China is experiencing a significant shortage of urban unskilled labor, the direct result of a reduced supply of workers from the rural sector. Many say this is a clear sign that China has reached the Lewis turning point, where the supply of excess labor diminishes so much that wage pressure rises significantly.
This is incorrect.
Shortages of unskilled labor in Chinese cities are mainly a consequence of institutional restrictions on rural migration to urban areas under the hukou household registration system. This discriminatory system divides citizens into rural and urban residents, each with strictly defined benefits. It denies rural workers full access to welfare, education, health care and social services when they migrate to towns and cities, and is probably the primary cause of China's current labor shortage.
The latest data from the National Bureau of Statistics suggests that China has 283 million workers still employed in the agricultural sector -- a large pool of potential urban workers.
In recent years, China's agriculture productivity has increased rapidly, and the majority of agricultural workers are underemployed. Data from Peking University's China Family Panel Studies indicates that in 2012, farm laborers worked an average 150 days. Thus, if we assume that a full-time employee in China should work 300 days a year, then as many as half of these 283 million workers could be made more productive by moving to the non-agricultural sector.
If urban employers are unable to find unskilled workers, why don't these millions of underemployed rural laborers move to the cities? The answer lies in the hukou system. Limited access to services means migrants are unlikely to permanently settle in cities with their families.
Indeed, migrants who move to cities do not stay long, residing on average less than 10 years, according to data from Australian National University's Rural Urban Migration in China survey.
As most rural laborers tend to migrate when they are young, they inevitably need to go home -- to get married, to be present at the birth of their children and during child rearing and schooling years. The lack of a developed health care system means migrants also return home when their parents are sick and require care.
Under normal circumstances, these life events do not substantially cut short people's working lives. But they do for migrant workers because, under the hukou system, they are denied full access to urban services.
The mistaken belief that China has run out of excess rural labor has led to policies that could challenge future urbanization and economic development.
One policy, adopted by many cities, has involved upgrading local economies from labor-intensive industries to capital- and technology-intensive ones. As demand for low-skilled workers has decreased as a result of these industrial upgrades, the hope was that the urban labor market would reach a new high-wage, high-skill equilibrium. But the shift has created a mismatch between the skill levels of current agricultural workers and the upgraded city jobs it was presumed they would fill.
So what is to become of the unskilled farm laborer locked out of cities because of the hukou system and the upgraded industrial structure? Based on current hukou policies and agricultural productivity, probably half of current farm workers, some 140 million people, are redundant. Most have very low skill levels: The education level of more than 60% of them is primary school or lower, according to data from the China Family Panel Studies survey.
Might time and generational change solve this problem? It seems unlikely. Agricultural workers are less educated across all age brackets, including the young. So if the urban industrial upgrading policy continues, the situation for the less-educated rural labor force will only deteriorate. If rural workers cannot find jobs in urban areas because of industrial upgrading, and there is no work in the rural sector, a large portion of the working-age population will be idle.
The government hopes that its new urbanization strategy will solve this problem, but it seems unlikely.
China has always envisaged a different urbanization path from that of the West. Since the start of China's economic reform and opening policy in 1978, the government has encouraged farmers to leave agriculture to seek other employment. At the same time, it has tried to ensure that they do not move to cities permanently.
China has always intended its urbanization strategy to be planned and controlled, focused mainly on the expansion of small cities. This is part and parcel of an effort to forestall the problems that have plagued big cities in other countries, notably the development of slums. In this sense, China's hukou and urbanization policies are intended to be mutually reinforcing.
The six-year urbanization plan announced in March 2014 by the State Council emphasizes the orderly building of small towns and cities to accommodate any future excess supply of agricultural workers while controlling the development of megacities. The plan states that China will "strictly control" the granting of urban hukou to rural migrants to cities of at least 5 million inhabitants.
For cities of 3 million to 5 million, permission to grant an urban hukou will be "reasonably contained." Restrictions can be slightly relaxed for cities with populations of 1 million to 3 million. For towns with populations of 500,000 to 1 million, hukou restrictions can be relaxed in an "orderly" fashion. For rural towns, restrictions will be abolished.
Under this new strategy, the old idea that farmers should be kept out of cities has morphed into a new one that they should simply be kept out of large cities. The national plan is silent on whether individuals and their families who are already working in larger cities will be able to obtain hukou status or whether they will be encouraged to head to smaller cities.
The plan also says very little about where jobs will come from in these smaller cities and fails to take into account the realities of job creation and labor market trends, key shortcomings that cast doubt on its chances of success.
Too often, small towns are located far away from input and output markets. They are also too small to develop clusters of companies in the same industry that can create workforce stability. One recent study found that workers change occupation and industry less often in big cities than in small ones where there are not enough companies in the same line of business. Bluntly put, individuals in less dense markets cannot become too specialized or they risk not being able to find another job if displaced. Lack of specialization in turn hinders income growth and economic well-being.
People will naturally migrate to cities where they can obtain jobs. A proper and rational urbanization process would be one in which individuals choose to go to cities where they can thrive and survive. But the national urbanization strategy uses hukou policies to direct people to locations regardless of whether jobs are actually available.
The bottom line: Using administrative tools to encourage the development of small towns may, in the long run, suppress economic growth and depress investment in human capital.
Xin Meng is a professor in the Research School of Economics at Australian National University