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Hukou reform key to labor supply stability

Author  :  Cai Fang     Source  :    Chinese Social Sciences Today     2017-04-25

Recently, commentators have said that China’s population will be sufficient for the next century. Though 100 years might be a stretch, the population size is undoubtedly adequate.

It is argued that the quality of the population is the real problem, most likely referring to the low level of education. While this is true, one cannot ignore the imbalance in China’s demographic structure. The age structure is not as conducive to economic growth as it was before.

The population of China, from a broad perspective, can be summarized as: aging before getting rich. Relative to the development stage reflected by the GDP per capita, China has a rather aged population.

The issue in the current economy manifests in the form of a labor shortage. In particular, there is a paucity of low-skill workers rather than highly skilled, educated workers.

So far, the labor shortage has caused wages for ordinary workers to soar at a speed outpacing the growth of labor productivity.

When the rise of wages exceeds the growth of labor productivity, unit labor cost increases, leading to a rapid loss of comparative advantage in China’s labor-intensive manufacturing sector. This accounts for enterprises’ lack of incentive to invest and the fall in the return on investment. Eventually, the potential growth rate drops and the actual rate naturally heads downwards.

This is why the problem we are facing can, to a great extent, be attributed to the disappearance of China’s demographic dividend. To address this, we can examine the potential urbanization still holds.

Measuring urbanization based on the number of permanent residents yields a different result from measuring by household registration, or hukou. Even though rural laborers work in cities for a long time, they lack equitable access to basic public services, so the labor supply is unstable.

First, they are neither bound to a certain enterprise nor willing to establish a stable labor relationship. Moreover, they cannot commit to permanent residence, because they have elderly family members and children to look after back in the countryside. And if they go back, they are unlikely to get a good job, so most of them intend to withdraw from the urban labor market when they turn 40.

Therefore, it is necessary to enable these people to settle down in cities. There are 170 million migrant workers in Chinese cities, and the new type of urbanization, also called people-oriented urbanization, is a good way to keep them from leaving. Hukou reform is the key in this regard.

To narrow the gap between the number of permanent residents and urban hukou holders, the 13th Five-Year Plan requires raising the urbanization rate based on household registration. The rate indeed rose in the last two years, but it was not because migrant workers were registered in the urban population, but largely a result of changes in administrative divisions.

According to an analysis, approximately 53 percent of the increase in urban population was due to the reclassification of residents. Since the change does not affect employment status and type of those concerned or involve migrant workers, it has failed to solve the real urbanization issue and remove the hurdle to the growth of productivity.

Promoting urbanization and hukou reform is difficult in that there is a cost associated with transforming migrant workers into urban citizens. For example, local governments have to provide them with basic public services, incorporate them into all sorts of basic social insurance systems and allocate part of the fiscal subsidies.

There is not yet a framework in place for reasonably distributing the costs between central government revenues and local finance, so local governments lack the incentive to reform.

As a vital step to propelling hukou reform, better institutional conditions are needed to reasonably share reform costs and dividend expectations, thereby advancing people-oriented urbanization.

This article was translated from Beijing Daily. Cai Fang is vice-president of the Chinese Academy of Social Sciences (CASS) and former director of the Institute of Population and Labor Economics at CASS.

Editor: Ma Yuhong

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