A Chinese man works amid orange robot arms at the Rapoo Technology factory in the southern Chinese industrial boomtown of Shenzhen. Factories in China are gradually replacing manpower with automation. The utilization of industrial robots greatly reduces demand for front-line personnel while increasing labor productivity.

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In recent years, China’s population has been aging at an accelerating rate, altering the demographic structure and the labor market. However, we should not be overly pessimistic about this trend. It is estimated that during the 13th Five-Year Plan period, the number of people who are of working age—between 15 and 59 years old—will decline. But the impact will be limited. The working-age population will be around 926 million, and the amount of laborers is expected to hover around 912 million.

Population aging will surely impact the economy and society to a certain extent. Foresight is needed to restrict the impact, and precautions must be taken to promote economic growth and improve production efficiency.

 

Smaller pool, higher labor cost
It is true that China’s population will continue to age, and the working-age population will decline in absolute terms and in proportion to the whole population. It is estimated that the working-age population will keep falling from 2015 to 2035.

In 2015, the country’s working-age population was about 925 million, and the number is expected to drop to below 900 million in 2023, while it will probably further drop to below 800 million in 2035. 

My research team found that in many cities that are experiencing increasingly severe population aging, the labor pool has begun to shrink remarkably. For example, in City A of Shandong Province, the proportion of the working-age population to the whole in 2016 dropped by 2.03 percentage points from 2015 and 3.82 points from 2010, while the proportion of people aged 65 or older increased by 1.13 points.

One long-term outcome of population aging is that the number of Chinese people engaged in production will decrease while consumers will increase, which means that in times of rapid economic and social development, demand may outstrip the supply of the labor, and labor costs will rise accordingly.

Meanwhile, population aging will raise the dependency ratio. If pensions are not lowered, each working-age individual will have to contribute more. In addition to pension commitments, society will have to devote more resources to healthcare, daily care, welfare and facilities for the elderly.

Moreover, as more and more workers pursue higher education and training, their expectations for compensation and job conditions will continue to rise, which to some extent raises the labor cost.
 

A survey of City A revealed the rising labor costs in recent years. For example, the average monthly wage for job hunters was 3,800 RMB for the first half of 2017, up 16 percent from that of last year. Another survey of students who are going to graduate with a bachelor degree this year shows that 40 percent expect their monthly salary to be between 5,000 and 8,000 RMB.

 

Population aging also leads to a lower labor force participation rate, affecting enterprises and local economies. Also in City A, the labor force participation rate has been declining in the past three years, from 61.48 percent in 2015 to 60.75 percent in 2016 and 59.28 percent in the first half of 2017.

At the same time, enterprises in certain sectors, including manufacturing, construction, retail and catering, have suffered labor shortages and other human resources challenges in recent years. For example, it is hard to find and retain skilled workers.

 

Hi-tech, capital-intensive industries
To solve problems in employment, enterprises should accelerate the transformation and upgrading of the industrial structure. Their only option is to build an innovation-based economy. Research found that many regions are exploring means to compensate for the lack of labor by using capital and technology.

As one of the first pilot regions for the country’s integration of informatization and industrialization, City B in Jiangsu Province enjoys favorable policies, and it has fostered a good environment for development.

To cope with population aging, it incentivizes the production of industrial robots and automation. Currently, the city has formed an industrial cluster for intelligent manufacturing.

While setting goals for developing intelligent manufacturing, it formulates incentive and compensation policies to encourage enterprises to transition to systematization and intellectualization.

It has implemented national policies of preferential tax for enterprises. For example, companies can deduct qualified research and development expenses in the calculation of taxable income. These policies are meant to encourage traditional industrial enterprises to innovate production and services by integrating information technology and intelligent manufacturing techniques.

Direct subsidies are given to enterprises for transforming and upgrading to intelligent manufacturing, and usually subsidies cover 5 to 15 percent of the overall expenditure for upgrading. 

One thing to note is that the trend of population aging is coinciding with industrial restructuring and a boom in innovation. Many factors are interacting, further worsening the structural contradictions in the labor market.

For one thing, as technological innovation intensifies and automation becomes more pervasive, enterprises are speeding up the technology and capital-intensive transformation. Capital is replacing manpower, especially for posts involving simple and repetitive operations and those requiring operation under a special working environment.

The utilization of industrial robots greatly reduces demand for front-line personnel while increasing labor productivity. Those obsolete workers need to change to other posts after receiving training, and some of them face obstacles in this process because of old age or low capacity to adapt to posts.   

Furthermore, new technologies, industrial forms and models are emerging. But the current labor force often lacks the skills and experience required by these new industries. According to the sixth national census in 2010, nearly 30.8 percent of working-age people have finished senior high school or higher education, and only 5.1 percent of them have a bachelor’s degree or higher.

In particular, the majority of migrant workers from the rural area have only a high school education. Therefore, amid the industrial transformation, the mismatch between the quality of the current labor supply and the high standards for emerging posts is becoming more prominent.

 

Healthy development
In light of the trend of innovation-based economy and industrial restructuring, population aging is further complicating the management of the labor market in China. Increasing the number of jobs and reducing unemployment has become the fundamental goal for economic and social development.

Currently, the emphasis should be placed on increasing supply, creating demand and exploiting potentialities to ensure the sustainable and healthy development of the labor market.

The first is to adjust policies. The population policy needs to be adjusted to rationally manage the size of the working-age population by maintaining a steady birth rate. Policies should be put in place to guide population flow and encourage orderly relocation. A flexible retirement policy should be implemented to extend the retirement age, and the current pension policies should be modified. Seniors should also be encouraged to take part in continuing education and training.

The second is to increase the effective labor supply. The channels for graduates to find employment need to be expanded. Measures are needed to encourage entrepreneurship, and related services should be improved. Occupational education and training for migrant workers needs to be strengthened, especially the new-generation workers.

The third is to tap the potential for employment. Vocational guidance and training programs are needed to help those who lose jobs during the process of cutting overcapacity and industrial restructuring. Also assistance is necessary for seniors to encourage them to work in areas requiring a high level of education or advanced skills and experience, like education, medical services, community work and housekeeping services.

 

Wang Yang is from the Institute of Social Development at the Chinese Academy of Macroeconomic Research.