Trying to count China's jobless

By S.R. | SHANGHAI

DESPITE all the ups and downs in China’s economy over the past decade, its official unemployment rate has remained incredibly stable. Incredible in the sense of “impossible to believe”. The registered urban jobless rate is just 4.1% now. This would seem to point to economic vigour, but the problem is that it has sat at that precise level, without moving, since late 2010. And it has stayed within an absurdly narrow range of 4.0-4.3% since 2002, even at the depths of the global financial crisis (see chart below).

New research claims that the real unemployment rate might be more than twice as high. In a working paper for the National Bureau of Economic Research, Feng Shuaizhang of the Shangai University of Finance and Economics and Hu Yingyao and Robert Moffitt of Johns Hopkins University parse data from an official housing survey to construct an alternative index. They find that China’s unemployment rate averaged 10.9% from 2002-2009, nearly seven percentage points higher than the registered jobless rate over that period.

The survey does not cover more recent data, so their research does not show whether the labor market has deteriorated as the Chinese economy has slowed. But their figures do point to the large, lasting impact of the mass closures of bankrupt state-owned companies in the 1990s. The unemployment rate was just 3.9% from 1988-95 and then climbed steadily upwards. State firms had played the biggest role in China’s north-east and so their closures dealt the region a particularly heavy blow, with its unemployment rate averaging 12.5% from 2002-9.

Just how worrying are these findings? The data comes from the urban household survey, which is conducted by the National Bureau of Statistics and covers all cities and towns, so it ought to be both representative and authoritative. And their unemployment index is more volatile than the registered jobless rate, making for a closer fit to the ebb and flow of economic cycles in China.

But if the official rock-steady 4.1% jobless rate is trusted by no one, the conclusion that China suffers from chronic unemployment of more than 10% is also worthy of a large dose of scepticism. As the authors readily admit, there is a major gap in their data. The survey only covers people who hold local hukou, or residency permits, and therefore excludes the tens of millions of migrants who stream to cities for work every year. In Shanghai, for example, some 14m residents hold local hukou, but another 10m people live and work in the city on a permanent basis. The latter are outside the remit of the urban household survey.

There is also good reason to think that the 10.9% unemployment rate exaggerates the problem, potentially by a wide margin. This figure covers a period in which China’s growth rate average more than 10% a year and annual wage growth in urban areas was 15%. It would be highly unusual, to say the least, to register such strong wage growth at a time of persistently high unemployment.

A skills mismatch between job seekers and job openings might account for some of the discrepancy, but not to the extent of more than one in ten people, especially younger workers, being unable to find jobs. A more likely explanation is that the household survey is itself problematic. The survey does not ask whether people are actively searching for jobs, so researchers have to glean from the way they describe their status (for example, “waiting to be employed”) that they are still actively in the job market. What’s more, respondents to surveys in China are notoriously reticent about working in grey parts of the economy, whether to avoid trouble or to evade taxes. Another survey found that the amount of income earned but not officially reported by households equals more than a tenth of GDP.

Bring in the boffins

This is not to say that the 4.1% registered unemployment rate is any better as a gauge of the labour market. It is, indeed, more flawed. Not only is it also restricted to urban hukou holders, it only covers those who actually file for unemployment benefits, which few do since they are so meagre.

Those tracking the Chinese economy thus have to look elsewhere to take the pulse of the labour market. One alternative is a survey of urban employment centres published by the ministry of human resources and social security. This shows that for every job seeker, there were 1.06 job openings in the second quarter this year, implying that the labour market is actually very tight, though a bit slacker than at the end of last year (when there were 1.15 job openings for every job seeker). But this figure is only partial: not all companies or job seekers go through employment centres.

Another alternative is a surveyed unemployment rate that in its methodology more closely resembles the unemployment rates reported by developed economies. According to this, China’s jobless rate is now 5.1%. This is more promising as a gauge of unemployment, but its coverage is limited (just 31 major cities for now) and the government only started publishing it regularly at the end of 2013.

If a wider survey confirms this relatively sanguine data, there is yet another complication. A recent working paper by Raphael Lam, Xiaoguang Liu and Alfred Schipke of the International Monetary Fund notes that the structure of the Chinese economy might lead to artificial stability in the labour market. State-owned companies tend to hold on to workers during downturns rather than laying them off, because the political objective of maintaining social stability trumps the corporate goal of maximising profits. And the countryside is still a safety valve for migrants to cities who lose their jobs in downturns. In 2008, when the financial crisis erupted, state media estimated that as many as 45m people returned to their rural homes, alleviating pressure on urban employment.

All this data confusion would be quite trivial were the unemployment rate not such a crucial economic indicator. With Chinese growth slowing, and the government trying to work out how much to stimulate it and where to target its support, the lack of clarity about the labour market is becoming a bigger problem. As David Keohane writing for FT Alphaville suggests, this at least points to a certain class of jobs that needs creating. Time to hire an army of boffins to count the true number of China's unemployed.