Several coastal manufacturing hubs in southern China have reported that labor shortages have increased following the Chinese New Year festivities, with employers claiming that migrant workers who returned home over the holiday have stayed there and are not coming back, creating labor shortages at a time of rising new orders. With a population of 1.3 billion, China is not an obvious country to associate with labor shortages. And in fact, overall, labor surplus and unemployment remain the dominant trend. While shortages are occurring in some regions in the critical manufacturing sector because of dislocations caused by the business cycle, China's longer-term challenge is the endemic shortage of skilled laborers — a problem much harder to correct.

The Migrant Labor Shortage

The roots of the current labor shortages begin with the desynchronization of migrant labor and the business cycle. China has roughly 150-180 million migrant workers. In recent decades, the booming manufacturing centers on the coast — especially in Guangdong, Fujian, Zhejiang, and Jiangsu provinces as well as the Shanghai municipality — have become the leading sector demanding labor and have attracted millions of poor rural workers who send their income back to their families and travel back to their hometowns during the Spring Festival. This cheap labor force is a key to sustaining China's economic development, but the workers are not formally granted the social benefits of the official urban population and mostly live in cheap housing and shantytowns, and are therefore most responsive (and vulnerable) to changes in economic conditions. (click here to enlarge image) When global trade collapsed in late 2008, the situation turned grim for migrants. Factories closed or laid off workers, many of whom went home unable to find work. During Spring Festival 2009, an estimated 20 million workers returned home and stayed there or in neighboring cities. As the central government's economic stimulus package kicked in, many of these workers benefited from rural aid or public works projects intended to create jobs. Meanwhile, coastal industries began booming again, riding a wave of government-supported bank lending and a reviving global economy. By summer 2009, manufacturers in Guangdong Province were complaining of labor shortages and attempting to attract migrants back to the city. These conditions persist in 2010. After the end of the Chinese New Year celebration, employers on the coast, especially in the Pearl River Delta, have complained that they cannot find enough workers — especially low-skilled and common labor — to fill their factories, even as the world recovery progresses and new orders pour in. Guangdong Province is the worst off; Shenzhen reported a shortage of 800,000 workers in late 2009, Dongguan expected some 20 percent of workers not to return after the holiday and estimates its shortage at 200,000 workers and Guangzhou is expecting a gap of 150,000. Fujian Province meanwhile claims a worker shortage of more than 30,000. Workers say they are unwilling to return to the high cost of living, poor working conditions and cheap wages in these areas, especially since the central government has increased rural spending and construction in 2009-2010 as it attempts to foster rural demand and create a new consumption-driven economy — providing incentives for workers to stay in the country and to be self-employed. Meanwhile, the reviving economy has seen housing and food costs rise, while wages cannot keep up. Between the high costs, the low pay and the assortment of other problems associated with migrant life — not least of which is lack of access to urban social services like health and education — many workers have chosen to take jobs in the country. Coastal cities have already begun offering higher minimum wages to lure workers back. Shenzhen claims it will raise minimum wage above the existing 1,000 yuan ($146) per month, and Dongguan officials have considered raising their minimum from 770 yuan to 1,000 yuan per month. Individual businesses are offering higher pay to attract workers, with some Shanghai firms reportedly raising wages from 1,200 to 1,700 yuan per month. Wages have only begun to creep up, but sustained wage increases would greatly affect the Chinese economy and society, increasing workers' incomes while adding to inflationary pressures on prices of critical goods and signaling the potential for China to achieve real economic restructuring, while at the same time posing serious (and potentially destabilizing) challenges to an economic model with cheap labor as its foundation. Of course, this state of affairs is by no means permanent, as the current economic boom is driven by government stimulus, and this stimulus cannot continue at full strength indefinitely. If the government cannot create a self-sustaining economy in the interior with rural spending, then workers could be forced to resort to migration in the future when those policies wind down and opportunities dry up. Similarly, if coastal manufacturers are responding more to artificially propped up domestic demand than to international demand, their present need for more workers (and their ability to pay higher wages to attract workers) could be short lived.

The Skilled Labor Shortage

The overall picture of Chinese labor shows that the bigger problem is not one of labor shortage, but of overall labor surplus coinciding with shortages of qualified labor in some critical areas. While coastal factory towns report shortages, some interior provinces continue to have surplus labor that is "exported" to other regions as migrant workers — Henan Province being the premier example, with an estimated 32 million in surplus labor. The general labor surplus has increased since 2007. According to a recent survey of 115 cities by the Ministry of Labor and Social Security, in 2007, for every 100 job seekers, employers needed to fill an estimated 98 slots — the culmination of improving employment conditions over the preceding six years. However, by 2009 that ratio had fallen to 91 open positions for every 100 workers. The 2009 official urban unemployment rate is 6 percent (80 million people), while the true unemployment rate could be 9 percent (some 120 million) or higher. (click here to enlarge image) Two groups of workers in particular are in surplus and having increasing trouble in recent years finding jobs: migrants and university graduates. Despite the current shortages of migrant workers in some manufacturing hubs, migrants and unskilled labor remain the group that is most in surplus. The share of migrant workers in China's total job seekers has risen from 26.2 percent in 2001 to 37.5 percent in 2009. At the same time, young people, especially college graduates, are having increasing trouble finding jobs, rising from 16.5 percent of all job hunters in 2001 to 22.7 percent in 2009. In other words, workers with the lowest or the highest levels of education are generally the ones having trouble getting jobs. These conditions point to problems not with finding labor, but finding labor with the right expertise. China's economy is increasingly driven by private and semi-private manufacturers, and what they demand most of all are skilled laborers — those capable of doing technical jobs but not so educated as to be unable or unwilling to work in manufacturing. And here is where shortages are most frequent. Since 2006, the manufacturing sector has been the highest source of demand for labor, demanding 32 percent of potential workers. Skilled labor is in highest demand, with shortages for technicians and engineers since 2001; within that skilled labor pool, the demand for technicians remains highest, as opposed to their more highly educated counterparts the engineers. The level of education most wanted is that of the intermediate vocational school graduate, which makes up nearly 57 percent of total labor demand. And yet these schools produce the fewest graduates (9 percent of total graduates at all levels). This shortage of skilled labor highlights the fact that China is attempting to restructure its economy so as to move up the manufacturing value chain. Eventually, higher wages in manufacturing cities may be enough to attract workers and contribute to economic restructuring, as the companies that cannot afford to pay the price for labor will gradually be weeded out while more efficient competitors survive. But this process will drive greater unemployment among the masses of low-skilled migrants while creating more demand for the educational system to produce skilled workers. The question for China is whether it can allocate the resources effectively to manage these problems and build up the institutions that make possible an economy driven by domestic consumption, advanced manufacturing and service sectors.