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Demographic change and labour market (outline)

Cai Fang

This paper touches upon issues of demographic transition, labor market development, and

challenges facing China when it approaches the Lewis turning point. This paper tries to

combine Lewisian theory of development of dual economy and its revised version and theory

of demographic transition and framework of demographic dividend to analyze the Chinese

transition and development in the past three decades.

The paper finds that the Chinese experiences of economic growth and reform, in general, and

labor market development, in particular, during the period, are consistent with major

pathways coined by the dual economy theory (Lewis, 1954, 1972, 1979; Ranis and Fei, 1961)

and expected results by demographic transition theory (Caldwell, 1976), and it has indeed

gained demographic dividend by reallocating laborers, which were surplus labor force in

agriculture and overstaffing in state-owned sector during the pre-reform period (Williamson,

1997; Cai and Wang, 2005; Cai and Wang, 2010).

When the demographic transition leads to diminishing growth of working age population (Hu,

2010; UN, 2009), scholars and policy makers become puzzled while observing the Chinese

labor market (Rawski, 2001; Cai, 2004; Zhang, 2008). This paper tries to solve those puzzles

about labor market dilemmas by deepening the study beyond the issues of whether or not

Lewis turning point arrives. And it concludes with some policy suggestions.

The paper is organized as follows.

1
1. Introduction

This section reviews the unique demographic transition of China, which has been gone

through in much shorter time than developed nations and newly industrialized economies,

illustrate its implications to labor market – namely, the changed nature of labor supply, and

unveils the puzzles about the Chinese labor market, which prevent scholars and policy makers

from understanding the conflicting phenomena in labor market.

2. The New Phase of Demographic Transition in China

This section first depicts the fast process of demographic transition due to the unprecedented

economic growth, social development, and strict population policy. It then explains the

changes in population age structure, as a result of dramatic decline of fertility. That is,

working age population has grown in diminishing pace and is predicted to shrink after 2015.

Such changes are not only incarnated in population aging but also reflected in slower growth

of labor force, which has been altering the property of dual economy – unlimited supply of

labor.

Given that the economic growth has been fast and will sustain a similar speed, the demand for

labor will be strong, which inevitably causes the fundamental change in relationship between

supply of and demand for labor. As a result, the Chinese economy will grow under a condition

of tight labor market other than a condition of unlimited supply of labor. This paper suggests

an incoming Lewis turning point as convinced by the facts from changes in demographics and

labor market.

3. Economic Transition and Its Labor Market Results

This section reviews the process of labor market development during the economic transition.

It argues that the employment policy reform and, more generally, the labor market

2
development in China is not like what some observers claimed of lagging behind the progress

of reforms in other areas. In contrast, the mass labor migration from rural to urban areas has

been the largest movement in human history of peace time. In 2009, there were totally 145

million migrant workers originated from rural areas and worked in cities, which account for

more than one-third of urban employment.

Equally impressive is the dramatic transformation of urban employment system. Since the late

1990s, when the urban workers were hit by East Asian financial crisis and macroeconomic

slowdown and experienced massive lay off, the overstaffed former SOE employees have been

relocated to non-publicly owned sectors and even to informal sectors. Although there appears

informality in labor market and some workers left less protected socially, the transition from

planning system to market mechanism in allocating labor resources have been by and large

accomplished.

As the result of foregoing labor market development in rural and urban China, through both

quantity adjustment and price adjustment, rural surplus labor force has been shifted from low

productivity agricultural sector to higher productivity non-agricultural sectors and urban

redundant workers have been reassigned to diversified jobs. Such reforms have gained

reallocative efficiency through labor market development.

4. Challenges Facing China’s Labor Market

While the labor market development has dramatically altered the pattern of supply of and

demand for labor by expanding employment and improving quality of labor force, there

emerged a host of intricate phenomena on labor market, which puzzle scholars and policy

makers.

Those puzzles include the coexistence of labor shortage and employment difficulty, in general,

and the coexistence of the easiness for migrant workers’ employment and hardness for

university graduates’ employment, and of the trend of tight labor market and difficulties

3
facing vulnerable groups of labor market participants, in particular. Confronted with such a

conflicting labor market manifestation, the government addresses it at loose ends and scholars

explain it inconsistently, which has refrained sound policy-making.

This paper reveals regrouping of various labor market participants, of which three groups –

namely, migrant workers, new entrants with university degree, and urban workers with special

difficulties in finding a job, catch the attention of the Chinese government. Given their each

nature, while migrant workers may become major takers of cyclical unemployment and

cyclically face employment difficulties caused by macroeconomic fluctuation, university

graduates and urban vulnerable workers are more likely to suffer natural unemployment and

frictional and structural difficulties in finding jobs.

5. Concluding Remarks and Policy Suggestions

The changed natures of the Chinese labor market require three-dimensional policy adjustment.

First, after the Lewis turning point arrives, labor market becomes of a more neoclassical type;

therefore, further liberalization is required, including free mobility of labor across regions,

sectors and enterprises. Second, labor market institutions should play bigger role in

determining wages, regulating labor relations, etc. Third, social protection needs to be

strengthened and to extend its coverage to all labor groups. All those policy adjustments call

for household registration (hukou) system reform.

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Implications for Public Policies, The Chinese Economy, Vol. 37, No. 5 (September-October),

pp. 74 – 89.

Cai, Fang and Dewen Wang (2005) China’s Demographic Transition: Implications for Growth,

in Garnaut and Song (eds) The China Boom and Its Discontents, Canberra: Asia Pacific Press.

Cai, Fang and Meiyan Wang (2010), Growth and Structural Changes in Employment in

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