Recruiting in China

Since the economic reforms and opening-up policies, China's role in the world economy has been steadily on the rise. Even before the global crisis of 2008-2009, the mainland's contribution to global growth exceeded that of the United States or Europe.

In the coming years, China's economic dominance will continue to increase, assuming there is sustained internal cohesion and a peaceful international environment. However, the nature of this growth is shifting, and the pace of change may be significantly faster than anticipated.

China is moving closer to the Lewisian turning point. In 1954, Sir Arthur Lewis published a highly influential analysis on economic development with unlimited supplies of labour, which contributed to his Nobel Prize a quarter of a century later. It can be read as a story of the rise and decline of rapid growth. In East and Southeast Asia, all successful industrialisers have experienced it, in one way or another.

In the Lewis story, a "capitalist" sector (read: manufacturing) evolves by taking labour from a backward non-capitalist "subsistence" sector (read: agriculture). Initially, there seems to be "unlimited" supplies of labour from the subsistence economy, which allows the capitalist sector to expand without rising wages. Things change dramatically when the supply of surplus labour from the countryside tapers off and industrial wages begin to rise rapidly.

In China, the debates over the Lewisian turning point began in the early 2000s. The coastal export regions were experiencing migrant labour shortages, while there was anecdotal evidence of soaring migrant wages. Consequently, some observers concluded that the huge reserves of supply labour had been exhausted. After all, the growth of the working-age population was also slowing on the mainland.

At the time, I argued that what these observers saw in China was an evolving reality in some coastal regions, but the generalisations did not apply at the national level. Industrialisation had taken off in the first- and second-tier megacities of the coastal export regions. But it had barely begun in the lower-tiered cities, inland and the west.

When the reforms were initiated at the turn of the 1980s, the level of urbanisation was barely 20 per cent. When the Lewis debate began in China, it was in the low-30s. In most developed economies, the comparable figure is over 75 per cent. In other words, China still had huge reserves of "unlimited supplies of labour".

But things are changing. Today, more than half of China is considered urban. Since economic development is unbalanced on the mainland, however, different regions exhibit different realities.

If the focus is on the labour market developments at the aggregate level, the evidence is mixed. Wage developments do not signal the demise of surplus labour. On the other hand, employment, industrial relocation and policy shifts do reflect tightening labour-market conditions.

Most importantly, demographic realities are changing, driven by decades of modernisation policies, and the attendant declining fertility and ageing, which have been amplified by the one-child policy.

Until recently, the UN anticipated that the growth of the working-age (15-64) population would turn negative on the mainland around 2020, along with similar International Monetary Fund projections. However, the pace of change may be even faster. According to the National Bureau of Statistics, China's working-age population (15-59) registered a decline in 2012, decreasing by 3.5 million to 937 million.

The different population bases of these projections explain some of the differences. This is even clearer, if the focus is more narrowly on the young, as most industry employees are relatively young.

In 2010, the growth rate of the core 20-39 population in China shrank to zero. Furthermore, it is expected to decline faster than the overall working-age population until the early 2030s.

While these demographic facts cannot be ignored, they are not destiny, as evidenced by the recent debate and policy developments in China. During the government reshuffle, the task of the population development strategy and population policy was transferred to the National Development and Reform Commission. That allows the central government to assess the population policy from the standpoint of the overall economy.

Over time, Beijing could also take advantage of "pro-natalist" policies - for example, a one-time baby bonus, child benefit payments or tax reductions, paid maternity and paternity leave. It could also promote pro-growth policies, raise the retirement age, increase the share of the workforce and accelerate retraining.

Some observers have argued that rising migrant wages are a result of labour market segmentation - the household registration system, limited portability of benefits, rising rural reservation wages and so on. In that case, overcoming the limitations of such segmentation could support demographic evolution as well.

The huge size of China's population, coupled with a proactive central government, offer opportunities to revise the course of China's demographic future - given a successful transition from extensive growth to innovation-driven intensive growth. But with demographics, change takes time. As a result, policy interventions must be proactive and have a long-term perspective.

In the coming years, several advanced economies, including Japan and Germany, will face demographic decline. Their current growth and prosperity is not sustainable in the long term. It is based on the demise of the ageing rather than the birth of new life. In China, another growth path is still conceivable in the long-term - with proactive intervention.