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Jan 9, 2013 | 11:30 GMT

New Challenges in China's Inland Labor Market

New Challenges in China's Inland Labor Market
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Summary

As manufacturers pressed by rising wages and falling profit margins in China's traditional coastal industrial hubs begin to shift production to China's heavily populated interior provinces, companies are facing a new challenge: labor shortages.

For more than a decade, high numbers of Chinese workers from the country's underdeveloped rural hinterlands have been migrating to coastal cities. This dynamic has reduced working-age populations in inland cities and created labor imbalances that are complicating attempts to develop the interior. To restructure the economy away from overreliance on external demand and achieve more sustainable economic growth, Beijing recognizes the urgent need to resolve this dynamic.

Over the past five years, China's major inland cities have benefitted from heavy private and foreign direct investment. Much of this has come since the Chinese government, in response to the 2008-2009 global financial crisis, launched a sizeable effort to develop inland urban housing, transportation infrastructure, power generation and distribution capacity. Companies such as Foxconn, Pepsi Cola, L'Oreal, Ikea and Renault (as well as a wide array of private Chinese firms) have either opened factories or signed cooperative agreements with Chinese companies in Henan, Jiangxi and Hubei provinces, among others, for projects such as large-scale manufacturing bases, retail outlets, financial services centers and research and development hubs. The sizes of such investments have varied greatly, from Foxconn's pledge to invest $7.4 billion in manufacturing complexes in Zhengzhou, Henan province, to Unilever's opening in April 2012 of a $29 million toothpaste plant in Hefei.

China's Provinces

China's Provinces

Companies are attracted inland by a combination of factors, including comparatively low wages and a variety of tax and other incentives. In 2011, for example, per capita urban income in Shanghai was nearly 20,000 yuan (roughly $3,200) higher than in Hubei, Anhui and Henan provinces, and average wages continue to rise more quickly in coastal provinces. Moreover, foreign manufacturers are drawn by the prospect of accessing a growing and potentially enormous domestic consumer base.

Labor Imbalances

However, while China's coastal manufacturing hubs boomed in the decades since former Chinese leader Deng Xiaoping launched the "Reform and Opening" process, the country's interior provinces largely continued to languish by comparison — a problem that Beijing only began to correct starting in the early 2000s. As a result, large numbers of inland Chinese youths with few employment opportunities and little incentive to remain, say, on family farms fled en masse to cities such as Shanghai, Shenzhen and Tianjin, where demand for the low-cost and low-skill labor needed to fuel Chinese industries has remained high. Currently, China has an estimated 250-300 million migrant workers.

This trend has had a measurable effect on inland cities and provinces. For example, from 2001 to 2011, Hubei province's population fell 14 percent, to 49.2 million. Over the same period, nearly 7 million people left Hunan, 9.6 million left Anhui, 11 million left Henan and 14.2 million left Sichuan. Meanwhile, Shanghai's population grew nearly 20 percent, reaching 20 million, Beijing grew by 5.2 million, to 17 million, and Guangdong province grew by 15.4 million, to 89 million. Between 2007 and 2011, Shanghai's working-age population (ages 15 to 64) accounted for 29 percent of the city's overall population growth, while the city's elderly population decreased substantially over the same period (as a result, the city's dependency ratio, the percentage of dependents to the working-age population, fell by nearly a third). Over the past five years, every demographic in the coastal Guangdong province has declined except the working age population, which has grown by 9 percent. 

With growth rates in coastal areas showing signs of slowing in recent years, there have been indications of a shift in migration patterns, with some workers either returning to their farms or villages or moving to emerging inland industrial hubs such as Chongqing and Wuhan. However, according to recent reports, a labor imbalance persists, complicating matters for inland companies. For example, factory owners in the cities of Wuhan, Zhengzhou and Chongqing have reportedly been relying on local vocational training schools for temporary "student intern" workers to offset seasonal labor shortages.

Long-Term Goals, Short-Term Implications

The Chinese government and manufacturers alike expect the direction of labor flows to eventually reverse. They recognize that as coastal provinces, under pressure from rising costs of living and education levels, focus more on production of higher-value goods, they will become less capable of employing the large migrant labor pools that have fueled low-end coastal manufacturing over the past three decades. This will spur a transfer of low-end and heavy industry. Some companies will leave China. Others, drawn to the potential of China's consumer market and the country's unparalleled parts sourcing infrastructure, will remain, but they will be forced inland. Beijing hopes this will create opportunities for the millions of migrant laborers no longer needed on the coast. If so, inland provinces could gradually become the key suppliers of low-cost goods to global and coastal Chinese consumers.

Beijing recognizes the critical importance of developing the interior and restructuring the economy away from overreliance on external demand. This is why, over the past five years, the government has been pushing to develop a new class of inland urban centers capable of taking on some of the economic activity clustered along the coast. But it is uncertain whether the government can achieve such long-term goals while managing certain short-term implications, including unemployment, growing labor imbalances, and the financial burdens that large-scale reform of the household registration system known as Hukou would place on municipal budgets, as well as the attendant migration. Beijing must balance conflicting imperatives: short-term social stability (through rapid economic growth and universal, even if redundant, employment) and long-term economic sustainability. Achieving the latter without undermining the former — and in turn risking widespread social unrest — will require more than a strong physical security presence. Beijing will also need time, something of which it has precious little.

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