The Dilemma of an Excessive Labor Force and Personnel Shortages in China

The Pressure of an Excessive Labor Force

Chen Ping Tian, China’s Minister of Labor and Social Security, had the following to say at a lecture at the Brookings Institution in Washington D.C. “There is an employment demand of 24 million every year in the urban areas. In reality 11 million of these are able to secure employment, while the remaining 13 million remain without work. Moreover, in rural areas there is a labor force of 497 million. 200 million of these migrate for work and 180 settle into agricultural work. Even rough calculations put the surplus of the rural labor force at 100 million”.

To create employment, the Chinese government is established 36,000 job placement agencies around the country. These agencies endeavor to eliminate the imbalance between employment demand and supply, and also offer free job training to help laborers laid-off from state-owned enterprises secure new employment.

The problem is, under the investment-heavy economic growth labor-intensive industries are losing their competitiveness, and the advancement of the industry structure is delayed. In other words, an annual increase of 30% in capital investment leads to a rise in the capital-equipment ratio (capital÷labor force), and as a result labor productivity also rises. However, an improvement in labor productivity also exacerbates the unemployment problem. The reason for this is the employment-creating effect is lowered with 1 point of growth in the GDP. A populous country like China must be able to upgrade the industry structure while at the same time maintaining labor-intensive industries such as fabric apparel. This poses a significant dilemma for China.

For Chinese policymakers, instead of economic growth itself the most important goal is the generation of employment from economic growth. In order to absorb the surplus of rural labor power it is important to implement urbanization policies. It is also vital that the service industry be advanced at the same time to alleviate the problem of unemployment in the city areas.

Taking a look across the country, the unemployment problem is most serious in regions where there is a heavy presence of state-owned enterprises. For example, in the northeast and northwest regions that were formerly bases for heavy industries, the unemployment problem is increasingly becoming grave as the equipment of state-owned enterprises ages.

The Hu Jintao and Wen Jiabao administration has laid out regional development policies in areas such as the development of the northeast or the rise of central China. It goes without saying that the goal is to generate employment through industrial development. The greatest destabilizing factor in Chinese society is indeed the problem of unemployment. It has been reported that cases of group “unrest” nationwide in 2005 reached 80,000 (announced by China’s Ministry of Public Security).

The Restrictions of Shortages in Human Resources

On the other hand, many foreign companies investing in China are suffering from shortages in human resources. In particular, for technology-intensive companies in fields such as electronics, efforts to recruit skilled technical personnel are generally not producing satisfactory results. Given this situation, in recent years there have been shortages in skilled technical workers and managers, which has resulted in a trend of increasing personnel costs.

The slowness of Japanese companies (given the company culture they come from) to raise base wages, they are generally not popular among Chinese university students. In western companies, on the other hand, where the principles of promotion based on merit and results are fundamental, base wages are increased much more quickly. The end result is a flow of top-flight human resources from Japanese companies into western companies.

Of course, western companies are not without their own concerns. The turnover rate even in western companies is in an upward trend as the headhunting of highly-skilled workers becomes more aggressive. For example, the turnover rate for system engineers exceeds 20% across the board.

Faced with this situation, companies in China are using various means to secure highly skilled workers. It is most important to secure managers who can bring teams together. Only a few companies offer stock options, which give workers the right to buy company stock, to prevent the turnover of managers. In particular, local Chinese companies are typically small in scale and cannot compete on equal footing with western or Japanese companies in terms of wage standards. These companies are granting stock options and expanding work-related decision-making power to promote retention. It would seem that Japanese companies could learn from these methods.

In addition, it is also important to strengthen the sense of purpose and challenge with regards to work. Research conducted on Chinese companies has revealed that the greatest cause of turnover among white collar workers does not have to do with wages; rather, dissatisfaction with work content is most often cited. Particularly in the case of primarily innovation companies, turnover of highly skilled workers is most common during “trough” periods when a particular project has been finished but a new one has yet to be ordered.

The last factor concerns the evaluation of work. Due to Japanese company culture, evaluations of employees are not generally made public. Oftentimes these matters are left entirely in the hands of top managers. The nature of Chinese society, however, makes it very difficult for Chinese workers to not experience natural resistance to the “secrecy” of Japanese companies. For Chinese youth who dislike the egalitarianism of a planned economy, entering a Japanese economy is to taste “socialism” all over again. In other words, the goal of “thin and long” management (eschewing short-term interests for steady, long-term profit) valued in Japanese company culture is not rooted in China.

In the case of western companies, it has become common practice to announce employee evaluations. If there is dissatisfaction with the evaluation, employees can appeal. This maintains a suitable level of tension between the evaluator and evaluatee, which contributes to better performance. While it may be important for Japanese companies to value their own company culture, it is also necessary that management be modernized to meet the market needs of overseas business.