30 Jan. 2013 | Comments (0)
Welcome to the next installment of The Conference Board China Center Chart of the Week series, hosted here on the Human Capital Exchange. This week we’ll take a look at the drivers of labor demand in China – which provide an illuminating view of China’s overall economy – and compare how those same drivers contribute to GDP growth.
Keen China watchers have known for years that China’s vaunted export sector contributes very little, relatively, to its GDP growth. Exports are, however, vital to Chinese employment, as the chart below demonstrates. But if we look closer we see that China’s consumption economy – both household and government – represents the single largest driver of labor demand. This is notable because, as we see on the right, China’s economic development path has tended towards an investment-driven growth model for many years rather than a consumption-driven model. Investment now represents almost fifty percent of China’s GDP, and it continues to grow, squeezing out the kind of consumption that leads to increased employment demand.
What does it all mean? China’s leaders face an unenviable challenge: an enormous portion of their population is working in a sector of ever-decreasing importance, exports, while the country’s traditional investment-driven growth model is becoming increasingly inefficient at generating labor demand and simultaneously squeezing out the most important driver of labor-intensive industries, household consumption. Something has to change, but what’s a Communist Party Premier to do? (Next week, we’ll demonstrate further reasons why an economic transition in China has become imperative.)
- The above chart reveals overall labor demand (i.e. both direct and indirect) generated by household consumption, government consumption, investment, and exports, respectively.
- Consistent with the declining share of consumption in China’s GDP over the last 20 years, labor demand from household consumption fell markedly from 2001 to 2008 while labor demand from the export sector rapidly expanded. However, despite its reduced share of GDP in recent years, household consumption has continued to account for the largest share labor demand. Of note, labor demand from investment grew quite slowly during the same time period, even as its share of GDP grew to around 50 percent of the total.
- While investment and exports have driven the majority of China’s economic growth over the past two decades, our estimation shows that consumption has created the largest amount of labor demand. This is due to the following three reasons:
° The majority of products and services consumed by households come from labor-intensive industries such as food, retail and the personal services sector (e.g. finance and entertainment). By contrast, investment and the manufacturing-intensive exports are more reliant on capital intensity than on labor.
° Products consumed by households and the government are often more sophisticated and mostly fall at the downstream end of the supply chain. These types of products (such as cars, home appliances and electronics) require many inputs from upstream manufacturing processes and thereby create a large amount of indirect labor demand. By contrast, investment activity mostly comprises construction and infrastructure development, which are more upstream and involve mostly raw material inputs. As such, they have fewer knock-on effects for employment – either upstream or downstream – and thus create much less indirect labor demand through the supply chain.
° Roughly 42 percent of China’s exports come from processing trade2. Even though the processing trade tends to be relatively labor intensive, many suppliers to the trade are not domestic and hence do not create indirect labor demand in China.
- This analysis underscores yet another important reason why transitioning to a consumption-driven growth model is so important for China. It is the most important driver of labor demand.
This report is part of a series of Conference Board China Center Charts of the Week that we share on the Human Capital Exchange. For more information about the China Center and its research, please contact our China Program Specialist, Ethan Cramer-Flood, at email@example.com.
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