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What worker shortage? The real story of China's migrants

7 January 2013 - Wall Street Journal. China’s army of migrant workers––more than 250 million at last count––is one of the most important but least understood factors in the world economy. But detailed survey work on the migrant work force by Xin Meng, an economics professor at Australian National University, shows it isn’t that simple.

China’s army of migrant workers––more than 250 million at last count––is one of the most important but least understood factors in the world economy.

In recent years, surging wages and fears the stock of rural workers is drying up have raised red flags about China’s future growth.

But detailed survey work on the migrant work force  by Xin Meng, an economics professor at Australian National University, shows it isn’t that simple.

With the results from her 2012 survey just in, China Real Time caught up with Ms. Meng and threatened to deny her an urban hukou unless she shared the main results. This interview has been edited for length and clarity.

China Real Time: Tell us about your survey.

Xin Meng: Over the past five years the Rural-Urban Migration in China project has been monitoring changes in the rural-urban migration process.

The survey is conducted in 15 cities located in nine provinces, including major exporting regions such as Guangzhou and Shanghai as well as big cities in interior regions such as Chengdu. We survey 5,000 migrant households.

CRT: The 2012 results show a surprise slowdown in wage growth.

XM: Over the past five years, migrant worker wages have increased significantly. The increase in monthly and hourly earnings for wage-salary earners between 2008 and 2012 are 12% and 14 % a year, respectively. Between 2010 and 2011, the real hourly earnings increased even more, 23%.

But wage growth of these magnitudes seems to have stopped in 2012. The real hourly wage growth between 2011 and 2012 is only 3.7%. If you strip out the increases of those with higher experience and skill levels, wages in 2012 rose just 1.7%, compared to 23% in 2011.

CRT: Why do you think wage growth slowed so much?

XM: The extraordinary wage increase between 2010 and 2011 might be a factor. There is evidence to suggest that this extremely high increase may not be a pure market-driven phenomenon.

Between 2010 and 2011 the average minimum wage increase in our sampled cities is around 19%. For cities located in the Pearl River Delta and Yangtze River Delta, the average is even higher.

This may indicate that many local governments are using the minimum wage to intervene in the industrial structure. In recent years, cities in the more-developed regions have been talking about the importance of moving up the value-added chain and trying to reduce the size of labor-intensive industries.

Perhaps, instead of directly picking winners, they are trying to use the minimum wage as a policy device to push low-wage, low-value-added industries out.

But government intervention is likely to be more effective when economic conditions are good. When conditions are bad, market forces will dominate and local governments are less likely to enforce the labor law. This is probably why wage growth has slowed.

CRT: We hear so much about a shortage of workers, but your results show large numbers of working-age adults still in the countryside.

XM: Since 2004, there have been reports of migrant-labor shortages in Chinese cities. Many economists believe that China has run out of cheap surplus rural laborers. However, in our data we find that only around 25% of the rural hukou labor force has migrated to cities in 2010, and they often stay in cities for a relatively short time–around seven to nine years.

This is because of the institutional restrictions on migrant access to social welfare and services in cities. When migrants want to get married, have children, when they lose their job, fall ill, or when they need to take care of their school-aged children or look after their parents, they have no choice but to return to the home village.

Imagine if the restrictions on migrant access to social welfare and social services in cities were abolished and hence the duration of migration, say, doubles. Any conceivable labor shortages would disappear.

CRT: Encouraging rural residents to move to the cities means improving migrants access to urban services–what do your results show about progress in that area?

XM: Things are gradually improving. The proportion of migrant workers with unemployment insurance increased from 11% in 2008 to 21% in 2012. Similarly, those with health, pension, and work-injury insurances increased from 13%, 18%, and 17% in 2008 to 27%, 31%, and 23% in 2012, respectively.

However, the large majority of migrant workers still work in cities without any protections. In addition, in recent years, the proportion of migrant workers with some type of employment contract seems to have reduced sharply, from 66% in 2010 to 59% in 2012.

CRT: How about wage equality between rural migrants and urban hukou holders?

XM: Migrants have always been at the lower end of the wage distribution. In 2009 migrant earnings, on average, were only 45% of the average urban hukou worker’s hourly wage.

This situation has not improved over the past 15 years.  I find that in 1995 migrant workers in Shanghai earned 50% of the hourly earnings of the urban hukou workers. By 2009, migrants in the same city only earned 40% of the hourly earnings of their urban counterparts.

CRT: Is there any evidence of migrants staying longer in the city?

XM: In a normal case, an urban worker starts working in the late teens or early 20s, and retires in the late 50s to early 60s. So a normal working life is around 35 to 40 years.

However, due to restrictions on migration, migrants on average currently only work in cities for eight to nine years.  Our data show that the average duration of staying in cities increased from 7.8 years in 2008 to 8.9 in 2012, an increase of one year over a five-year period. So migrants are staying longer in cities but the change is slow.

Staying longer in cities not only increases much needed city labor supply, it is also beneficial to an individual’s productivity and wage. Each additional year migrants work in cities, their earnings increase by 2% controlling for other characteristics. The evidence suggests that this increase occurs every year for 24 years. Given that currently migrant average duration is around nine years, this suggests a significant human capital waste.

CRT: What’s the most important thing China’s new leaders could do to improve the situation?

XM: The policies have existed for a few years now but implementation has been extremely slow. The main reason is that there are many financial and political complications.

For example, since 2008 the central government has introduced a new law which requires all employers to pay health, unemployment, work injury and pension insurances for migrant workers.

The policy should be enforced by the local governments, but they have limited incentive to do so. Enforcing the policy implies a significant increase in labor cost, which has direct implications for local economic growth. Employers, in turn, are unlikely to pay if they can avoid it.

The current financial arrangement is also not suitable. China’s central government passes laws and states the policy intentions, but implementation and paying the bill are local government responsibilities.

So there has to be a significant reform of the current public finance system: either to centralize finance for the social welfare system or to significantly increase the resources of local governments.



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