Reconciling China’s labor shortages with the jobless automated future

For a long time, analysts and economists believed 8 per cent economic growth in China was necessary to create enough jobs to maintain social stability in the country. But China has fallen short of that line a few times now and there is no unemployment crisis. If anything, there is evidence of skills shortages in some parts of China.

The 8 per cent red-line myth has disappeared without a trace.

Guan Qingyou, a prominent economist and deputy head of the research at Minsheng Securities, a brokerage house, argues that analysts and policymakers need to update their toolkits to stay ahead of the game, and points out three examples of applying out-of-date techniques to the shifting reality in China.

1. The relationship between GDP and employment

The main reason Chinese policymakers care so much about the GDP growth rate is largely related to employment. The focus on delivering 7.5 per cent growth is based on the understanding that the country needs to maintain a 7.2 per cent growth rate to absorb 10 million new entrants to the labor market every year, according to the figure quoted by premier Li.

However, this widely accepted understanding is somewhat lagging behind the reality. Statistics shows that the correlation between GDP growth and job creation has been breaking down since 2010. We are seeing a curious situation where employment data remains strong while the economy is growing at its slowest pace in recent years.

China is shifting to a services growth engine

Guan suggests this situation is due to the fact that China’s economy and labor market is undergoing structural changes. China may be the world’s factory but the services sector has overtaken manufacturing as the largest part of its economy, as well as its new growth engine. The services sector has better capacity to absorb new jobseekers, according to Guan.

Rural surplus labor is reducing

More importantly, China has reached the so-called Lewis turning point: i.e. it is about to run of rural surplus labor. In the coming years, there will be less and less people entering the job market. Guan argues the real challenge for China in the future is labor shortage, not unemployment.

What about automation and the jobless future ?

Many people are concerned about a jobless future. However, automation and job elimination is not happening as quickly for the overall world economy as some fear. Also, there are policy and regulatory barriers that limit the speed of change.

If Amazon were to kill Walmart or if Walmart went to a mostly online model that would indicate the accelerated shift had happened. Meanwhile the changes and killing of other retailers is a way to track the shifts in employment in retail. This kind of exercise can be examined in each job segment. There are more efficient transportation companies and technology (self driving cars, multiple containers per truck, bigger container ships, Uber instead of taxis – part time people and not full time taxis etc…)

Amazon and Walmart are killing or transforming retailers like TJ Maxx. Amazon is five times more efficient than them in terms of revenue per employee. Amazon’s revenue per employee is leaps and bounds above its competition. The only other one on our short list that comes close is CVS, but despite the public perception of the company as a retailer, it now generates the overwhelming majority of its revenues from its insurance programs, so it’s partially miscategorized. Even so, it still doesn’t come close to Amazon in terms of revenue efficiency; CVS would need to grow its sales by nearly 50% without adding a single staffer in order to catch up. Walmart? It would have to lay off over two-thirds of its employees or triple its same-store sales to even come close.

TJ Maxx benefits from all the dinosaur dung burned by its customers coming to the store and driving goods back home for it. Amazon, on the other hand, takes those nearly countless millions of extra miles and absorbs them into its business model.

What Amazon doesn’t spend hiring direct employees, the company outsources to others, and the sum of those expenses is enormous.

In fact, the company is so good at spending that gross margin per staffer, that it usually manages to spend it all. Just look at this graph of Amazon’s gross revenue and its profits for the past five years…

All of those dollars flow into the economy, be it through FedEx drivers and pilots, outsourced programmers, content licensing agreements, purchases of inventory to keep its unimaginable selection of goods growing, or any of hundreds of other paths. And each path is itself a series of jobs generated and a series of taxes.

Compared Amazon has a lock on retail efficiency. After all, Costco—the star quarterback of the big-box store movement—generates over $975,000 in sales per this way, Amazon is incredibly inefficient.

Automation and jobless for the overall economy has to look at the entire supply and service chains for different industries and sectors.

China is developing a consumer market

The Economist notes that consumer spending has already begun its expansion, with its share of GDP rising from less than 35 per cent in 2010 to more than 36 per cent last year. And this year it has accounted for more than half the growth in GDP.

A big reason for stronger consumer spending is rapid growth in wages. Get this one: over the five years to 2013, real wages in manufacturing rose by about 2 per cent in the US, but by 45 per cent in China. As always happens, the benefits of economic development do flow eventually to ordinary workers.

2. How important is the industrial sector to China?

One of the most widely watched Chinese economic indices is industrial production. Given the sheer size and importance of the country’s manufacturing industry, it is not hard to understand why. The industrial sector accounts for about 40 per cent of the country’s GDP and there has been a strong correlation between industrial production and the GDP growth rate.

However, recent data suggest the once-strong correlation has also started to break down. For example, the industrial production growth rate dropped from 9.7 per cent to 8.7 per cent during the first quarter of 2014 — and it didn’t have noticeable impact on economic growth, which stayed around 7.4 per cent.

This apparent inconsistency has sparked speculation about whether Beijing fudged the numbers to suit its political needs. However, Guan believes there is a more innocuous explanation for the breakdown in this relationship: the importance of the industrial sector is declining in China. For example, the Chinese economy grew 7.7 per cent in 2013; the services sector contributed 47 per cent of that growth, while the industrial sector contributed just a touch below 40 per cent.

3. How good is the ‘Li Keqiang Index’?

In 2007 when he was still the governor of Liaoning province, Premier Li Keqiang met the American ambassador and confided in him about his distrust of official Chinese statistics. Thanks to Wikileaks, we know Li prefers to track the economy by looking at other indicators: railway freights volume, electricity consumption and bank loans.

Many commentators and analysts have used the Li Keqiang Index to develop an alternative model of understanding the Chinese economy. But Guan argues that the reliability of the Li Keqiang Index is declining because of changes in the electricity generation sector and the financial industry.

He has made following observations: industrial electricity consumption is declining as companies opt for lower-energy-intensive production methods and improve energy efficiency; Beijing is actively phasing out high-energy-consumption and high-pollution companies; and household electricity consumption has increased.

Meanwhile, bank loan disbursement used to be a good indicator of economic activity in China as companies mostly rely on banks to finance their business activities. But we have seen a large increase in China’s informal banking sector, as well as an explosion in off-balance-sheet lending. Consequently, bank loans have become a less reliable indicator.

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