Unemployment figures in China may be distorted by government policy

An article in The Economist on China's labour market says that unemployment is rising, particularly in heavy industry such as shipbuilding and coal mining, but it is not always visible. According to the Chinese Government's latest survey of 31 big cities, the jobless rate crept up to 5.2% at the end of September 2015 from 5.1% at the start of the year. The article's authors suggests that official employment figures are "flattered by two uniquely Chinese shock-absorbers". First, the "hukou" system of household registration means that the millions of migrant workers who have gone to the cities for jobs do not enjoy a permanent right to live in them and with that, no right to claim unemployment insurance there. When they lose their jobs, they are expected to return to their homes, often in rural areas, and do not count as unemployed. The second buffer is that state-owned enterprises, while enjoying certain privileges such as easy access to finance and a dominant presence in certain sectors, must also carry out certain political duties which includes an obligation to help maintain social stability by not laying off workers.   

THE crane that looms over Sainty Marine’s shipyard on the lower reaches of the Yangzi river had been motionless for weeks when a worker climbed it late last year. The struggling company had stopped getting orders and, rather than deal with the headache of laying off its employees, it simply stopped paying them. The man on the crane threatened to jump to get the attention of local officials, coming down only when they promised to help him. Other workers took a somewhat safer, though (in a country where strikes are illegal) no less provocative measure to demand their missing wages: they marched out and blockaded a nearby highway.

That Sainty Marine workers have resorted to such actions is perhaps not surprising. The global shipping industry is depressed, plagued by oversupply at a time when slowing trade means demand for new ships is shrinking. Chinese firms that rushed to expand are now gasping. Sainty Marine, which overextended itself by buying another shipbuilder, is veering towards bankruptcy. Withholding wages is a common tactic for Chinese companies in trouble; in Yizheng, the gritty town that is home to Sainty Marine’s shipyard, the local government has published statements admonishing employers for doing so.

Many workers at other hard-hit companies, especially in heavy industry, are facing similar frustrations. The China Labour Bulletin, a watchdog group based in Hong Kong, recorded 2,774 strikes and worker protests nationwide in 2015, double the 1,379 posted in 2014. Police arrested four labour activists last week in the southern province of Guangdong, China’s manufacturing heartland—a sign of the authorities’ unease over the growing protests.

Although the swooning stockmarket and falling currency have captured global attention in recent days, the effect of slowing growth on employment is a more sensitive problem for the government. The Communist Party has always treated markets and, by extension, investors with a certain disregard. Workers are different: the steady improvement in their living standards over the past three decades has helped to legitimise the party’s rule.

How worried should it be? The stresses have made only a small dent so far in overall employment figures, at least in the official telling. The jobless rate crept up to 5.2% at the end of September from 5.1% at the start of last year, according to the latest government survey of 31 big cities. Manufacturing firms are clearly cutting jobs: the employment index in the closely watched Caixin survey of the sector dipped to 47.3 in December—its 26th consecutive month below 50, the threshold marking a contraction. But for services, a bigger share of the economy than manufacturing, Caixin’s employment index hit 51.3 in December, above last year’s low of 50.1 in August. That points to an expansion.

However, the employment data are flattered by two uniquely Chinese shock-absorbers. First, the hukou system of household registration means that some 270m migrant workers who have gone to cities for jobs do not enjoy a permanent right to live in them, let alone collect unemployment insurance there. When they lose their jobs, they are expected to return to their original homes, often in the countryside, and do not count as unemployed. In 2008, at the height of the global financial crisis, tens of millions of migrants simply went back to rural areas, tilling fields or scrabbling for meagre pay in villages. There has been no similar exodus this time, but the countryside remains a safety valve that can help to absorb the unemployed.

Daily dispatches: China's stockmarket mess The other buffer is one of the things hobbling the economy in the first place: state-owned enterprises (SOEs). Private firms are better run and more profitable, but SOEs, with their political backing, have far easier access to finance and dominate a series of restricted sectors, from energy to transport. These privileges carry with them political duties, including an obligation to help maintain social stability by refraining from laying off workers. With the army planning to cut some 300,000 positions as part of a modernisation plan, the government reminded SOEs last month that they are required to reserve 5% of vacancies for demobilised soldiers. In a working paper last year, analysts at the International Monetary Fund noted signs of “increased labour hoarding in overcapacity sectors”, helping to suppress unemployment at the cost of weaker productivity. But even SOEs do not have infinite resources. Loss-making companies with little prospect of turning round their performance are starting to shed workers. Longmay Mining, the largest SOE in the northern province of Heilongjiang, said in September that it would cut up to 100,000 jobs, nearly half its workforce. China’s economy should, in theory, be able to accommodate many of the unemployed. The working-age population peaked in 2012, so all else being equal, there is less competition for jobs. At the same time, the economy’s tilt towards the services sector, which is more labour-intensive than industry, generates jobs even as growth slows. Services probably accounted for more than half of China’s GDP last year for the first time in decades, and their share is growing: in nominal terms, service output grew by 11.6% year-on-year in the first nine months of 2015, whereas manufacturing grew by just 1.2%.