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

Migrant worker income growth lagged GDP growth in 3Q2017 for a sixth consecutive quarter. Although the trend is slightly less negative than in our last review period, this worker segment is still falling behind. Job creation continued to recover from a 2015 trough. The strongest growth was in the country’s less-developed western region, while migrants faced headwinds finding higher-paying opportunities in bigger cities. This reflects dislocations between where companies are investing and where workers are located (and allowed to locate – as many are pushed out of wealthier eastern cities). Growth in incomes for rural households was slightly faster than growth in incomes for urban households, meaning a positive trend of convergence between the two, though rural incomes are not growing fast enough to erode the gulf with urban incomes any time soon.

Our outlook is for stepped-up public attention to labor welfare and social issues in the quarters to come, but with limits to meaningful progress until broader, pro-growth reforms are well underway. President Xi’s report to the 19th Party Congress in October pledged the Party to shift focus to quality of life issues, though the limited progress on this front seen in our data shows this will be hard. Policy designs are plentiful, but implementation requires fiscal support that is already stretched and oversight by local officials conflicted by unclear incentives.

Our outlook is for stepped-up public attention to labor welfare and social issues in the quarters to come.

This Quarter’s Numbers

The real wage-to-GDP growth ratio for migrant workers improved slightly to 0.77 in 3Q2017 from 0.68 in 2Q2017. This means real wage growth of only 5.2% on average for 180 million migrants (or about 20% of China’s total workforce), while the economy they supported grew at 6.8%. The gap is more striking in nominal terms: 7.0% wage growth for migrants compared with 11.2% GDP growth. This is the sixth consecutive quarter where migrants’ wage growth lagged behind economic performance. In other words, workers are not benefiting from growth.

On the other hand, our supplementary indicator New Job Creation suggests strong employment growth. Unlike advanced economies where the unemployment rate plays a key role in policymaking, the Chinese government mainly relies on a job creation indicator to evaluate labor market conditions. In 2017, local governments front-loaded their fiscal expenditures to ensure stable growth ahead of the 19th Party Congress in October (see our Fiscal Affairs cluster). As a result, on an annualized basis job creation grew at 2.4% year-on-year (yoy) in 3Q2017, the fastest in two years. The government was only 2 million jobs away from hitting its target of 13 million new jobs for the year as of the third quarter, which should be easily attainable in the fourth. However, our primary indicator suggests that job creation did not push migrant worker wage growth above GDP, even though migrants are the primary laborers engaged in typical fiscal stimulus projects including construction and infrastructure. If the economy cools and fiscal space narrows in coming quarters, as expected, employment and wage growth for migrants will decelerate absent more sustainable market-driven demand.

At the regional level, China’s workers face different job markets depending on their location (see Labor Demand-Supply Ratio). For every 100 applicants, there are as many as 124 job openings in western China, compared with 113 in developed eastern provinces. Although the eastern number bounced back strongly from 105 in 2Q2017, a closer look into the data reveals that happened because job applicants declined (by 176,000 people as recorded in the government’s human resource platforms) more than job openings (declined by 60,000). This could be explained by recent campaigns in Beijing and Shanghai to evict migrants lacking local residency permits.

While wage growth for migrant workers as compared with GDP growth is a strong indicator of shared welfare, disposable income data indicate whether average material incomes are improving across the country. The rural-urban income gap (see Rural-Urban Household Income) trended in the right direction in the third quarter, with caveats. Both urban and rural households saw higher growth in disposable income in 3Q2017, at 8.15% and 8.44%, respectively, the first recovery since 4Q2016. Income growth for both segments was mainly driven by non-wage sources – throughout 2017, transfer income for both rural and urban households grew at double digits, reflecting fiscal stimulus and increased social welfare expenditures (see Social Spending). Rural property income also grew by 9.3%, slightly higher than 8.9% for urban households. Other indicators of income tell a more cautious story about the urban-rural divide though: rural business income grew by only 4.2% in 3Q2017, compared with 6.7% for urban households. Taken together, the urban-rural income gap is narrowing, but slowly, and driven by government transfer payments.

40% of China’s 55 million rural residents in poverty are in this situation due to healthcare costs, suggesting much work remains to be done.

Policy Analysis: 3Q2017

The third quarter was quiet on the labor policy front. A lower urbanization rate target announced in early 2017 (from 1.3% in the past five years to 1% for 2017) was officially explained as a shift toward “people-centered urbanization,” meaning an attempt to ensure that migrants have access to adequate social services where they live. But on July 13, the National Development and Reform Commission (NDRC) issued its second annual “National New Urbanization Report” (the first one was issued in 2016), which found that only 16 provinces amended their fiscal spending rules to cover migrants following the State Council’s directive to do so in August 2016. Strained local fiscal conditions (see Fiscal Affairs) remain a major constraint to realizing urbanization goals.

Even Beijing and Shanghai, the two wealthiest cities in China, are taking steps to limit migration. In recent months, both announced and moved to implement plans to cap their respective populations, in part to mitigate the fiscal burden of ever-higher social welfare costs. Implementing such strict population controls will risk labor shortages and inflationary pressures.

On healthcare reform, the NDRC’s 2017 healthcare reform action plan issued in May continues to guide policies. A State Council Executive Meeting on October 9 was spent entirely on reviewing healthcare reform progress. It found that by September all public hospitals abolished mandatory 15% surcharges on drugs, and drug commissions as a percentage of hospital revenue declined from 46.3% in 2010 to 38.1% in 2016. Out-of-pocket expenses as a percentage of total healthcare expenditure declined from 40.4% in 2008 to less than 30% in 2016, and about 90% of the highest-ranking hospitals joined a “medical treatment combination” group to facilitate patient referral across general and specialized hospitals. World Health Organization (WHO) officials praised these numbers in an interview with state media on September 15, 2017. However, the WHO also expressed concerns about the challenges ahead: 40% of China’s 55 million rural residents in poverty are in this situation due to healthcare costs, suggesting much work remains to be done.

In early July, multiple cities adjusted up their pension payment benchmarks, following national 2017 pension guidelines published by the Ministry of Human Resources and Social Security in April. However, the benchmark increase (5.5%) was lower than that in 2016 (6.5%), and many cities fell short of the target, reporting pension increases between 2.5% and 5.5%. In addition, the monthly pension distribution gap between general residents (RMB 500–1,000 per month) and those retired from state-owned enterprises or government positions (RMB 3,000–4,000 per month) remained sizeable, adding to income inequality.

Education reform received more attention in 3Q2017. On September 24, the Communist Party and the State Council issued a joint release on deepening education reform. The document encourages wider access to preschool education, after-school private training, more equal urban-rural education access, and more flexible school hours to accommodate working parents. A subsequent scandal at a private kindergarten in Beijing highlighted the risks inherent in the current fragmented education system, which is characterized by opaqueness and inadequate oversight in areas such as education quality and student safety.

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