Transformation and Dynamics of China's Labor Market

Key Insight

China's labor market has undergone a profound transformation since 1978, characterized by a massive shift of workers from agriculture to urban employment in industry and services, and from the state sector to the private sector. In 1978, 70 percent of workers were in agriculture; by 2013, this figure dropped to 31 percent. Similarly, state-owned and collective enterprises, which employed nearly all urban workers in 1978, accounted for only 18 percent of urban employment by 2013, with private firms generating 95 percent of net urban job creation since reforms began. The initial wave of off-farm employment surged in the 1980s through Township and Village Enterprises (TVEs), growing from 28 million workers in 1978 to 123 million by 1993, absorbing nearly 20 percent of the active workforce.

The late 1990s marked another significant turning point with the massive reorganization of state-owned enterprises (SOEs). Between 1995 and 2005, employment in urban SOEs plummeted by nearly 50 million people, from 113 million to 64 million, with approximately 30 million officially laid off. Despite these job losses, which were five times greater than those in the US Great Recession of 2008-2010, total urban employment astonishingly increased by 90 million during the same decade. This remarkable outcome was facilitated by the deregulation of manufacturing allowing private sector growth, trade liberalization leading to WTO entry in 2001, the emergence of new service businesses, and increased government spending on infrastructure and a real estate boom.

China is now experiencing its 'Lewis Turning Point,' where the surplus of rural labor is diminishing, leading to increased bargaining power for workers and accelerated wage growth for migrant and low-skilled jobs since 2010. While unemployment rates fluctuated (e.g., rising to over 11 percent by 2002 before falling), maintaining full employment remains challenging, exacerbated by a decline in the labor force participation rate from 79 percent in 1995 to 71 percent in 2010, particularly among older workers (dropping from 82 percent at age 40 to 30 percent at age 60). This shift toward a more constrained labor supply means employers face pressure to raise wages more aggressively, altering national income distribution towards labor and away from capital. Continued efforts to increase labor force participation, especially among the 45-65 age range through raising retirement ages and improving education/training, alongside boosting worker productivity, are crucial for future economic growth as the working-age population begins to decline.