China grappling with hidden unemployment

Workers at a restaurant in Beijing waiting to welcome customers. The industrial sector's reluctance to retrench staff slows the shift of labour to service jobs, where demand is stronger.
Workers at a restaurant in Beijing waiting to welcome customers. The industrial sector's reluctance to retrench staff slows the shift of labour to service jobs, where demand is stronger.PHOTO: AGENCE FRANCE-PRESSE

Firms facing overcapacity shun layoffs, slowing shift of workers to thriving sectors

BEIJING • Cracks are starting to show in China's labour market as struggling industrial firms leave millions of workers in flux.

While official jobless numbers have not budged, the underemployment rate has jumped to more than 5 per cent from near zero in 2010, according to Professor Bai Peiwei, who teaches economics at Xiamen University.

He estimates that the rate may be 10 per cent in industries with excess capacity, such as unprofitable steel mills and coal mines that have slashed pay, reduced shifts and required unpaid leave.

Many state-owned firms battling overcapacity favour putting workers in a holding pattern to avoid mass layoffs that risk fuelling social unrest. While that helps airbrush the appearance of duress, it also slows the shift of workers to services jobs, where labour demand remains more solid in the shifting economy.

"Underemployment in overcapacity industries is a drag on the potential improvement of productivity in China, which will lead to a softening wage trend," said Ms Grace Ng, a senior China economist at JPMorgan Chase in Hong Kong. "It would exert pressure on private consumption demand and in turn affect the overall rebalancing of the economy."

Other projections indicate the employment situation is even worse. An indicator of unemployment and underemployment produced by research firm Fathom Consulting has more than tripled since 2012 to 13.2 per cent.

The official jobless rate is not much help for economists: It's been virtually unchanged at about 4.1 per cent since 2010 even as the economy slowed. The gauge counts only those who register for unemployment benefits in their home towns, which does not take into account 277 million migrant workers. Total employment is 775 million, National Bureau of Statistics data shows.

The NBS also compiles a newer survey-based jobless rate for big cities, which has been steady at about 5 per cent, but that index is not updated on a regular basis. There's no official underemployment rate.

With the newly-added labour force now in decline as the population ages, workers should become more scarce during the boom of the labour-intensive services sector. That suggests that economic slowdown is the main culprit of labour under-utilisation, said Mr Fielding Chen, an economist at Bloomberg Intelligence in Hong Kong.

Prof Bai bases his estimate on average labour activity and worker productivity. From 2004 to 2008, underemployment was effectively near zero after rapid productivity gains from China's 2001 admission to the World Trade Organisation and state-owned industry reforms.

Prof Bai's rate is lower than numbers for other countries, which use varying methodologies. The US rate known as U-6 is 9.7 per cent, down from a record 17.1 in 2009. Australia's underemployed ratio is 8.7 per cent. Mexico's underemployment rate is 7.68 per cent.

Conflicting objectives complicate China's labour market dynamics. Even as President Xi Jinping and other top leaders pledge to reduce overcapacity, other official policies prevent widespread firings, in turn letting unprofitable "zombie companies" lock up broad swathes of the labour force by keeping them in limbo with shorter shifts and less pay.

"Underemployment is especially rampant at state-owned companies," said Professor Zeng Xiangquan, a labour and human resources lecturer at Renmin University in Beijing. "The government tends to overprotect them."

That keeps laid-off workers from getting retrained and hired into new jobs in more thriving sectors like services or high-end manufacturing, Prof Zeng said.

If policymakers act swiftly, history shows it is possible for them to tighten that unwanted slack back to where it used to be, said Prof Bai.

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A version of this article appeared in the print edition of The Straits Times on August 23, 2016, with the headline 'China grappling with hidden unemployment'. Print Edition | Subscribe