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Weekly Economic Briefing

Emerging Markets

Workers still in the driving seat

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The Chinese labour market has tightened noticeably over the past year, owing to an improved external environment and a pick-up in industrial sector demand. A few interesting trends emerge among the data. First, rebalancing and industrial upgrading is evident in the employment data, with electronics and environmental industries continuing to show gains in employment. Second, income growth has improved, largely due to direct government transfers and housing-related income (see Chart 10). Third, the industrial rebound and supply-side policies have provided direct support to embattled western provinces, where much mining and heavy industry is based.

Growing rural transfers Tight labour in Western China

What is the data telling us? China’s official unemployment rate is uncannily steady, having hovered between 4% and 4.5% for the last decade. Despite its “steadiness”, it can still reflect general trends in the labour market. In this vein, the unemployment rate has dropped below 4% for the first time in over a decade, registering 3.95% in Q2. The ratio of job openings to job seekers is another data point that can help form an outline of the broader trend. This ratio has been on a broadly improving trajectory since 2015, but the regional breakdown provides more interesting insight. By region, eastern China and central China show stable ratios; however, this contrasts with western China which shows a labour market that continues to tighten (see Chart 11). This suggests that policies meant to move economic activity further inland from the coast are having an effect. In addition to an improved growth outlook, direct policy support is also bettering the outlook for migrant rural labourers – government transfers to rural workers are accelerating and grew 13.5% in Q2 as part of the government’s wealth redistribution and rural support goals. Following the Party Congress, we expect Xi to continue supporting rural wealth redistribution, both through favourable housing policies but also through larger direct income transfers.

The health of the labour market has been, and will continue to be, one of the main drivers of economic policy. Stimulus, both when and how it’s delivered, is largely responsive to the labour market. For example, supply-side policies were mainly a response to economic stress in western and northeast China. Likewise, as wage growth accelerates and the labour market tightens, authorities are wisely taking this opportunity to raise interest rates and push financial and corporate deleveraging. However, the rapid improvement in the labour market also raises other concerns. On a recent trip to Beijing, economists expressed concern about the recent pace of income growth. Furthermore, despite the recent improvement, policymakers will continue to face difficult structural issues. Although there is generally less pressure to create jobs than in the near past, will new sectors be able to add enough jobs to absorb displaced workers as old industrial sectors continue shed jobs and higher wages push manufacturing jobs to Bangladesh and Vietnam? Lastly, will the economy be able to produce enough jobs to employ the millions of new graduates produced by Chinese universities every year? Indeed, the swelling ranks of graduates looking for suitable work may be the next driving force behind liberalising reforms.

Alex Wolf, Senior EM Economist