The (Old) People’s Republic: Confronting Demographic Decline

The People’s Republic of China isn’t shrinking, yet. But it is certainly getting older, which presents a significant challenge to the country’s continued long-term economic growth. While the Communist Party of China is attempting to ensure growth through a few demographic policy instruments, some (including Z Geography) think that these are too weak and too late. Z Geography believes that the Communist Party is wary of stronger pro-natal policies because of the potential for demographic to outstrip economic growth, a future which could threaten the party’s singular hold over the country.

Z Geography stumbled upon a BBC article reporting that the PRC’s working age population decreased by over 2 million last year (uncited, of course). While statistics are always problematic (numbers have a nasty habit of differing based on source and definition), the statement in BBC appears sound. Unlike the BBC, Z Geography will give you sources. The U.S. Census Bureau’s International Data Base estimates that the working age population is shrinking.

The working age population is legally defined (in most cases), which provides effective bounding boxes for statistical estimates (of course,child labor isn’t captured in these statistics an important consideration for China). Article 15 of The PRC Labor Law prohibits employers from recruiting minors under the age of 16 (see the U.S. Library of Congress), with a few exceptions. As Bloomberg reports the current compulsory retirement age in China is 60 for males and 50 for females.

Utilizing 1-year age groups for males and females in China, Z Geography discovered that the PRC’s labor pool (16-59 for males, 16-49 for females) shrank for the first time in 2013. In 2012, 830 million (62% of the total population) were in these broad groups and available for (legal) economic employment. In 2013, their number fell to 826 million (61%). This population decline of about 4 million wasn’t due to a natural disaster, pandemic disease, or war – it was simple aging. Between those two years the population considered “elderly dependent” (60+ among males, 50+ among females) rose from 261 million to 274 million (an increase from 19% to 20%).

The Census population estimates over the long term expects a continuation of this trend. By 2025, the labor pool will have decreased by over 75 million persons to 817 million (53% of the population) and 403 million elderly dependents represent 28% of the population. One root of the problem lies in the low fertility rate of China’s women (thanks to the One Child Policy), tallying these ratios only 19% of the population is under the age of 16 (in other words, 19% of the population represents the country’s future workforce). In 2040, Census estimates 648 million workers (47%), 515 million elderly dependents (40%), 194 million youthful dependents (13%).

For comparative purposes, the U.S. in 2040 is expected to have 231 million workers (aged 15-64, 60% of the population) and 147 million elderly and youthful dependents.

More succinctly: by 2040, the number of retirees in China will be nearing the number of potentially active workers. While many of these retirees may have access to retirement benefits (presumably) it remains to be seen whether these benefits are sufficient to maintain quality of life for decades. For those without substantial benefits, or no benefits at all, they will have to rely on children or, more likely considering the one child policy, the government.

Recent news highlights at least two policy measures aimed at averting the potential economic consequences of having an overburdened workforce. The first, and somewhat earlier, concerns the infamous One Child Policy that stipulated below replacement-level family sizes. With few exceptions (minorities, rural inhabitants having a daughter, couples who are both only children) the law prohibited families from having more than one child. While the policy succeeded in slowing population growth it is one of the main causes of the declining labor force (another being emigration). The Times of India (via AFP) reported earlier in January 2014 that one province in China is relaxing the policy somewhat. The loosening of the policy, agreed to by Communist leaders in November 2013 and rubber stamped by the legislature in December, allows couples where at least one parent is an only child to have two children.

The Bloomberg article cited above highlights another policy approach, raising the retirement age.  As one analyst noted, this policy move provides a short term salve to the long term population shift predicted by relaxing the one child policy. The Party hopes that raising the retirement age will keep men and women in the workforce longer, increasing the labor pool in the short term, while more children are born. Of course, the labor pool won’t increase due to higher births for 16 years (when these babies enter the work force).

While Z Geography appreciates the complex approach taken by the Communist Party in stalling a potential economic crisis precipitated by demographics, I feel that the relaxation of the One Child Policy might not go far enough. The Party is presumably worried about relaxing the policy too much, thereby encouraging a baby boom that challenges social and political stability, if the economy can’t provide gainful employment for those youth. However, by taking a far more conservative approach (instead of scrapping the law altogether) the Party risks long term economic security, and its political legitimacy. If firms have to raise wages in order to compete for a smaller number of laborers, they may decide to relocate altogether. In fact, Bloomberg observes that Samsung has already decided to relocate to Vietnam (though Bloomberg doesn’t explicitly attribute that decision to rising labor costs). Steering a middle path is more likely an indication of the Party’s desire to hold on to power, rather than decisively correct the problem.

With enough cash, time may be on the Party’s side. As the BBC points out, another potential solution is increasing productivity of the labor pool. Increasing productivity with not only lower labor costs but make the lower birth rate easier to digest economically. However, the long term demographic question than becomes – as Japan has learned – how do families (and the state) care for an increasingly elderly population especially when the country’s population starts to decline (as China’s is expected to do by the mid-2020s)?

A less expensive and quicker way to increase the labor pool and birth rate is, as you may have guessed, immigration.

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