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HomePublicationsBrowse ListingCan Social Security Boost Domestic Consumption in the People's Republic of China?Labor Market Trend and Unemployment Shock

Labor Market Trend and Unemployment Shock

Prior to the second half of 2008, the labor market in urban areas of the PRC was loose (see Figure 3). In the late 1990s, deepening the reform of state-owned enterprises (SOEs) released millions of urban workers who were laid off or unemployed and caused the surveyed unemployment rate to rise. With the completion of this reform, rapid growth between 2001 and 2007 had generated millions of employment opportunities that created changes in urban labor market trends. As shown in Figure 3, the surveyed unemployment rate declined from 7.6% in 2000 to 5.0% in 2007, indicating an improved labor market. Unlike the surveyed unemployment rate, the registered unemployment rate has followed a steady upward trend and increased from 3.1% in 1997 to 4.2% in 2008 (see Figure 3 [ PDF 36.6KB | 1 page ]). The registered unemployment rate is a ratio of registered unemployment to urban labor force, which is highly related to the entitlement of unemployment insurance benefits. Under the segregation of the hukou system, rural migrants are excluded from the statistics of registered unemployment rate. Workers are not registered if they did not go to local agencies and report that they are unemployed. Therefore, the registered unemployment rate is not a good indicator for labor market trends in urban areas of the PRC.

The rising unemployment in 2008 indicates that the urban labor market was hit by the global financial crisis. A survey conducted by the Ministry of Human Resources and Social Security in December 2008 showed that the number of early returned migrants was about 4.85 million, accounting for 5.4% of total rural migrants. However, this number increased at the beginning of 2009. According to a rural survey of 150 villages in 15 provinces conducted by the Ministry of Agriculture before the Spring Festival of 2009, about 15.3% of total rural migrants returned home ahead of schedule; that is to say approximately 20 million lost their jobs due to economic recession or downturn. The National Bureau of Statistics (NBS) in February 2009 estimated that about 23 million rural migrants lost their jobs due to the shock of the global financial crisis, accounting for 16.4% of total migration outside their townships. According to the NBS statistics, about 11 million rural migrants who flew into cities are still hunting for jobs, and about 14 million rural migrants had to stay at home and tried to find job opportunities locally.

The global financial crisis hit the eastern coastal regions and export-oriented manufacturing sectors of the PRC heavily. The eastern coastal regions took the lead in market reforms during the reform and opening up and are now deeply integrated into the global trading system. The rapid growth of the manufacturing sectors in those regions generated millions of employment opportunities to attract the inflow of rural migrants. Guangdong, for example, had both the highest ratio of export to GDP and the highest concentration of manufacturing employment (see Figure 4 [ PDF 77.3KB | 1 page ]). As the sharp decline of foreign demand forced firms to cut production, postpone recruitment and/or go bankrupt, leading to job losses and layoffs, so the Pearl River Delta area in Guangdong province was the first to witness the phenomenon of early returned rural migrants when the global financial crisis emerged. The unemployment shock then spread to the Yangtze River Delta areas and inland areas, weakened employment generation, and intensified competition in the urban labor market. The surveyed unemployment rate was estimated at about 6.0% in 2008, 1.0 percentage points higher than that in 2007. In 2008, the number of urban employment was 302.1 million. The unemployment rate increased by 1%, which means a huge number of workers lose their jobs.

Rural migrants bear the brunt of the unemployment shock caused by the global financial crisis. With an average age of 29, they are young, highly mobile, and hard to trace for policy targeting. They are more vulnerable under low social security coverage when facing unemployment shocks. As a new generation of rural migrants, most of them will choose to stay in cities in the future, so the provision of public services such as employment, training, and social security will be very important for them to migrate to and live in cities. A study shows that more than 95% of returned migrants have already flowed backed into cities (Wang et al. 2009). By the end of 2008, the number of urban registered unemployment was around 8.3 million. On top of the 6.1 million new college graduates in 2009, 1.5 million recent graduates from previous years remained unemployed in 2008. So the total number of new urban entrants is about 15 million. Without considering further loss of employment opportunities, total number of rural and urban entrants on urban labor market will cause a demand for 30 million new employment opportunities. However, urban employment generation has averaged about 9 million in recent years, which is insufficient to fill in the gap between labor supply and labor demand in the urban labor market. With the excess of labor supply, the urban labor market in PRC will face an unprecedented amount of pressure.

The economic slowdown caused by the global financial crisis will further worsen the urban labor market situation, which will cause income and poverty issues. In an unfavorable employment environment, rural migrants who flow into cities may face a declining wage. In a survey of fifty rural households, nearly 20% reported that out-migrating household members suffered from a wage cut (Wang et al. 2009). In poor areas, non-agricultural earnings are the main source for income growth and poverty alleviation. The decline of non-agricultural earnings put many in the central and western poor areas in danger of slipping into poverty. Most rural migrants do not receive income support from urban unemployment insurance and the dibao scheme when they are unemployed. Once rural migrants use up individual savings, they become new urban poor (Asian Development Bank 2009). The unemployment shock may also cause the decline of income growth for urban poor and low-income families. The decline of income growth will then cause low consumption growth, which runs counter to achieving the goal of boosting domestic consumption.

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