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RIM
September 2002, No6
China's Growing Unemployment Problem
Hiroshi Imai

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Summary
1. At the end of 2000 China had a population of 1,265.8 million, making it the largest country on Earth. Continuing high population growth and the shift of population into urban areas are both having a serious impact on the employment situation. The supply of new workers is expected to remain above 10 million per annum.

2. In 2000 the number of urban workers increased to 212.7 million. During the 1980s and the first half of the 1990s, the state sector, including state-owned enterprises, was a major absorber of labor. The importance of the state sector declined in relative terms during the 1990s, however, with the growth of employment in the non-state sector, including private enterprises, individual enterprises, and foreign-funded enterprises. The number of people employed in the rural sector has also risen consistently in every year except 1998. Until the introduction of the reform and open-door program, most rural workers were employed in agriculture. The growth of employment in township-village enterprises was an important factor in the 1980s and the first half of the 1990s. However, growth in the number of jobs provided by township-village enterprises has slowed significantly since 1995, and the outlook for employment in the non-agricultural sector has started to appear less optimistic. There is a chronic over-supply of labor in the rural sector due to factors that include stagnating agricultural incomes and a lack of developed industries to take the place of agriculture. As a result, large numbers of rural people are working as migrant labor in coastal and inland cities.

3. According to the official statistics, China's urban unemployment rate stood at 3.6% at the end of 2001. However, these figures provide only a partial picture of unemployment in China, and the number of de facto and latent unemployed is much higher. Laid-off workers, surplus labor in enterprises, and latent unemployed people in the rural sector should all really be regarded as unemployed. Laid-off workers differ from unemployed people in the sense that they remain in an employment relationship with a company. In practice, however, most laid-off workers are on leave or have effectively left their jobs, and the probability that they will actually return to their original work is extremely low. In fact there is little distinction between workers who have been temporarily laid off and unemployed people. State-owned enterprises have large numbers of surplus workers. This is a legacy from the planned economy era, when the government aimed for full employment in the urban sector. There are also large numbers of surplus workers in the rural sector. An estimate based on 2000 data indicates that broadly defined unemployment has reached 270 million, or 29.1%. The number of surplus workers in the rural sector is around 171 million, or 34.4% of the rural working population.

4. Many foreign companies will move into China following its admission to WTO membership. The resulting escalation of competition in domestic markets is expected to cause a sharp rise in the numbers of unemployed and laid-off workers. Agriculture will also be exposed to fierce international competition, and the employment situation will inevitably worsen. The government has responded to the growing seriousness of the unemployment problem by adopting three priority policies: (a) the creation of employment opportunities through economic development, (b) employment system reforms and the establishment of new labor market mechanisms, (c) systematic relocation of rural labor through projects designed to bring about an orderly re-circulation of rural labor. However, there are signs that the situation is still deteriorating, including a continuing rise in unemployment. There are three main reasons for this lack of progress toward the solution of the unemployment: (a) rapid population growth, (b) the negative legacy of policies designed to maintain high employment in the planned economy era, and (c) the lack of major absorbers of labor. The unemployment problem will be difficult to solve because of its links to a variety of structural factors. Despite the government's efforts, there are no sweeping solutions with the potential to reduce unemployment or boost employment in the short-term perspective.

5. China is inadequately prepared for large-scale unemployment or the provision of social security benefits, and the unemployment problem is likely to have a greater political and economic impact than in the advanced economies. The government's only option in the foreseeable future is to continue with its present balancing act.