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, discourage discrimination and labor abuse, improve income distribution, fund social security and pensions, and enhance healthcare and education. The share of Chinese people 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 legal 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 charts 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

Beijing’s 2013 Third Plenum Decisions pledged to improve labor productivity and welfare through a variety of policies including reforming the hukou household registration system, expanding employment opportunities, and delivering adequate social services. To track progress on these goals, we evaluate conditions for China’s 172 million migrant workers – a critical demographic accounting for 20% of the country’s working population. Unfortunately, our Labor and Shared Welfare assessment remains the most negative of all the reform clusters we track. Our primary indicator shows migrants are still shortchanged by China’s labor markets, benefiting less than other workers from economic growth in part because of restrictive policies that prevent them from taking higher-paying jobs in big cities. Meanwhile, debt deleveraging is constraining government spending on infrastructure – a critical driver of employment opportunity for migrants – and on social welfare. Spending less on social welfare sets back equality goals and efforts to strengthen labor productivity.

On the bright side, two policy developments point to an improving labor policy outlook with Beijing taking action to address structural deficiencies that contribute to labor challenges. First, five years after the 2013 Third Plenum promised to do so, authorities finally took steps to address persistent local government fiscal shortfalls with a State Council notice shifting more social welfare responsibilities from local governments back to Beijing (see Fiscal Affairs). Second, a bureaucratic restructuring in March addressed conflicting social security system regulatory mandates, consolidating and reshuffling healthcare agencies. The new approach may streamline processes, eliminate information gaps, and improve central oversight of social security funds. Both reforms should advance labor and shared welfare reform if implemented well, though they do not come fully into effect until 2019 and so will not improve our indicators in the short term.

The fact that so few new migrant workers are venturing beyond their home provinces indicates that one of the great drivers of China’s reform-era growth and industrial success – labor mobility – is coming to an end.

This Quarter’s Numbers

Our primary indicator, which looks at migrant workers as a barometer of broader labor conditions, shows migrant wages continue to trail economic growth – a setback given that the 2013 Third Plenum Decisions committed to promoting shared welfare. Our indicator shows that price-adjusted wages for migrants grew by only 5% year-on-year (yoy) in 1Q2018, in an economy reported to be growing by 6.8%. This marks the eighth consecutive quarter that migrant wages have lagged GDP. Migrant workers are benefiting less from growth than both urban and rural households, where wages grew by 5.4% and 8.2%, respectively, this period.

The disadvantages faced by migrants in the job market are inconsistent with Beijing’s pledge to reform the household registration system (hukou) and remove other institutional barriers to internal migration. As these reforms have been delayed, data show that workers are becoming less willing to venture out around the country in search of work. According to the 2017 Migrant Worker Report issued by the National Bureau of Statistics in April, 55.3% of 172 million migrant workers and 96.4% of new migrant workers (up from 54.7% and 88.2%, respectively, in 2016) are staying within their home provinces, even though in many instances jobs in other provinces offer higher wages. The fact that so few new migrant workers are venturing beyond their home provinces indicates that one of the great drivers of China’s reform-era growth and industrial success – labor mobility – is coming to an end.

Our supplemental indicators similarly paint a concerning picture of labor and shared welfare reform conditions. New Job Creation moderated in the review period, growing only 1.3% yoy, as deleveraging efforts squeezed local government financing for construction and infrastructure projects. This is good for long-term sustainability, but it weakens employment in the near term, particularly for migrant workers. The importance of efficient labor markets becomes more evident as easy fiscal support for employment falls away. However, draconian residence restrictions in megacities and campaigns to push people into smaller locales (see Spring 2018 edition) have done the opposite by driving people away from areas of greatest labor demand. This resulted in 20%–30% of job openings remaining unfilled in 1Q2018 in 95 surveyed cities in all regions (see Labor Demand-Supply Ratio).

As China aspires to grow more innovation intensive, educating the workforce and providing basic healthcare are increasingly crucial. China’s leaders acknowledged these needs in the 2013 Third Plenum Decisions, which included numerous promises to provide better social services. However, our Social Spending indicator shows that government spending on social welfare is flat. As of 1Q2018, fiscal expenditures on education and healthcare were 3.7% and 1.8% of GDP, respectively, barely changed from 4Q2017 and down from a year ago. This is not surprising given the fiscal conditions discussed above. The United States, by contrast, spends 4.2% of GDP on education and 8.2% on healthcare.

Local governments remain under severe financial strain, curtailing their ability to spend on welfare promotion.

Policy Analysis

Policy developments in the review period were moderately encouraging. The government took steps to address systematic deficiencies identified in the 2013 Third Plenum as causes of many of the country’s labor and social welfare problems.

In February, the State Council reorganized central and local government fiscal responsibilities for social welfare services. Since a 1994 tax system overhaul, local governments have had to pass on most of their revenue to the central government while still being liable for funding ever-rising social welfare obligations. Under new guidelines, central authorities will take on more responsibility for education (50%–80% of total outlays depending on the fiscal capacity of individual provinces) and pensions (50%–100% of total outlays). Beijing will also enhance healthcare resources for less developed cities, bearing up to 90% of costs in the poorest areas. If implemented, these changes would significantly increase the central share of social welfare burdens, improving local fiscal conditions and the health of local social security funds.

There are limitations to the envisioned reforms. The central government did not explicitly commit to increasing funding for two other major social welfare expenditure items – employment services and public housing, instead leaving these items open for case-by-case negotiations with provinces. These two items in particular are closely connected to local government revenue sourced from land sales and other financing vehicles. The lack of reform to these items probably reflects an inability to build consensus around how much of an increased fiscal burden should be put on the central government’s balance sheet.

In March, the National People’s Congress approved a restructuring plan for social welfare system coordination. The National Health and Family Planning Commission (NHFPC) and the State Council Healthcare Reform Office were combined and replaced by a newly established National Health Commission (NHC), which absorbed the policymaking functions of NHFPC and oversight for other health-related issues like elderly care, occupancy safety, and tobacco. In addition, the restructuring also consolidated the country’s healthcare insurance system, merging central-level authorities (divisions under the NHFPC, the Ministry of Human Resources and Social Security, the National Development and Reform Commission, the Ministry of Civil Affairs, and others) and the agencies responsible for administering healthcare insurance (central and local tax bureaus). These changes are meant to streamline processes, eliminate information asymmetries, and provide the central government better insight into the status of social security funds.

Reforming the central-local fiscal system and reshuffling the bureaucracy are important structural changes. But even if these reforms succeed, their impact on our labor and shared welfare indicators will not be immediate. The announced changes to central-local burden sharing will take effect on January 1, 2019, and the restructuring of the social welfare bureaucracy will not be finalized until the end of 2018 at the central level and March 2019 at the provincial level. In the meantime, our indicators will probably remain lackluster, absent more immediate policy breakthroughs. Local governments remain under severe financial strain, curtailing their ability to spend on welfare promotion. And stalled hukou reform and related restrictions on migration into big cities remain major constraints to worker mobility.

Explore the Reforms

Photo Credit: STR/AFP/Getty Images