Abstract: With the shift of China’s labor market from “infinite supply” towards “finite supply”, many factors related to the economy are changing. As a well-known Chinese economist, Cai Fang has been studying the relation between population and labor economics for long. He believes in the face of the rapid decline of the working-age population, China has to attach importance to both supply-side reform and expansion of domestic demand, step up efforts to cultivate high-quality labor force and strive to achieve balanced regional development.
I. EMPHASIS ON BOTH THE SUPPLY-SIDE STRUCTURAL REFORM AND EXPANSION OF DOMESTIC DEMAND
Q: In the past decade, China’s working-age population has been shrinking year by year, indicating that China is losing its demographic dividend. Meanwhile, China’s economy retains relatively strong growth momentum. What changes do you think are taking place in the labor market that can support China’s economic development?
Cai Fang: According to the data from the National Bureau of Statistics, working-age population (aged 15–64 years) reached its peak in 2013 and then began to decline at an accelerating rate from the magnitude of ten thousand, hundred thousand, million to ten million. By 2020, the decline reached 41.7 million accumulatively.
The implications on China’s economy can be evaluated from several aspects.
First, a shrinking working-age population will slow down economic growth. But such an impact on economic growth is not only due to the smaller size of the labor force, but also the slower improvement of the labor force quality due to the declined number of new entrants into the labor force; rushed replacement of human labor with machines will lead to higher capital-labor ratio, thus lowering the return on invested capital; the decline of labor mobility will also squeeze the room for reallocation of resources, which will decelerate productivity growth. All these factors will decrease the potential GDP growth rate, followed by a drop in the real GDP growth rate. We have already seen that with the demographic changes, the GDP growth rate has started to slow down since 2012.
Second, as long as economic growth remains at the level of potential growth rate, we can say it is a reasonable growth rate. Based on the supply of labor and capital, and the potential of productivity growth, the potential growth rate of a country normally remains stable within a particular period; without the interference of any special factor, the real growth rate usually moves in tandem with the potential growth rate. Since 2012, China’s economic growth has been declining, but the real growth rate has been in line with the potential growth rate. Hence we say the growth rate is reasonable. However, if demand restrains the realization of growth potential, the real growth rate will fall below the potential growth rate, which indicates that the real growth rate is out of the reasonable range.
Third, the demand-side shock due to the arrival of the population peak should be prevented. In 2021, China’s population growth dropped to 0.34‰, a level close to zero, suggesting that China is about to enter the era of negative population growth. Meanwhile, the population will age faster. With the proportion of elderly people reaching 14.2 percent in 2021, China has become an ageing society according to the general definition. On the one hand, population means consumers. On the other hand, as seniors have lower capacity and propensity to consume, a declining and ageing population will inevitably bring about demand shocks to consumption. Therefore, starting from 2022, China should keep a close eye on the demand side.
Q: The birth rate will continue to decline in the recent two years due to a variety of factors, such as the efforts for controlling the pandemic. Will this affect GDP growth in the coming decades? What short-term and long-term policy responses should be taken?
Cai Fang: Sooner or later, population will peak and start to decline, which will cause demand-side shocks and slow down economic growth. If the new normal of economic development was mainly reflected on the supply side in the past, now it is on both the supply and demand sides. Therefore, we should emphasize both the supply-side structural reform and the expansion of domestic demand. The 19th Party Congress, the plenary sessions of the CPC Central Committee, and the Central Economic Work Conference have set up a series of strategies and policies. What we need to do now is to implement them in a seamless way from short term, medium term to long term.
In the short term, while working on pandemic control, we should also balance the relationship between “ensuring the operations of market entities” and “ensuring people’s livelihood”. Ensuring the operations of market entities is to boost economic recovery from the supply side and to get the real growth rate back to the trajectory of the potential growth rate; ensuring people’s livelihood is to stabilize household consumption, or domestic demand, to support a reasonable economic growth rate. Both are to preserve potential for future growth. Counter-cyclical policy should target at families who are the the basic unit of human capital accumulation, the mainstay of childbearing, parenting, and children’s education, and the driver for expanding consumption.
In the medium term, promoting reform can help realize the growth target from both the supply and demand sides. Given that the demand constraint has become the new normal, measures to promote common prosperity should be stepped up to remove such constraints. Boosting urbanization with a focus on reforming the household registration system can kill two birds with one stone. On the one hand, by largely increasing the population with urban hukou and improving the overall quality of and equal access to basic public services, household consumption can be expanded sharply; on the other hand, through increasing the supply of labor force in the nonagricultural sector, and making resource allocation more efficient, we can improve the potential growth rate.
In the long term, we should pursue common prosperity in a gradual and persistent way. First, tax measures and transfer payment should be leveraged to increase the share of household income and labor income so as to adjust income distribution and reduce the Gini coefficient to lower than 0.4 before 2035. Second, the supply system of basic public services should be improved by enhancing the quality and equalization of the services. Lastly, a social welfare system that covers all people and their whole life should be established to improve people’s wellbeing and sense of happiness, and meanwhile to promote a sustainable rebound of the birth rate.
II. COMPETITION FOR HIGH-QUALITY LABOR FORCE
Q: Some people think that China sets a quota of 50 percent of the junior high school students to be enrolled in vocational high schools through the high school entrance examination, which is modeled after the German education system. This will transfer more labor force to the more efficient manufacturing sector. What is your view on the possible effects of this policy?
Cai Fang: In terms of developing vocational education, Germany can provide many lessons to learn from. But the development of China’s education should take into account both the common practice and its own national conditions, especially the present and future challenges the country faces.
Whether to upgrade the manufacturing sector or to develop a high-end service sector, high-quality labor force is needed. And the so-called “high-quality” should include several dimensions. There is no doubt that vocational education should cultivate talent with higher-level skills. However, skills are constantly changing, especially in the context of new technological revolution. Therefore, vocational education should also nurture the labor force’s ability to adjust to the labor market. That requires liberal education to improve students’ cognitive and learning abilities.
In this sense, the development of vocational education should take into account the following things.
First, the teaching content of vocational education should be based on general knowledge instead of being restricted to a narrow scope. Therefore, there should not be a strict distinction between liberal and vocational education. The two systems should be overlapping with each other. Second, the future career paths of students after receiving liberal and vocational education should not be artificially separated. Instead, an overpass of human capital cultivation should be established to let all roads lead to Rome.
Third, it is not necessary to set a quota of students for each education system in advance. We should follow the standard of “providing education that satisfies the people”, and give a relative lead to the development of the education that is better run and more welcomed by people.
Q: China’s regional development and income distribution are uneven, with higher per capita income in the eastern region and lower per capita income in the central and western regions. We can see that many eastern provinces offer a lot of preferential conditions to attract college graduates to work there. Under this trend, what will be the differences between the eastern and the central as well as western regions?
Cai Fang: As the saying goes, “men strive upwards while water flows downwards”. Creating a center for talent with better material conditions is the key to attracting talent. Apart from the preferential policies of local governments, developed regions also have an edge in employment and entrepreneurship environment, livability of cities, public services, and average wage level, which lead to the brain drain and loss of labor force in less developed regions. The current strategy of balanced regional development will further improve the development conditions of the central, western, and northeastern regions to attract more talent and labor force. In addition to the mentioned measures, there is more China can do to accelerate the process.
First, the central, western, and northeastern regions, including the small- and medium-sized cities, can tap into their own attractiveness and reduce institutional barriers of population movement to attract talent. For example, if they step up efforts to reform the household registration system with a faster pace, they could get an edge in attracting the latent and labor force.
Second, at the national level, all kinds of regional development strategies should be coordinated and integrated. Normally, a regional strategy is designed and implemented to create a better environment for the development of the region. However, if every regional strategy has the same effect, for example, the strategy for large-scale development of western China, the revitalization of the northeast, the rise of the central region, and the trailblazing development of the eastern region, when all these strategies are implemented, regional disparity will still exist. Therefore, balanced regional development should focus both on the development of a region and the balance between regions.
Lastly, at the national level, the most important measure to promote balanced regional development is to step up income redistribution and speed up the equalization of basic public services among regions. Balanced regional development is achieved through the process of solving one imbalance after another. Equalizing access to basic public services among regions will help stabilize the regional demographic pattern. And when opportunities arise, talent and labor force will naturally flow to the less developed regions.
This article is compiled from an interview between China Business Journal and the author. The views expressed herein are the author’s own and do not represent those of CF40 or other organizations.
