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China Working Age Population Drop Will Push Up Labor Costs, Slow Growth

Growth in China may be slowing due to a drop in the size of the labor force, according to Ma Jiantang, head of the National Bureau of Statistics. Shrinking resources will also contribute to rates of economic expansion that will likely fall several points below the average of the last two decades.

Ma said that expansion would continue to be driven by rural to urban migration, industrialization, and urbanization. A rate of 7 – 8 percent will be enough to keep China stable and on-track.

For the apparel industry, a shrinking workforce means labor will continue to get more expensive. However, increased government spending could ease the shift to higher value-add products, and facilitate expansion in non-coastal provinces.

Growth in China was 7.8% in 2012, down from 8 to 10 percent in the last decade. The government has aimed for 8%, believing it was necessary to control unemployment and maintain social tranquility, but it now seems that it is willing to settle for a lower rate of growth. To achieve that target, it has stepped up spending on fixed assets to 19.3% of GDP.

The working age population declined for the first time last year, in a sign of a potential limit to China’s potential as an exporter and market for foreign goods. The labor squeeze is a direct result of China’s one-child policy, which punished families that had more than one child in an attempt to control the country’s spiraling population.

The policy was supposed to bring prosperity by allowing GDP growth to outstrip population growth, but it is now expected to be a drain on the economy, as fewer productive citizens will need to support higher numbers of retirees. China currently has a labor force of 937 million and is due to drop by 24 million in the next decade. The number of people aged 65 or older will increase by around 66 million.

“Potential economic growth in China will slow to around 6% by 2020,” said Lu Ting, head of Greater China economics at Bank of America.

Leaders are seeking “quality and efficiency” of growth, rather than just shooting for raw numbers. China is going through a leadership change that is expected to bring a more technocratic and comprehensive approach to the economy as it shifts from manufacturing and exporting to services and consumption.

Despite the drop in growth and population China is the global growth leader and is expected to propel other Asian and global economies forward in the coming year.