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LU Feng: An Evaluation of China’s Labor Market Recovery and the Outlook for the 2022 Employment Situation


Abstract: In this paper, the author points out the incomplete recovery of China’s employment since last year, analyses the restrictive effects of inadequate employment on the growth of household income and consumption, and discusses the policy implications and choices.


The discussion on the relationship between the labor market and macro economy has two considerations. First, the policymakers have always highly valued employment, putting it as the foundation of people’s well-being. In response to the current economic situation, the statement issued by the Central Economic Working Conference pointed out that, among the “six priorities”, the most important three are employment, people’s livelihoods, and market entities. Second, over a decade ago, we conducted relevant research on this issue and proposed a new way of explanation— generalized Okun's Law as we found the Okun’s Law was unfit for explaining the empirical data of the performance of China’s labor market and macro economy. Over the past two years, China’s macro economy has experienced unusual volatility, providing a new opportunity for us to delve into this issue.

We will first observe the incomplete recovery of China’s employment since last year (during the pandemic), and then analyze the restrictive effects of inadequate employment on the growth of household income and consumption, and lastly discuss the policy implications and choices.

First, unemployment rate. Based on the indicators of registered and surveyed unemployment rates officially released, the relation between the fluctuations of unemployment rate in the past two years and macroeconomic volatility is consistent with the general logic in economics: when an economic downturn is at its worst stage, unemployment rate will rise sharply. This year, with economic recovery, unemployment rate fell accordingly, which is in line with the logic in and laws of economics.

However, further analysis of how unemployment rate responds to macroeconomic fluctuations reveals that the response is not sensitive and adequate enough from a quantitative perspective. In terms of registered unemployment rate, although the relative macroeconomic recession last year is rare or even once-in-a-lifetime since the reform and opening up, unemployment level does not hit a record high and is even slightly lower than the previous two peaks in the 21st century. We will see that the limited response of China’s unemployment indicators to the macroeconomic fluctuations is not an accidental case but has underlying causes.

Another issue is that against the backdrop of high unemployment rate during the pandemic, it is normal that the volume of unemployment benefits collection rises dramatically, but in reality, unemployment benefits claimants account for a slightly smaller share of registered unemployed population. This indicates that there are some unreasonable threshold and procedure or other restrictions that hinder the registered unemployed from enjoying their legitimate rights to claim unemployment benefits. Obviously, the problem needs to be addressed. Experts from Chinese Academy of Social Sciences also pointed out the problem last year, which is a well-founded concern.

Researchers who follow closely the relation between China’s macroeconomic fluctuations and the labor market all know that there is no significant systemic negative correlation between China’s GDP growth (as an indicator of macroeconomic volatility) and unemployment indicators, which is not in line with Okun’s Law. This does not mean that there is no significant correlation between macroeconomic fluctuations and labor market dynamics, but suggests that the traditional analysis model is not fit for China. Over a decade ago, we proposed that to analyze the relationship between labor market dynamics and macroeconomic fluctuations during the transition period of the dual economy, we should combine the actual conditions and incorporate the structure factor—flows of migrant workers—to establish a generalized Okun’s Law as the analytical framework, whereas the standard Okun’s Law only applies to advanced countries.

Based on the long-term data since the reform and opening up, the annual incremental change of the rural-to-urban migrant flows reflects more sensitively the labor market dynamics in response to China’s macroeconomic fluctuations. The data show that the rural-to-urban migrant flows measured by migrant workers continue to grow, but the annual incremental change of this indicator fluctuates a lot and has a significant positive relation with the macroeconomic fluctuations: when the macro economy is performing well, migrant flows grow, and vice versa. It can be seen that changes in migrant flows serve as a shock absorber to buffer the hit on the labor market due to macroeconomic fluctuations during China’s economic transition. This is the most visible manifestation of the Okun’s relation in the context of China’s dual structure and economic transition.

Consistent with the generalized Okun’s Law, last year, due to the shock of the pandemic, economic growth dropped unusually, followed by an unprecedented fall in the increase of migrant flows with an absolute decrease of 5.2 million people, the largest decrease of the indicator since the reform the opening up. This year, macro economy bounced back and recovered while the increase of migrant flows also rose greatly with an annual growth of about 5 million based on the data of the first three quarters. This suggests that currently, rural-to-urban labor migration remains the main buffer to absorb macroeconomic fluctuations.

Furthermore, although the increase of migrant flows has bounced back sharply in this year and the total number has recovered to the level of 2019, the increase still fails to make up for the expected volume in the recent two years. Based on the average incremental increase during the five years before the pandemic, there might still be a 6 million gap between the total numbers of migrant workers this year and the trend value on the assumption that the pandemic does not happen.

The gap reflects that China’s employment recovery is not adequate from a certain perspective. The volume and structure of rural-to-urban labor migration changed in response to the macroeconomic fluctuations, weighing on income increase. First, by curbing the income increase through expected rural-urban earnings differential, given the gap between the per capita disposable income of urban residents and the income of peasants, the relative decrease of millions of migrant workers in two years could cause hundreds of billions RMB of income loss. Second, the share of migrant workers who work outside of their hometowns dropped by 0.5 percentage point in 2020. As the income of these workers is relatively higher, the structure change of migrant workers might curb income increase and lead to tens of billions RMB of income loss.

In addition, China’s newly added urban jobs, one of the two main targets of employment policy, fell sharply due to the shock brought by last year’s pandemic from 13.52 million in 2019 to 11.86 million, down by 12.3 percent. In the first three quarters of this year, China created 10.45 million new jobs in urban areas, while in the fourth quarter of last year, the number only stood at 2.88 million. In terms of monthly added jobs, the figure dropped incrementally after the second quarter, and declined even faster in October with a decrease of 230 thousand compared with October 2020. Given that the relative drop of new jobs in November and December might be even greater, the number of new urban jobs in the fourth quarter of this year might fall by 800 thousand compared with the same period last year. Thus it can be inferred that this year the newly created urban jobs might reach 12.55 million, up by around 6 percent year on year, but still lower than the pre-pandemic level, indicating that the employment recovery is not sufficient.

Macro economy and employment are mutually constrained by each other. Insufficient employment recovery will affect income and consumption, thus dragging down economic growth. If we look at the composition of aggregate demand growth in the last two years, a prominent feature is that external demand of import and export has changed its average negative contribution for many years before the pandemic, and is estimated to contribute over 20 percent to GDP growth in the past two years based on data in December. Against the backdrop of strong external demand during the pandemic, the main reason behind the new downward pressure on China’s economy is apparently low internal demand, especially the lower-than-expected consumption growth.

The key reason for the relatively weak consumption growth is that income increase is lower than expected, which is closely related to inadequate employment recovery. I will not elaborate on the data that shows employment restricts income and consumption recovery. This year, the increase of urban residents’ income and consumption makes up for the sharp fall last year. However, statistics show that urban income and consumption started to drop in the second and third quarters one after another, and based on the onging data, some indicators might even hit the bottom for a second time. This demonstrates the features of the current situation—“shrinking demand, supply shock, and weak expectations”.

To sum up, first, the indicators of China’s unemployment declined after an increase over the recent two years of the pandemic, responding inversely to the economic dynamics from contraction to recovery. Nevertheless, the intensity and sensitivity of unemployment rate’s response to macroeconomic fluctuations are still limited, and the absorption of macroeconomic shocks by the labor market still needs to be realized by the increase of migrant flows to a large extent. The macro performance of China’s labor market can be explained by the generalized Okun’s Law, while in the future it is expected to converge with the relation unveiled by the standard Okun’s Law.

Second, the employment situation in 2022 is not promising. On the one hand, graduate students in recent years are the main part of around 15 million potential new employment positions. This year, there might be 10.76 million graduates, an increase of 1.67 million, far exceeding the increase of 350 thousand in 2021 and the average increase of 300 thousand over the decade before 2021. On the other hand, the new downward pressure on the economy adds to the mission to maintain steady macroeconomic growth in 2022, thus placing more pressure on achieving the goal of full employment.

Third, to cope with employment difficulties, we should strive for full employment by using the two levers of macroeconomic policy and employment stimulus policy. Facing the downward pressure on the economy, we should adopt proactive monetary, fiscal and structural policies to stabilize the fundamentals of macroeconomics, and meanwhile discuss new issues arising from the practice of economic policy: Macroeconomic policy should strike a proper balance between maintaining high-quality development and realizing the potential growth target, which requires that high-quality development goal should be achieved on the premise of ensuring the real economic growth rate is close to the potential growth rate. Although the economic growth rate rebounded dramatically this year, the average growth rate during the past two years still falls short of the potential growth rate. When real economic growth is lower than the potential growth, macroeconomic policy should avoid being too tight.

In addition, high-quality development entails strengthening regulation of some sectors and departments. When rolling out stricter regulatory measures, relevant departments should also stick to the basic path that centers on economic development, and coordinate and balance the principles of employment first and a higher-level of full employment, so as to avoid causing excessive shocks to economic operation and growth in some measure and reduce employment loss.

Moreover, cross-cyclical adjustment is a new approach proposed by macroeconomic policy departments, with the aim of achieving a stable and sound economic operation by smoothing out the volatile economic cycles during the pandemic. Cross-cyclical adjustment is based on the premise of the anticipated features of the economic situation in the next stage. If the anticipation deviates from the reality too much, the intention of the regulation that was supposed to be reasonable will be hard to achieve, and will even backfire. Therefore, we should take stock of experience to improve the accuracy of the anticipation and soundness of cross-cyclical adjustment.

Lastly, we should step up efforts to implement proactive policies to promote employment and enhance people’s livelihood. Enterprises should play the main role in absorbing the labor force. By improving the business environment, anchoring business expectations, and cutting tax and fees, we can stimulate business vitality and create more jobs. As for the special situation where more than ten million college students will graduate next year, the recruitment scale of students of certain postgraduate programs can be expanded to some degree to enrich potential human resources for sunrise industries like healthcare, artificial intelligence, and advanced manufacturing.

As for low-income households and the unemployed, more subsidies such as consumption vouchers and discount vouchers could be provided. In addition, given the special situation of 2022, large scale income subsidy in the form of digital RMB could be issued for low-income residents and the unemployed for one or several times. To address the low share of claims for unemployment benefits, the procedural restrictions on claiming unemployment benefits should be reduced so as to strengthen the supportive role of unemployment benefits in ensuring people’s livelihood.

From: CF40 website
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