To secure labour market security and stability is one of the Chinese government’s top priorities. A slower growth could cause higher unemployment. This is however not the case for China. China’s unemployment rate unexpectedly dropped although its gross domestic product (GDP) growth for 2019 slowed to 6.1%. Beijing announced that 13.5 million new jobs were created in urban areas, and that the surveyed urban unemployment rate was at 5.2% (0.3% higher than in 2018) while the registered urban unemployment rate was at 3.6% in 2019 (0.2% lower than in 2018).

With the number of new college graduates set at a record high of 8.3 million and that of “long-distance” migrant workers increasing to 174.3 million, seeking employment in the urban sector was competitive. A slowing growth had heightened concern about unemployment, but Premier Li’s 2020 work report, in highlighting previous years’ (2019) almost flat unemployment rates, had apparently brought relief for Chinese people. Contrary to popular belief, why did the overall unemployment rate not increase in a slowing economy?

There are three types of unemployment, namely

(i) frictional unemployment based on individual circumstances;

(ii) structural unemployment caused by a mismatch between labour skills and market demand; and

(iii) cyclical unemployment that is subject to economic fluctuations.

The first two constitute natural unemployment, but of the three types, structural unemployment is caused by fundamental economic changes, and hence has long-lasting effects.

Cyclical unemployment in developing countries usually affects industrial workers and is the main reason of high unemployment. In China’s case, it has a major impact on rural migrant workers. For example, when global financial crises affect the Chinese economy, shrinking demand pushed many rural migrant workers back to the countryside; and later when the economy recovered from crisis, labour shortage occurred in the urban sector. Migrant labour shortages in 2004 and 2009 are consequences of cyclical unemployment.

China’s demographic dividend is diminishing rapidly after its total working-age population (15–64 years old) peaked at 1 billion in 2013. Without demographic dividend, the elderly dependency ratio increases, and both labour supply and marginal return would slow down and even decline. With a slower growth, China sees higher risk of cyclical unemployment.

Urban residents however are less affected by cyclical unemployment due to household registration (hukou) restrictions and China’s urban–rural dualistic economic structure. But the main problem that urban Chinese face are structural and frictional unemployment. Both registered and surveyed unemployment rates used in China’s statistical system are based on urban populations, hence statistically close to the natural unemployment rate. China’s registered unemployment rate remained mostly stable, and the largest increase from 4.0% (2002) to 4.3% (2003) occurred before the 2003 marketization reform. Based on the latest age-disaggregated statistics, the highest unemployment rate was reported in the 20–24 and 25–29 age group (with a combined proportion of 31.8% among all age groups in 2018), implying that the employment situation for new university graduates was worse than the working-age population in general. Against the backdrop of a stable natural unemployment rate – including both frictional and structural unemployment – this implies that the structural unemployment of young people is particularly prominent in the labour market.

Despite a constantly stable registered unemployment rate with the government’s assurance of a stable labour market, unemployment worries are growing. Under current conditions, the number of rural migrant workers stagnated while their wage level has increased year by year. In 2019, wage increase for rural migrant workers reached an average of 6.5%, while that of construction industry rose by 8.5% – much higher than that of GDP growth. There are worries about the increasing wage rate in the labour market under the impacts of the housing and construction market booms. If industrial wages continue to increase in order to attract or keep necessary labour input, China’s industrial competitiveness will decline as labour costs rise.

On the one hand, new university graduates feel that it is increasingly difficult to get a job, while on the other hand, the industrial sector faces shortages of both skilled and unskilled labour. First, structural contradictions in the Chinese labour market have become prominent. China now has 170 million skilled workers, about a quarter of total employed population; while among the total employed population, only 7% are high-skilled personnel (about 48 million). At its current development stage, China still needs sufficient industrial workers to help complete the country’s industrial upgrade and to enter the high-income group. Secondly, the number for total migrant labour has already been stagnating for years. China did well in poverty reduction and rural development in the past decade, and successfully increased both job opportunities and pay levels in the rural sector – especially in inland provinces. However, the side effect of such success is that the opportunity cost for migrant labour has been raised, hence why low-cost unskilled labour is no longer accessible for the industrial sector.

Beijing has already started policy adjustments as structural unemployment has significantly outpaced cyclical unemployment. China’s current working-age population has reached its peak and will subsequently decline year by year. As long as the economy grows, jobs will be created. Hence, the country faces a fundamental change in its labour market and perennial labour shortage. In the context of a declining working-age ratio, adjustments of and between different segments of the labour market become especially important. Encouraging more births and labour market structural adjustments will be foci of Beijing’s concern.