Abstract: In the era of negative population growth, the author argues that the challenge of declining demographic dividends also presents opportunities for the emergence of reform dividends. The most important reforms are in the household registration system, the education system, and the market system. First, the core of the household registration system reform is to allow migrant workers to settle in cities and become urban residents. Second, we need to reform the education system by extending the compulsory education age, reducing educational inequality, and improving the quality of education. Finally, we also need to reform enterprises, investment, and financing systems to accelerate factor mobility, market competition, and survival of the fittest to further improve production efficiency.
Population decline is not a good thing or a bad thing. But it deserves great attention. Negative population growth is already happening, but its impact on the economy is not definitive. How to understand demographic factors? How should the economy seize the opportunities and leap forward again?
At the end of 2022, China’s population decreased by 850,000 from a year ago. It is the first time China’s population growth turned negative over the past 61 years, and the turning point occurred five years earlier than the UN forecast, which is surprising for most people. Negative population growth signals a new era, after which China’s demographic dividend will wane year by year, which will definitely weigh on China’s economic growth.
Meanwhile, China’s economic growth is coming to a critical period of transformation and upgrading. According to the 14th Five-Year Plan, looking ahead to 2035, China’s per capita GDP is expected to reach the level of median developed countries with a larger middle-income group, equalized basic public services, and significantly smaller urban-rural developing and living standard gaps.
In the context of negative population growth, will these goals be achieved as planned? In his new book The Era of Negative Population Growth: Challenges and Opportunities for China’s Economic Growth, Cai Fang gave his answers: “The challenge of declining demographic dividend also presents opportunities for the emergence of reform dividend”.
In the era of negative population growth, what changes will the labor market witness? Will demographic dividends continue to be unlocked? How will the Chinese economy be affected? How should the reform be carried out to seize the new opportunities? To answer these questions, Caifang gave an interview to Caijing.com.
Caifang is CF40 Advisor, Chief Expert of the National Think Tank of the Chinese Academy of Social Sciences (CASS), a member of the Monetary Policy Committee of the People's Bank of China, and a member of the Standing Committee of the 13th National People's Congress. Previously, he served as Vice President of the CASS. He was selected as one of the "100 economists who influenced the economic development of China in the past 60 years". He is the author of Understanding the Future of China's Economy, On the Dual Circulations, and Solving the Mystery of China's Economic Development, and has been awarded the Sun Yefang Economic Science Award, the China Publishing Government Award, the China Economic Theory Innovation Award, and the Zhang Peigang Award for Outstanding Achievements in Development Economics. He is a pathfinder in the fields of China's economic reform and development and population and labor economics.
I. RISE TO THE CHALLENGE OF POPULATION DECLINE
Q1: In the era of population decline, the working-age population will fall sharply. Will it resolve the employment issue or make the issue worse?
Cai Fang： I think in the era of negative population growth, the structural employment issue will exacerbate, which will lead to a higher unemployment rate.
Around 2010, China’s working-age population started to decline after hitting a peak, and the labor market began to witness shortages and higher wages. To cut costs, businesses tend to use capital to replace the labor force. But with the transition away from labor-intensive industry, society’s ability to absorb employment also declines. We find that between 2004 to 2009, the average nominal growth rate of manufacturing value-added was 11.5%, while the average annual growth of urban employment created by the manufacturing sector was only 1.5% and has turned negative since 2013.
With the advent of the era of population decline, the labor shortage will become much more severe, and capital factors like machines and new technologies will replace more labor force. Although the emergence of new industries will create new jobs, the positions often require higher human capital skills, which are hard to match immediately based on the existing human capital training mechanism. For example, if a traditional factory lays off workers, the unemployed shop floor workers may not be able to take up posts in some artificial intelligence companies that are hiring people.
Therefore, I reckon that this type of structural unemployment caused by a mismatch between workers’ skills and job demand will become a more common issue in the future.
Q2: That means even if the economy recovers after the pandemic, this structural issue will not be solved, and the natural unemployment rate will even rise further.
Cai Fang: Yes. Both theory and practice show that after every recession or crisis, the structural issue in the labor market will exacerbate with a higher natural unemployment rate.
This is because during the process of recovery, new companies with new technologies and higher productivity tend to play a greater role, and they want more higher-skilled workers, which will make it difficult for some workers to meet the requirement and add to the structural issue. In the future, China’s economic growth will become more innovation-driven, and a higher frequency of job transfer will be a common problem. In other words, even if China’s economy emerges from the pandemic, it will be difficult to regain those jobs that were lost due to low productivity and economic shocks.
Academia usually estimates that China’s natural unemployment rate stays at around 5%. Before the breakout of the pandemic, China’s real unemployment rate did hover around 5%, which means we basically realized full employment. But over the past 3 years, China’s real unemployment rate has been much higher than the natural unemployment rate. If this situation continues, we estimate that China’s natural unemployment rate might rise again.
Q3: According to the National Bureau of Statistics, the surveyed unemployment rate of the labor force aged 25-59 was 4.2% in April, while the surveyed unemployment rate of the labor force aged 16-24 was as high as 20.4%, a difference of 4.8 times between the two. Why is the youth unemployment rate relatively high?
Cai Fang: The issue of high youth unemployment usually refers to the job-seeking challenge faced by college graduates.
First of all, the relatively high youth unemployment is not a special phenomenon under the current economic situation, nor is it unique to China. The phenomenon is common around the world. For example, when the sovereign debt crisis erupted in Europe, the youth unemployment rate in Spain surged to as high as 40%.
There are two main reasons behind this phenomenon: First, compared with older workers with the same number of years of education, college students lack working experience and face greater difficulties in matching their skills with the employers’ demand, which puts them in a disadvantaged position. Second, compared with the younger labor force who also lacks working experience, college students have a higher level of education and more specialized skills, which also means that they lack general skills and they are more likely to be restricted by their specialization and face greater difficulty when seeking jobs.
However, I have always believed that it is neither correct nor helpful to advocate that “studying is useless”, “there is a glut of college students” or even to completely deny the value of knowledge and education. After college students come into the labor markets, they will gradually show their human capital, and better performance will bring them more opportunities of promotion and “job-hopping”. In terms of the long-term trend, the return on education (the percentage of income increase for every additional year or stage of education) will eventually demonstrate.
Q4: At the end of 2022, China witnessed negative population growth for the first time and the new phased economic characteristics. How does the negative population growth impact China’s economy?
Cai Fang: Population, as a significant factor affecting economic development, impacts the economic growth rate through workforce supply, human capital, return on invested capital, labor productivity, consumption as the motive force, and other approaches.
The negative population growth, on the supply side, impacts the economy mainly in four aspects:
First, as the working population decreases, China no longer has a prominent comparative advantage in labor-intensive industries, so China’s traditional industries are losing their international competitiveness.
Second, due to the late start of China’s education development, China’s new labor forces receive a higher level of education. With the negative population growth, every year, fewer new labor forces enter the labor market, and the improvement of human capital slows down accordingly.
Third, since the labor shortage will escalate, enterprises tend to replace humans with machines and other capital for production. When the use of capital rises to a certain level, the marginal return on capital decreases, and the enterprise’s return on investment declines accordingly.
Fourth, with the negative population growth, the decline of the rural population aged 16 to 19 speeds up, and the transfer of rural labor to the cities slows down. In the past, the increase in productivity derived mainly from the reallocation of resources, due to the release of rural labor forces from the primary industry with low productivity to the secondary and tertiary industries with higher productivity. Productivity growth is bound to slow down accordingly in the future.
Over the past decade, China’s economic growth rate has shown a downward trend mainly because of the supply-side impacts. With the negative population growth, these impacts have more or less been expected.
It is worth noting that the impacts of demographic factors on the demand side will become a constant constraint. To begin with, a decrease in population means a decrease in consumers, which curbs the increase in aggregate social demand. Furthermore, as economic growth slows down, the increase in residents’ income slows down, and the growth of consumption expenditure decelerates in tandem, thus slowing down the rise of social demand.
In addition, as the population ages and the proportion of the elderly gradually increases, the overall level of consumption is adversely impacted. A 2016 sample survey by the Institute of Population and Labor Economics of the Chinese Academy of Social Sciences showed that among people aged 23 to 85 years old, every year old increase represents 1.8% less average consumption. Such low ability and willingness to consume derive from the fact that the elderly do not have labor income or enjoy high-enough social security levels, and sometimes they have to consider the needs of the next generation.
More importantly, on the external demand side, due to the current geopolitical impacts and the rise of anti-globalization, though China actively opens its door to the outside world, it is difficult to resume the high growth of external demand. All these factors have led to the downward trend of China’s economic growth. Due to the early arrival of negative population growth, the decline in the working-age population speeds up, so the potential economic growth rate may even be lower in the future.
But compared with the world level, this economic growth rate is roughly medium or high. Though China’s economic growth rate drops due to negative population growth, the potential growth rate does not constitute an obstacle to China’s Vision 2035, not to mention that we still have reform dividends to be tapped. Therefore, we do not have to be too pessimistic about China’s economic growth rate.
II. RELEASING THE “DEMOGRAPHIC DIVIDEND” THROUGH REFORMS
Q5：During the NPC and CPPCC this year, Premier Li Qiang pointed out at the press conference, in response to a reporter’s question on the negative population growth, that China’s “demographic dividend” has not disappeared, and that a “talent dividend” is being formed. Do you think the “demographic dividend” has disappeared?
Cai Fang: This viewpoint mentioned the “demographic dividend” and the “talent dividend”. The “demographic dividend” refers to the number of the labor force, including both stock and increment. In China’s current situation, the “demographic dividend” is still considerable, or as the Premier said, it “has not disappeared”.
This is manifested in two aspects: first, China’s current population stock can still provide opportunities for economic development. According to the National Bureau of Statistics, in 2021, China had a labor force of about 780 million. The stock of labor is the source of production and supply and the basis of the consumer market. By improving these people’s labor participation rate, employment quality, ability, and willingness to consume, China can still support the smooth running of domestic economic circulation.
Second, by adjusting the employment structure, China still has a large surplus labor force as an increment to be released. According to the World Bank, in 2021, China’s share of agricultural employment (the share of agricultural labor in the total labor force) was 23%, 20 percentage points higher than the average of high-income countries. In the long run, every percentage point reduction in the share of agricultural employment will release 7.8 million people from the labor force; a 10 percentage point reduction will release 78 million people from the labor force. The transfer of these labor forces to industries with higher productivity will be sufficient to support China’s sustained economic growth.
The “talent dividend” is the dividend of population quality. As a result of demographic changes, from 2001 to 2021, the number of students in primary and junior high schools in China has already decreased by 17.1 percent. As we enter the era of negative population growth, the number of compulsory education students will further decrease, which seems unable to continue to support the growth of China’s total human capital.
However, the lack of population quantity can be supplemented by quality, and human capital is always the most important. According to international studies on the costs and social benefits of preschool education, preschool education is more generalized and is the public investment with the highest social return. Therefore, “the high-quality steel should be used to make the blade of the sword”, by reforming the compulsory education system, preschool education and senior high school education are incorporated into compulsory education. In this way, more people will receive higher stages of education, the labor force’s average education years will be increased dramatically, and the level of China’s human capital will naturally grow again.
Moreover, this reform is highly feasible. According to the baseline of education investment (the national fiscal expenditure on education should not account for less than 4% of GDP), with economic growth, public expenditure on education increases proportionally; at the same time, as fewer people receive education year by year, public expenditure is sufficient to ensure the expansion of preschool education. In the future, the adequacy of China’s educational resources will increase significantly.
If we consider the population aged "4-18 years old" as the compulsory education population and the population aged "19-64 years old" as the extended employment population, the ratio of the two is the "compulsory education burden ratio". According to research, from 2021 to 2035, if the burden of compulsory education significantly decreases, the level of public expenditure available for education will significantly increase.
This means that the period from 2021 to 2035 will be the window of opportunity for China's education to make its third leap, following the "universal nine-year compulsory education in 1986" and the "expansion of college enrollment in 1999". It is also the window period for the "talent dividend" proposed by the Premier. We must seize this opportunity, not only to promote the formation of the "talent dividend", but also to achieve it faster.
Q6: What reforms are urgently needed in China to seize these "dividends"?
Cai Fang: There are many areas in China that need reform, and these reforms are closely related to each other. Regarding the impact of negative population growth, I believe that the most important reforms are in the household registration system, the education system, and the market system.
First, I advocate for the reform of the household registration system. The core is to allow migrant workers to settle in cities and become urban residents. This reform can achieve a "kill three birds with one stone" effect.
As mentioned earlier, the proportion of employment in agriculture in China is still too high. Labor transfer can increase the supply of non-agricultural labor, and at the same time, through the reallocation of resources between industries and regions, labor productivity can be further improved.
In addition, once migrant workers and their families obtain urban household registration status, both the more stable employment and income and the better and more comprehensive basic public service provision can significantly eliminate worries about household consumption and greatly increase the propensity to consume. According to research data from the OECD China Economic Policy Study Room, rural labor consumption can increase by 28% by employment and living in urban areas, and their consumption can increase by another 27% if they can obtain urban household registration.
At the same time, after rural laborers and their families have urban household registration, their expectations for urban life will also improve. With more stable labor employment, they will actively accept more skills training, and pay attention to improving their human capital, and their children's education level will also be correspondingly improved. This improved human capital can help them better adapt to future industrial structural upgrades.
Second, we need to reform the education system. I propose to improve it in three ways:
Firstly, as mentioned earlier, extend the compulsory education age to 4-18 years old. By increasing the average years of education for the labor force, we can improve China's overall human capital.
Secondly, there are still education gaps between schools, urban and rural areas, and regions, which means that the potential for improving China's education quality has not been fully realized. We need to reform to reduce educational inequality and avoid further exacerbating social inequality caused by the digital divide as technology advances.
Thirdly, the advancement of technology represented by AI has raised requirements for critical thinking and creative abilities and has put new demands on the quality of education. The shortcomings of the traditional exam-oriented education model have been magnified, and educational methods such as "rote memorization" need to be improved.
Finally, we also need to reform enterprises, investment, and financing systems to accelerate factor mobility, market competition, and survival of the fittest to further improve production efficiency. According to Schumpeter's concept of "creative destruction," new innovation eliminates existing technology, and higher productivity arises from the survival of the fittest in market competition. Therefore, the market must play a decisive role in resource allocation and let the market competition mechanism allow high-productivity companies to survive and expand. This is also a necessary means to improve the future potential economic growth rate.
Q7: At this new stage of development, how should individuals and companies prepare to seize new opportunities of the era?
Cai Fang: Future industry changes will be more intense with the influx of new technologies such as ChatGPT, and even some repetitive mental labor may be replaced, and the labor market's evaluation parameters for the quality of human capital will change. Focusing on improving professional skills in a certain field is like learning dragon-slaying skills; once the position is replaced by machines, those skills will no longer be useful. Individuals should master generic skills while mastering labor skills, and continuously cultivate critical thinking and innovation ability to better adapt to changes in the future labor market.
In addition, enterprise management ideas should shift from focusing on "production" to focusing on "market." Even well-managed enterprises will face a situation where their output capacity is greater than the market consumption capacity in their natural expansion. Once the product has no market, production will not be sustainable. In the future, the demand side will increasingly become a restricting factor for economic growth. When setting production goals, enterprises need to pay more attention to market consumption demand and take it as an important reference for production expansion strategies.
Therefore, I suggest that enterprises, especially large and mega-sized technology enterprises, actively incorporate the concept of "technology for social good" and "innovation for social good" into their business goals and cultivate their consumers and users through productivity sharing. With existing digital technology, they can completely cooperate with the government to achieve "common prosperity."
Although China's current social structure has not yet formed an olive-shaped structure, the size of the middle-income group is relatively small, and there is a large low-income group, which to some extent, suppresses China's consumption potential. In the process of gradually reducing income inequality, enterprises should also pay more attention to the large low-income group and release the consumption potential of this huge "pyramid base," which can promote the relief of demand-side constraints and further expand the market size needed for enterprises to grow.
China has not yet formed an olive-shaped social structure. With a small-scale middle-income group and a large-scale low-income group, China's consumption potential is suppressed to a certain extent. But as the income gap gradually narrows, companies should also pay more attention to the large-scale low-income group, release the consumption potential of this huge "pyramid base," which can alleviate the constraints of the demand side, and the company will also gain the market scale needed for further expansion.
This article is compiled based on an interview with Caifang, first published on CF40’s WeChat blog on July 3, 2023. It is translated by CF40 and has not been reviewed by the author. The views expressed herewith are the author’s own and do not represent those of CF40 or other organizations.
