Working assumptions

China downturn points to a wage dilemma

The surprising thing about China's slowdown is not that it has kicked in so fast, but that it has done so apparently without causing massive lay-offs. Jobless statistics are among China's most unhelpful numbers, but there is little evidence of rising unemployment, even though most economic indicators are pointing south. Though that can last for a while, dwindling growth will eventually create a dilemma.

Workers have done pretty well in China in recent years, despite the global downturn. Wages have risen by 79 per cent for urban workers in nominal terms since 2008, according to official data, while over the same time consumer prices have risen 16 per cent. One driver of higher wages is jobs moving from country to city. China added 10.8 million urban jobs in the year to September, and migration is a big factor.

It's hard to see how the pace of improvement can continue. Industrial output growth of 7.7 per cent in October was the second lowest since 2009, while retail sales grew at their slowest rate since 2006. Wage strikes in urban areas are breaking out with increasing frequency, especially in the construction sector, according to China Labour Bulletin, which gathers data on such incidents. No wonder: housing investment grew at less than half the five-year average rate in October.

China still has the means to soak up excess labour. Growth in the services sector is one explanation for why job vacancies still exceed the number of jobseekers. Services created 19.5 million new positions in 2013, if official data are to be believed. Yet if nominal economic output grows by, say, nine per cent, it's hard to see how China can continue to increase both employment and wages at double-digit rates.

The big problem is that making the job market bigger is easier than making it better. Replacing jobs in steel factories with equally low-paid cleaning or security guard roles is a stopgap. Future wage gains will have to come from improved efficiency, which means deeper legal and financial reforms. China's leaders say employment is the thing they care most about. That means addressing quality as well as quantity.