China’s long-term GDP growth depends on labor policy reform. From the birth of the People’s Republic of China in 1949 through to 2015, China’s working-age population grew by 600 million people: it is little wonder economic output expanded. Today the size of the workforce is shrinking, so improving its quality and mobility makes all the difference. Labor policies that facilitate investment in people are needed to sustain growth once nations – like China today – reach middle-income levels. China’s plans call for labor policy reforms to boost job creation and entrepreneurship, regulate discrimination and labor abuse, address income distribution, fund social security and pensions, and improve healthcare and education. The share of Chinese living in cities is slated to rise to 60% by 2020. With a population of 1.38 billion, this means resettling another 100 million rural dwellers in cities (by granting them permanent urban residency, known as hukou status, to enjoy full social services) in just a few years (for comparison, the “Great Migration” in the United States from 1910 to 1970 consisted of 6 million African Americans moving north). This brings pressure for social services but also huge additional growth potential.

To assess progress in China’s labor policy reforms, we chart wage growth for the less-empowered segment of China’s workforce, those likely to bottleneck the country’s productivity potential: migrant workers. Working away from home in temporary and low-skilled jobs, and with little access to urban social services, migrant workers supported China’s growth miracle but find themselves increasingly vulnerable to structural changes. Our primary indicator compares the growth rate of migrant worker wages relative to the GDP growth rate. Wage growth below GDP growth suggests falling productivity or inadequate workforce policy support, or both. The wage/GDP growth trend for other segments of the workforce is included. Divergence in income gains among segments can lead to social unrest, as can downward trends impacting all segments simultaneously. Our supplementary indicators look at job creation, labor market demand and supply conditions, urban-rural income gaps, and social spending relevant to labor outcomes.

Quarterly Assessment and Outlook

Our primary indicator of labor reform conditions shows incomes for less-empowered Chinese workers still falling behind the nation’s GDP growth in 2Q2017, for a fifth consecutive quarter. The outlook for this migrant worker segment is key to whether China has a sustainable long-term growth outlook or falls prey to the development challenges so many emerging nations encounter upon reaching middle-income levels. New job growth is seeing modest improvement because of fiscal support; however, given the weight of infrastructure in that boost, it is unclear whether this is sustainable and helps develop new skills.

On the policy side, which foreshadows future quantitative outcomes if implementation is robust, there are encouraging signs this quarter in healthcare reform. Education reforms and fundamental labor mobility tasks including hukou reform are moving more slowly. Major policy developments are focused on basic social services, pension reform, and maintaining social stability.

This Quarter’s Numbers

Migrant worker wage growth continued to underperform GDP growth in 2Q2017. Relatively strong economic activity at the start of 2017 helped buoy the ratio back to its current level of around 0.7 from the low point of 0.6 last year. But this was not enough to end five consecutive quarters of lower-than-GDP migrant worker wage performance. For too many of these people, the wage gains driven by the Global Financial Crisis stimulus package in 2009–11 only produced temporary gains, not the skill upgrading that would help them lock in higher wages for the future, and we have witnessed a wage gain subsidence for almost six years through 2Q2017. Other workforce segments – employees of state-owned, foreign, and private firms – are also encountering wage growth headwinds, although their performance is much closer to par with GDP growth, not 30% below it. (Data for these other segments lags considerably, so we do not have current quarter comparators in the primary indicator; anecdotally, we believe wage growth rates for SOEs, foreign, and private firm workers are currently in line with GDP growth rates.)

Despite stable reported GDP growth, the pace of new job creation has slowed (see New Job Creation), showing only 1.6% year-on-year growth in 2Q2017 despite low base effects from the period a year ago (only 0.5% growth in 2Q2016). Though up from the mid-2015 trough, this was down from the beginning of 2017. This fits with our understanding that most of this year’s GDP resilience has come from a government-led infrastructure stimulus, which has a limited ability to create new jobs (since the industries it supports are already over capacity). Nor does it lead to skill upgrading.

The job demand-supply ratio in Western China reached a record high this quarter, with 126 positions for every 100 applicants (see Labor Demand-Supply Ratio). This ratio declined in Central and Eastern China. This divergence suggests the dislocations that can arise between jobs created and jobs workers are looking for. Infrastructure projects under the Develop the West rubric and Belt and Road initiative (BRI) boost investment in inland China but do not make the region more attractive to job seekers or address labor mobility impediments.

The biggest labor-relevant development this quarter was on healthcare reform.

The rural-urban income gap also continues to widen (see Rural-Urban Household Income). In 2Q2017, urban households generated annualized average disposable income of RMB 34,000, three times the level for rural dwellers. In the past, both urban and rural disposable income growth rates were higher, and rural income, coming from a lower base, grew considerably higher than urban income – 5% faster, at 13% annualized as recently as late 2013. Today both averages have fallen to nearly identical levels – around 7.8%, precluding the possibility for rural incomes to catch up. Stepped-up social spending by government is the key to managing the growth challenges presented by these trends – falling wage growth, income distribution equity, regional labor market clearing, and skill development. Fiscal outlays supportive of these goals including education, healthcare, and social security are rising (see Social Spending), but not as much as required to steer China toward OECD levels of development and away from the middle-income trap (the observed inability to sustain growth once a nation reaches levels of per capita income now present in China).

Policy Analysis: 2Q2017

This quarter we have seen less ambitious but more practical labor policy developments. The goal of Premier Li Keqiang’s 2017 work report was set to grant urban hukou to 13 million new residents this year, 3 million fewer than last year. The report urged acceleration of the residency permit system under which permit holders would enjoy the same social services regardless of hukou status. On April 13, the National Development and Reform Commission (NDRC) published a 2017 workplan, confirming the goal to increase the urbanization rate by only 1% in 2017 compared with 1.3%~1.6% in the past five years. Despite the lower goal, NDRC’s plan emphasizes residency-based fiscal support (which was approved by the State Council in August 2016) and school admission. These actions, if well implemented, will help ease the gap between urban-rural social services and encourage labor mobility while fundamental hukou policy reform is still under debate. This would be a major accomplishment.

The biggest labor-relevant development this quarter was on healthcare reform. On May 5, the NDRC issued a healthcare work plan, setting a monthly timeline for specific tasks to be completed. So far this schedule is mostly on track:

  • On April 11, NDRC required all public hospitals to abolish a 15% surcharge on drugs by September.
  • On April 26, the State Council committed to expand “medical treatment combination,” a key step toward implementing a referral system to aid in directing patients and resources more efficiently.
  • On May 23, the State Council issued a document encouraging private investment in healthcare services. Specifically, it commits to relax market restrictions, saying, “private investment in healthcare cannot be prohibited for any reason as long as it complies with the plans and fulfills entry requirements” and exempts such investments from paying value-added taxes. The document also encourages foreign investment, personnel, and technology, although in most cases joint venturing is still required.
  • On June 28, the National Health and Family Planning Commission (NHFPC) launched a mechanism to provide drugs in short supply, and another to facilitate healthcare insurance payments across provinces. The latter is particularly important for China’s 200 million migrant workers who need to claim reimbursements based on which hospital they go to instead of where they are from.
  • On July 25, the State Council issued its vision for modern hospitals, including greater decision autonomy, gradual retirement of antiquated administrative personnel titles, service-based compensation, and public-welfare–based performance measurement. Both for-profit and not-for-profit hospitals are allowed.
  • On June 30, the State Council launched a National Nutrition Program for 2017–30, setting specific targets for population nutrition with more focus on women and children in rural areas. This would improve the foundations of national health for the coming decades.

Longer life expectancy is increasing the burden on China’s pension schemes. Six provinces have pension funds running in deficit according to a September 2016 report. Central initiatives are focused on righting this ship. On April 25, the Ministry of Human Resources and Social Security announced that seven provinces had signed up for a centralized pension fund managed by Lou Jiwei, the former Minister of Finance. On July 4, the State Council issued a document encouraging commercial pension funds and related services, recognizing the importance of private players working in parallel to state programs. However, recent crackdowns on insurers and the investment of insurance officials (see Financial Reforms section) reform section) demonstrate that many prior missteps need to be cleaned up in the course of stabilizing the country’s insurance and welfare systems.

Developments in education reform were more modest this quarter. Policies continue to encourage and subsidize schools to accept students from poor areas. On March 30, the Ministry of Education (MOE) announced a target of 90% for high school enrollment nationwide by 2020. Two weeks later, the MOE announced a goal of 10% increased student admission this year over 2016 for poverty-reduction target areas. But with 60% of students dropping out of junior high school and not coming back and 20% of migrant children still blocked from urban public schools, the challenges are large, and fundamental reforms to distinctions among citizens based on their birth in cities are needed.

Explore the Reforms

Photo Credit: STR/AFP/Getty Images