Limitless cheap labor in China comes to an end
January 30, 2013
It was widely expected that that ChinaaEUR(TM)s labor force would begin to shrink. As recently as two years ago, the prevailing view was that ChinaaEUR(TM)s working-age population (aged 15-59) would peak as soon as 2015. Surprise! The day has come a lot quicker than anticipated. According to the most recent data, the number of people of working age has shrunk for the first time in "a considerable period of time," as China's National Bureau of Statistics put it.

Surprising as it might be, it should not come as such a shocker. When ChinaaEUR(TM)s 2010 Census was released, the trend had been set. A preliminary projection based on population cohort and death rate by age shows that the working-age population will drop beginning in 2012 and will continue declining steadily. An average annual decrease could exceed 4 million people between the peak years of 2011 and 2025, as far as interpreters of the census data are able to infer. As people between 1960 and 1972 exit labor market around 2025, we can predict that the declining trend will persist thereafter. The reported 3.45 million drop in 2012 is just the beginning. But it dramatically signals the end of the apparently limitless supply of labor in China.

The demographic changes in the coming years will have a deep impact on ChinaaEUR(TM)s economy and society, and more broadly, on the landscape of global manufacturing and commerce. Soaring labor costs and regional labor shortages provide the incentive for low-tech, labor-intensive industries to move where workers are cheaper. It could be Bangladesh, Vietnam, Cambodia, Indonesia or elsewhere. Meanwhile, with a greater number of people growing old, the old-age dependency ratio will increase from 12 percent in 2010 to more than 22 percent in 2025. The rapid shift from a growing and relatively young population to a steady and older one is a great challenge that can place substantial pressure on the adapting infrastructure, public health insurance and pension programs.

But donaEUR(TM)t rush to conclude that China has no more aEURoedemographic dividendaEUR? to reap. In fact, the potential of the hundreds of millions workers is far from being maximized, due to policy constraints. Policies that have been criticized the most are the household registration system, land tenure, and locally administrated insurance and pension systems. These make mobility difficult, impeding the efficient allocation of labor.

One thing for sure is that ChinaaEUR(TM)s demographic window of opportunity is closing. The country must take action to utilize its labor force in a smarter way, and quickly.