China's Migrant Workers: A Boon and a Challenge

8 MINS READSep 21, 2012 | 10:17 GMT
China's Migrant Workers: A Boon and a Challenge
Chinese migrant workers in Beijing

Migration patterns in China are changing. In recent years, fewer people have moved to the coasts seeking work and more migrant workers already on the coasts have moved back inland. This shifting labor pattern could prove a temporary relief for Beijing, since maintaining employment is critical for China's social stability and the industrial hubs on the coast are not able to provide jobs for nearly every available low-skilled worker like in previous years. It also fits into China's plan to develop its inland economy so that region can take over most low-skill manufacturing and embark on urbanization, freeing up the manufacturing centers on the coasts to do more advanced, value-added activity and thereby facilitating China's transition to consumption-based economic model.

But while migrant workers are moving inland, they are not necessarily moving there to take the widely available low-skill manufacturing jobs. Many migrants, especially laborers from rural areas within inland provinces, are returning to work in agriculture, the service industry or other sectors they find more attractive. Inland factories are thus facing a growing challenge to recruit the needed labor force. The current trend in the inland economy is part of a larger problem that all of China will eventually face: the country's demographic challenges — its declining birth rate and aging population — will make it impossible to rely on an unlimited supply of cheap labor to fuel economic growth in the future.

Estimated at 250 million people, China's migrant labor force is the largest in the world. Two main factors have contributed to its emergence in recent decades: first, the surplus labor made available by China's transition from a primarily agricultural economy to an export-oriented industrial economy since the 1980s; second, the rapid development along the coast that made it the logical destination for much of that surplus labor. These workers provided the country with a near-inexhaustible supply of cheap labor for unskilled manufacturing and infrastructure construction along the coast, which in large part sustained the country's economic miracle.

Due to migrant workers' relatively replaceable nature (most are temporary contract workers and do not receive benefits that would tie them to their jobs long term) these laborers are the most sensitive to social or economic changes. Consequently, migrant laborers' movement offers a bellwether on the country's economic prospects, particularly for the labor-intensive manufacturing sector, which employs more than one-third of total migrant workers. For perspective, construction employs 25 percent of the workers and the service industry about 15 percent.

Policymakers in Beijing are watching the trend carefully, since the employment situation is key to preserving social stability. During the 2008-09 financial crisis, more than 20 million migrant workers lost their jobs as a result of factory closures. This contributed to instability through conflicts between migrant workers and their former employers in the cities and through land disputes involving workers who returned to their rural homes after losing their jobs.

Shifting Migrant Labor

The current change in migrant labor patterns is different from the one that followed the 2008-09 financial crisis. As a result of Beijing's push to develop the interior and relocate manufacturing plants from the coast, many inland provinces are now technically able to absorb a larger portion of the labor force than they had before. According to official estimates, returned migrant workers employed in central and western provinces accounted for 34.3 percent of total migrant employment by 2011, a 5.7 percent increase from 2008. In particular, southwest Sichuan and central Henan provinces — which together account for nearly 20 percent of the country's total migrant workers — saw a 50 percent increase in migrant workers returning to work in the provinces over the past five years. In fact, in both provinces, intraprovincial employment of its migrant workers had already surpassed the number of those who are employed outside the province.

Besides Beijing's political imperative to push interior development, widespread worker unrest and inflation have increased the costs of labor, energy and raw materials along the coast since 2010, making it a less attractive place for cost-sensitive industries that are already operating at low profit margins. As a result, some large foreign and domestic manufacturers have moved their assemblies and research centers inland. The relocation of Taiwan-based Foxconn alone into Chengdu and Zhengzhou brought more than 150,000 migrant workers back to those cities' provinces. Unilever, Samsung and Dell as well as a number of domestic firms have also relocated their manufacturing plants and research centers inland, bringing with them jobs in other sectors such as the construction and service industries.

General Migration Patterns in China

General Migration Patterns in China

While surplus labor remains the main challenge nationwide, sporadic labor shortages have already emerged. These shortages have been caused primarily by a lack of guidance for migrant workers returning home, higher expectations from younger migrant workers than earlier generations, and a dearth of skilled laborers. In fact, shortages have been reported since 2004, primarily along the eastern coast and mostly occurring around the Chinese New Year when migrant workers return home to be with their families. Since 2010, however, this has developed into a prevailing phenomenon throughout the entire year. More notable are the shortages in the interior, as relocated manufacturers increase the demand for unskilled workers. 

To a degree, these changes in migrant labor movement can be useful in the near term for Beijing, since they reduce pressure on the government to ensure jobs are available and thus lower the risk of unemployment-driven instability from the overall labor force surplus. Coastal low-skill jobs are diminishing, a trend certain to continue in the future, so jobs available inland can ease the government's concern on stability. This also gives the government some flexibility in trying to restructure its economy to one less dependent on exports, for example it would not necessarily have to subsidize industries simply to save low-end manufacturing jobs along the coast. Nonetheless, without the proper industrial structure between inland areas and the coast, the shifting labor movement can expose more challenges in the long term.

Potential Challenges

Beijing needs the inland region to create a sustainable economic model, but some worrying signs have already emerged.

Inland areas are attractive destinations for manufacturers in recent years due to their significantly lower costs for labor, land and utilities than the coast, not to mention the potentially vast domestic consumer market that an industrial presence could help create. Under Beijing's initiative and economic incentives provided by local governments, manufacturing companies — particularly some large domestic and foreign enterprises — led the way on relocating inland, betting that these comparative advantages and potential to open a new market will prove lucrative. According to estimates, labor-intensive industries including textiles, garment and leather tanning account for a total of 13 percent of relocated manufacturers. Meanwhile, some high-tech sectors like electronics manufacturing also saw a higher degree of industrial relocation.

However, since 2011, inland provinces have been victims of the same inflationary wave as the coast, following the general rise in raw materials costs and massive government stimulus spending. Meanwhile, the growing need for workers in inland provinces has forced some companies to increase wages to make the interior a more attractive place to work. Following a series of minimum-wage hikes by the state and local governments, some inland provinces have seen the wage gap compared to their coastal counterparts diminish to a lower level than in the previous years. In the underdeveloped western province of Ningxia, the minimum wage ranged from 950 yuan to 1,100 yuan ($150 to $174), similar to central Sichuan province's 1,050 yuan minimum wage. This is only about 10 percent lower than some coastal regions, such as Beijing.

In addition to inland companies having to pay higher wages, they also have to deal with poorer infrastructure and facilities that some estimates say add at least 20-30 percent to logistics costs compared to the coastal regions, depending on the particular inland location. This also makes them less competitive and potentially less attractive over the long term for labor-intensive manufacturers. Some companies receive government subsidies to offset their move inland, but continued rising costs and weak infrastructure will certainly factor into decisions on relocation in the coming years.

Another challenge is the fact that many migrant workers are increasingly turning away from low-paying manufacturing and construction work. So far, other than a few large companies, many domestic manufacturers are having difficulties recruiting workers with the pay and work conditions they offer. This could be due in part to the lack of public services and educational opportunities offered to inland migrant workers, particularly ones used to conditions along the coast, where workers generally demand higher minimum standards for their working conditions.

Generational differences also may contribute to this lack of recruits. Many who migrated to the coasts in the 2000s, the second wave of migration in China's modern history, have grown accustomed to social advantages offered by living in a large urban center that were less important to their parents' generation. For many of them, returning inland is an unappealing option they will consider only if they cannot find employment on the coast.

Beijing wants the inland provinces to assume the function of a low-skill manufacturing base, freeing up the coastal regions to begin upgrading its industrial capabilities to do more profitable, value-added work. However, the reoccurring labor shortage particularly for unskilled labor the in the interior indicates that this process remains far off. 

Demographic Obstacles

China's Demography: 2010

China's Demography: 2010

China's Demography: 2025

China's Demography: 2025

Amplifying these challenges is the country's shifting demographic outlook for the coming decades. With its decreasing birth rate since the 1970s, China is gradually approaching a point where its population will peak in the next 10 to 15 years. Around 2025, the workforce of 25- to 35-year-olds will decline by 7-8 percent from the 2010 level. While China's rural areas are still generating a large number of migrant workers, the overall growth rate of people entering the labor force is slowing. The limited migrant labor supply means two things for the Chinese economy: rising labor cost and labor shortages — whereas cheap and plentiful labor have been critical pillars for China's export-driven economy.

China is a composite country; it has a developed area and a developing area simultaneously vying for the central government to tailor its policies to their respective needs. Unlike many developed nations where industrial modernization and the transition to a consumption-driven economy were completed by the time the labor force and overall demographic outlook plateaued or declined, this is not the case for China. The reliance on cheap labor has proved the one sure way to provide economic growth, and consequently the shifting demographic structure will be a significant constraint on the country's future development. As that shift approaches, China's efforts to adjust its economic model will grown more urgent in the coming years.

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