have described Chinese 
employers as reluctant to raise wages, especially in export- 
oriented industries which, due to intense competition, cannot 
set the export price of their final products.  Labor is the only 
input cost some employers can control, and employers fear that 
due to other impediments to labor mobility, raising wages will 
increase their expenses without attracting more workers.  As a 
result, employers often try alternatives, such as increasing 
hours worked (sometimes in violation of overtime regulations), 
changing labor supply contractors, or expanding production to 
lower-cost inland cities, before raising wages.  In the PRD, the 
lag between the emergence of labor shortages and significant 
wage increases was about two years.   Wang Dewen and other 
scholars have called for China to improve labor law legislation 
and enforcement, and reform the trade union and wage 
determination mechanisms, and a survey report on Labor Law 
enforcement published by the National People's Congress in 
December 2005 made the same recommendation. 
 
¶17.  (SBU)  Reluctance to raise wages, however, does not explain 
all the rigidity in China's labor markets.  Several political 
and social factors also contribute to labor market imbalances. 
A CASS study prepared for China's National Development and 
Reform Commission (NDRC) attributes the mismatch between the 
rural labor surplus and urban labor demand mostly to the hukou 
system.  While there are still too many surplus workers in rural 
areas, the report states, migrants are not sufficient to meet 
the needs of non-agricultural production and urbanization 
because the hukou system restricts the flow of labor.  Migration 
only occurs when non-agricultural employment opportunities are 
substantially more attractive than staying in rural areas.  The 
deterrent power of the hukou system is strongest for lower- 
skilled workers, whose wages are not high enough for them to 
forgo publicly funded housing, health care or education benefits, 
however meager.  A "hukou-neutral" labor market in which workers 
could freely relocate and enjoy the same access to jobs and 
 
BEIJING 00000800  005 OF 006 
 
 
benefits as established residents would be able to respond far 
more nimbly to changing conditions than Chinese workers can 
today. 
 
¶18.  (SBU)  Qi Jianguo told Laboff that he believed 
unrealistically high minimum-wage standards and social benefits 
for urban residents also contribute to labor shortages.  In his 
view, industrial and service sector employers turn to migrants 
to avoid the relatively high wages and benefits urban employees 
have grown accustomed to (pension, medical and other social 
insurance program contributions can add 30 percent to the wage 
bill), but are finally having trouble recruiting migrants as 
well.  Qi observed that wages move upwards each year after the 
Chinese New Year holiday, depending on how many migrant workers 
return to their jobs in the cities. 
 
¶19.  (SBU)  The inflexibility of China's education system is 
another factor behind China's skill-based labor supply 
imbalances.  Zhang, Wang and Qi all told Laboff that China's 
higher education system is outdated, oriented toward producing 
academics rather than skilled workers.  Despite the high level 
of unemployment among recent university and vocational school 
graduates, a recent survey of 80 foreign-invested enterprises in 
the PRD revealed that lack of skilled personnel is their top 
human resources concern.  The Chinese Government is also 
concerned about the growing mismatch between supply and demand 
for skilled labor.  Qi said the Government should also reduce 
the red tape associated with setting up a business and encourage 
more graduates to create more employment opportunities for 
themselves. 
 
The impact on China's future competitiveness 
-------------------------------------------- 
 
¶20.  (SBU)  While most Chinese labor market experts believe 
China will have a labor surplus for years to come, some experts 
believe the shortage of skilled workers poses a serious threat 
to China's competitiveness and economic development.  In their 
paper on "Globalization and the Shortage of Rural Workers," Wang 
Dewen and his co-authors conclude that labor costs will rise in 
China, and that the rise will make China's manufacturing 
industries less competitive.  Wang told Laboff that the 
Government is very mindful of the competitive threat from 
Vietnam, India and others whose wage levels are already lower 
than China's, but he noted that the Government is already 
looking beyond labor-intensive, export-oriented industries to 
sustain China's economic development.  China has an 
underdeveloped services sector, a huge internal market, and lots 
of room to improve the skills and productivity of its workers, 
Wang said.  Wang and his co-authors conclude that China can also 
mitigate the threat to its competitiveness by deepening reform 
of the hukou and education systems, and by taking other measures 
to improve labor mobility and labor market efficiency. 
 
Comment 
------- 
 
¶21.  (SBU)  Most of the reforms necessary to reduce China's 
labor market imbalances are already underway, but they will not 
be politically easy.  The Government is slowly making progress 
on its legislative agenda to improve labor laws and better 
protect workers' rights, which will contribute to correcting the 
problem of the "one-sided" labor market.  However, improving 
enforcement of even existing laws and regulations and bringing 
more accountability to often well-connected employers will 
likely prove a great challenge, as it has in such areas of 
intellectual property rights and environmental enforcement. 
Reforms implemented at the local level continue to chip away at 
the hukou system.  Many small cities have made it easier for 
migrants to obtain urban residency status.  Large cities, 
however, continue to take a piecemeal approach, allowing migrant 
workers who pay into social welfare insurance programs, for 
example, to receive benefits, but appear reluctant to undertake 
obligations to provide migrants with such costly public services 
as free public education.  MOLSS and the Ministry of Education 
are seeking ways to provide more vocational and skills training, 
improve the quality of existing education curricula, and 
developing mechanisms to help the education system become more 
responsive to the laQr market, but to date, this has produced 
 
BEIJING 00000800  006 OF 006 
 
 
few meaningful changes.  Although China's economy continues to 
evolve toward more market-driven allocation of inputs, the 
Government continues to seek Socialist-style control over labor 
organization, migration and education.  As a result, labor 
market imbalances are likely to persist.  End comment. 
 
¶22.  (U)  Amcongen Guangzhou and Amcongen Shanghai cleared this 
message. 
RANDT