News in Charts: China’s hidden unemployment problem

We have long doubted China’s official GDP data. Now we turn our attention to China’s labour market data. Over the past ten years or so, the headline unemployment rate has fluctuated between 4.0% and 4.3%. We find it implausible that the degree of slack in China’s labour market can appear so rigid, at a time when the pace of economic growth in China has varied enormously. Here we introduce our own, top-down measure of the amount of spare capacity in China’s labour market. Our China Underemployment Indicator (or CUI) suggests that the degree of underemployment in China may have trebled over the past three years. It is this surge in hidden unemployment that explains why China’s authorities are now under immense pressure to re-start the old growth engines, and ‘double-down’.

For the best part of two years now, we have placed little weight on China’s official GDP statistics, believing that our own China Momentum Indicator (or CMI) provides a better measure of the pace of economic growth in the world’s most populous nation. As we show in our first chart, the CMI began to diverge substantially from official NBS estimates around mid-2013. By the end of last year, it suggested that growth had slowed to little more than 2% per annum.

We are now becoming more convinced that economic growth in China bottomed out earlier this year. The prices of commodities on which China’s economy depends have rallied somewhat, and our CMI has staged a modest recovery. Indeed, the central scenario in our latest Global Economic and Markets Outlook, saw China’s policymakers throw in the towel on rebalancing, and ‘double-down’.

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Here, we introduce our own estimate of the amount of spare capacity in China’s labour market – the China Underemployment Indicator (or CUI). In contrast to the official unemployment rate, which has barely budged for ten years or more, the CUI suggests the degree of slack has surged in recent years. China has a substantial hidden unemployment problem, in our view, and that explains why the authorities have come under so much pressure to re-start the old growth engines.

Officially, unemployment stable at 4.0% – 4.3%

In the mid-2000s, according to our CMI, China was enjoying double-digit growth. Growth then dipped as the financial crisis hit, only to recover in the aftermath of a 4 trillion yuan infrastructure stimulus package. It has slowed substantially since 2010, taking China into hard landing territory. And yet, over this same twelve-year period, the registered urban unemployment rate has varied between 4.0% and 4.3%. We find it quite literally incredible that unemployment should be so unresponsive to such dramatic changes in economic growth.

We have put together our own alternative measure of the degree of slack in China’s labour market, which we label the China Underemployment Indicator (or CUI). It will shortly be added to our suite of proprietary indicators. This is Fathom’s estimate of the true rate of unemployment, including hidden unemployment. It has been calculated by looking at the employment shortfall implied by using our own CMI in place of China’s official GDP statistics, taking published estimates of labour productivity at face value. Relative to the official unemployment data, the 10.1% reading for 2015 records a shortfall in full-time, full-capacity urban jobs, equivalent to around 6% of the urban labour force. The CUI for 2016 is a forecast, based on our forecast for the CMI through this year, and for productivity growth.

As we show in the table and chart below shows, the CUI suggests that true unemployment in China has approximately trebled over the past three years as economic growth in China slowed from around 8% to just over 2%.

Job insecurity is a key driver of social instability – something that China’s authorities need to avoid at all costs. With the CUI lying some way north of the official unemployment rate, that adds to pressure on the Chinese policymakers to ‘double-down’.

 Extent of underemployment mirrored in poor productivity data

Productivity growth across China’s economy as has been on a downward trend since 2007. In 2015 it reached a 16-year low of 6.6%.

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The weakness in productivity growth is perhaps surprising given the ongoing transition out of low productivity primary sectors, into higher productivity secondary and tertiary sectors over this period. However, productivity growth in the tertiary sector has been particularly weak. Employment growth has picked up sharply in recent years, while output growth has barely budged.

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The jump in tertiary sector employment is partly down to the relaxation of the household registration system, or hukou, which has led to a significant shift in the compositon of the labour market from rural to urban jobs during the past decade. Urban employment surpassed rural for the first time in 2014. Data released by the National Bureau of Statistics, shown in the pie chart below, demonstrates that close to one half of all migrants find a job in the services industry.

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At first, increased momentum towards the tertiary sector may be seen as a step towards ‘good’ rebalancing. However, owing to the weakness in the productivity growth within this sector, it may instead be the case that firms are hoarding labour while demand is weak, meaning the employed urban labour force is running increasingly far below full capacity – evidence of underemployment. Yet again, this provides another motive for Chinese policymakers to return to their old ways by kick-starting the economy with another investment and credit-led splurge. This is not a sustainable solution as it will aggravate China’s long-standing problems of excess capacity and non-performing loans. However, it can be used to boost growth and productivity, for a year or two.