Exactly how serious is youth unemployment in China?

The unemployment situation has been a hot focus for China’s policymakers and investors alike, so much as that our in-depth data research on youth unemployment has quickly become the second most popular article in the history of this newsletter to date.

Today, we are presenting another article that does an even better job of explaining the context for this crucial issue. This fascinating article is written by Mr. Wang Mingyuan a researcher at the Reform and Development Institute of Beijing, and has been widely shared among investment and policymaking circles in China. It addressed two crucial questions regarding China’s unemployment situation: how many young people are actually unemployed, and how should China deal with it.

Key highlights

1. Employment is the primary goal of economic development, and it is also the best indicator of the genuine results of economic development. GDP growth that cannot effectively solve the employment problem cannot be considered as effective growth.

2. This year, there will be over 10 million graduates who cannot find jobs.

3. By a conservative estimate, the absolute number of unemployed youths (aged 16-40) has increased by approximately 25-30 million since before the pandemic.

4. The problem of employment will not ease on its own and will only become more severe. If it is not properly addressed, by 2028, society will have accumulated around 50 million unemployed youth.

5. Neither “进体制 employment by the public sector” nor “乡村振兴 rural revitalization” can truly solve the problem of unemployment. Instead, we should start by improving the development environment for the private economy, digital economy, and service industry.

6. It is necessary to thoroughly improve the market environment and reignite the dreams of young people to start their own businesses.

Our full translation of the article:

到底有多少青年人失业 Exactly how many young people are unemployed?

By Wang Mingyuan

1. The three unemployment peaks in the history of the PRC

Since the founding of the PRC, there have been three unemployment peaks.

The first peak occurred between 1973-1979, when a large number of educated youth returned to cities, causing an employment crisis.

At that time, there were over 15 million unemployed urban residents waiting to be resettled, in addition to about 5 million unemployed graduates, demobilized soldiers, and other youths, resulting in over 20 million unemployed young people.

This accounted for about 17% of the urban labor force (115 million) or more than 30% of the young labor force.

The large number of unemployed youth was due to the interruption of education and recruitment during the Cultural Revolution. In essence, it was caused by fundamental problems such as "the Three Major Transformations" and the establishment of a planned economy, which indiscriminately eliminated private enterprises, unilaterally developed a socialist public ownership economy, and suppressed the development of the service industry.

In the face of severe employment situation, the new leaders of the time, such as Deng Xiaoping and Hu Yaobang, proposed the idea of "three doors" to solve the employment problem.

That is, in addition to expanding the recruitment scale of state-owned enterprises, it is more important to allow the establishment of collective and private individual economies to solve the unemployment problem.

After adjustment, by around 1981, over 22 million new job positions were added nationwide, and the employment problem of urban youth was solved. China's private economy also emerged and gradually grew into an important part of the economy.

The second time was the “下岗潮 layoff wave" brought about by the reform of state-owned enterprises from 1998 to 2001.

After entering the 1990s, state-owned enterprises began to suffer massive losses. In 1998, over 55% of national state-owned enterprises are unprofitable, with an overall negative profit of 7.2 billion yuan, setting a historic low.

To address this, the new administration at the time launched a three-year plan to rescue state-owned enterprises, with the main direction of "encouraging mergers and acquisitions, regulating bankruptcy, laying off employees, and increasing efficiency."

During this period, more than 26 million state-owned enterprise employees were laid off, accounting for about one-fourth of the total number of state-owned enterprise employees at that time.

In addition, over 10 million people were laid off from collectively-owned enterprises, and the total number of urban laid-off workers exceeded 36 million. At that time, the total urban labor force was about 230 million, and the unemployed population accounted for 15.6% of the total labor force.

Faced with the severe laid-off problem, the government actively supported re-employment while encouraging the development of the private economy. During this period, private enterprises created about 50 million job opportunities, which not only helped laid-off workers to find new jobs, but also absorbed many rural migrant workers who came to cities for work.

Right now is the third time. Since 2020, the employment problem has been caused by a combination of factors including the sudden change in the international economic environment and the unprecedented pandemic. A detailed calculation of the scale of unemployment will be provided later.

Compared with the previous two employment crises, this one has two special features:

Firstly, this is the first employment crisis that has occurred after the general urbanization has been reached in China. The current urban employment population in China is nearly six times that of 1978 and nearly three times that of 1998. Therefore, even a slight increase in the unemployment rate will lead to a significant number of unemployed people and more serious social problems than before.

Secondly, the number of urban employed people in China decreased from 467.73 million in 2021 to 459.31 million last year, a decrease of 8.42 million, which is the first decrease since 1962.

This indicates that China's employment problem has reached a very prominent moment.

Overall, China experiences an employment crisis every 20 years or so. Although we are currently facing some problems, we should also recognize that this is a result of the inherent laws of economic operation.

After a development cycle, the shortcomings of the economic growth mechanism and the comprehensive domestic and international environment will become apparent, leading to significant economic fluctuations and subsequently affecting employment.

Each unemployment problem serves as a warning to past economic policies and development paths. Only by taking a serious approach to current issues and effectively solving problems through a reformist attitude can we overcome difficulties.

2. Flaws and shortcomings in China's unemployment statistics

Since 2018, the government work report has for the first time changed "registered urban unemployment rate" to "surveyed unemployment rate", which is a huge progress in China's unemployment statistics.

However, the surveyed unemployment rate also has distortions.

For example, according to data from the National Bureau of Statistics, the national urban surveyed unemployment rate in April 2023 was only 5.1%, which is 0.1 percentage points lower than the end of 2019 before the epidemic.

This is clearly different from everyone's actual experience: in the more than three years since the epidemic, social employment has not improved but has greatly deteriorated.

Why is there a distortion in the unemployment rate statistics? I think there are several reasons:

First of all, China has set the standard for "employment" too low.

According to the International Labour Organization, working for at least 10 hours per week is considered employment. The standard in the United States is 15 hours, and in France it is 20 hours. However, in China, it is only one hour, which is significantly lower than the international standard.

The minimum hourly wage in China is around 21 yuan. If someone only works for one hour per week, it means they earn only 3 yuan per day, which is far below the United Nations' minimum daily living expenses of 1.9 US dollars. Clearly, this is not considered effective employment that can solve daily life problems.

In contrast, according to the minimum employment standard in the United States, the daily income of workers can reach about 20 US dollars (most states' hourly minimum wage is around 10 US dollars), which can cover basic food expenses without any problem. This is what effective employment should look like.

Secondly, although the urban unemployment survey has started to include rural residents, due to the fact that migrant workers often choose to return home because they cannot afford the high cost of living in cities after becoming unemployed, it is difficult for the unemployment survey to sample unemployed migrant workers, and their unemployment will not be reflected in the unemployment rate.

Last year, the number of migrant workers who entered the city in China was still as high as 172 million, and the actual estimated number of those who returned home due to unemployment is around 12 million, which is a gray area in unemployment statistics.

Thirdly, it is estimated that there are as many as 200 million flexible employees in China [Baiguan: these include food delivery people, Didi drivers, etc.], accounting for about 40% of the urban employed population. How to accurately account for their employment status is also a very big challenge.

For this group of flexible employees, the participation rate of social security programs is less than 20% (in Guangdong, there are more than 20 million flexible employees, and the number of participants in social security is only more than 3.2 million; in Beijing, there are more than 4 million flexible employees, and the number of participants in social security is only 650,000). It is also difficult to observe their actual employment situation through indicators such as unemployment insurance and unemployment registration.

Therefore, we cannot simply rely on official statistical data to measure the actual unemployment problem. We also need to calculate China's actual unemployment level from other statistical clues in order to truly understand the society's suffering and the confusion of young people.

On the other hand, many media outlets now use the 20.4% unemployment rate for 16-24-year-olds announced by the National Bureau of Statistics in May as the overall youth unemployment rate, which is also unreasonable. In April, there were about 32.2 million people aged 16-24 in China participating in the labor market, with approximately 6.56 million unemployed, accounting for 20.4% of the total. Due to the special population characteristics of this age group (especially 16-20-year-olds), even if they do not attend school, their labor force participation rate is not high, and it has been maintained at above 18% for a long time. Therefore, in recent years, the unemployment rate for this age group has not changed much, only increasing by more than one million unemployed people compared to 2018, and has not reflected the actual employment difficulties faced by young people. We also need to comprehensively examine the issue of youth employment from a more comprehensive perspective.

3. Calculating the Actual Unemployment Rate for Young People (Aged 16-40)

3.1 How many recent graduates can't find jobs?

Recent graduates lack work experience and savings, making them less capable of withstanding unemployment. Therefore, the difficulty for recent graduates to find employment is the most pressing issue among all employment problems and is the "number one issue" in China's employment problem.

So, how many recent graduates can't find jobs specifically?

The government has not provided any official statistics on this issue, and the economists lack research. However, we can make some calculations based on the difference between the number of graduates from medium or higher education each year and the number of newly added job positions.

[Paragraphs redacted]

Before 2013, China's economy was in a stage of rapid development, and overall, the number of newly employed people exceeded the total number of graduates. For example, in 2007, the number of new employment positions in China was 12.04 million, while the total number of graduates that year was 8.29 million. This means that not only were the needs of all graduates met, but also a large number of surplus rural laborers were absorbed. Between 2013 and 2019, both the scale of graduates and the number of new employment positions have increased, but the former has grown faster. The number of new positions and the scale of graduates are both around 13 million, and the supply and demand in the initial employment market are roughly balanced, which is a relatively ideal state.

However, after the outbreak of the epidemic, the employment situation underwent a fundamental change.

On the one hand, the dramatic decrease in the number of new jobs created each year has resulted in a reduction of 1.48 million new jobs in 2022 compared to 2019, which was only equivalent to the numbers in 2010. On the other hand, due to the expansion of enrollment in the past, the number of graduates from vocational and higher education institutions has surged, and the number of overseas students returning to China has also increased rapidly. Last year, the number of these three types of graduates reached 16.55 million, which is twice the number in 2007. As a result, the job market is facing a severe shortage of positions.

Roughly estimated, about 2 million new graduates in 2020 and 2021 are unable to find jobs each year, accounting for about 15% of the total number of graduates. The number of unemployed graduates in the 2022 cohort has risen to over 4 million, and has climbed to over 5 million this year, accounting for about 30% of the total number, which is consistent with the actual observation of most people.

Considering the economic situation in 2020 and 2021 was actually okay, so although the employment of graduates from these two years was delayed, the vast majority eventually could have found jobs. However, the economy has been declining in the past year, so most of the unemployed students from the 2022 cohort and the shortfall in the 2023 cohort may still be without employment. The number of unemployed graduates from these four years should be around 10 million.

During the 2010s, when the employment situation was more relaxed, fresh graduates preferred to choose their careers in the job market, and the number of candidates for postgraduate entrance exams, civil servant exams, and teacher qualification exams grew slowly. For example, from 2005 to 2016, the number of postgraduate candidates only increased by an average of 50,000 per year, while from 2019 to 2023, it increased by nearly 370,000 per year.

There has also been a significant increase in the number of applicants for other exams. Over the past three years of the pandemic, the number of applicants for the national civil service exam has increased by 1.21 million (from 1.29 million to 2.5 million); the number of applicants for the teacher qualification exam has increased by 2.64 million (from 8.8 million to 11.44 million, with some stages open to associate degree holders); and the number of applicants for provincial exams has also surged to over 5 million.

All of these indicate that the job market's gap in positions has expanded by millions in recent years, forcing young people to participate in various competitive selection exams to find a way out.

Number of applicants for post-graduate studies from 2004 - 2022, Source: Ministry of Education

3.2 How many employed people fall into unemployment?

In addition to the problem of job-seeking difficulties for first-time job seekers, the phenomenon of unemployment has become increasingly prominent in recent years.

Firstly, the average number of employees in A-share listed companies has shrunk by 11.9% compared to before the epidemic.

A-share listed companies in China disclose their number of employees every year. Before the epidemic, the average number of employees in A-share listed companies fluctuated between 6,500 and 6,600. In 2018, the average number was 6,560, but by 2022 this number had dropped to 5,775, a decrease of 11.9%, with the most significant decline occurring in the fiscal years 2021 and 2022.

Some of the technology companies we are most familiar with (although listed on US or Hong Kong stock exchanges) have similar numbers of layoffs. For example, the layoff rates of Tencent, Alibaba, Meituan, and Baidu were all around 9%. Especially in the travel, real estate, and education industries, the layoffs are even more severe. For example, Ctrip's layoff rate reached 27.3%. In addition, among the 57 A-share listed real estate companies, only 8 had an increase in total employees, and 28 had layoffs exceeding 20%, with the highest layoff rate reaching 73%.

Considering the profitability of listed companies is often better than that of similar unlisted companies, therefore, the layoff rate of other companies should be even higher.

Secondly, the cancellation rate of small and medium-sized enterprises last year was about 10%.

Last year, 215,000 small and medium-sized enterprises in Shanghai were de-registered, accounting for 19.9% of the total number of enterprises in the city, which was more than three times the 51,000 de-registrations in 2018. In Guangzhou, 94,000 small and micro enterprises were de-registered, accounting for 13% of the total number of enterprises in the city, which was nearly 2.4 times the 28,000 de-registrations in 2018. Overall, the de-registration rate of small and medium-sized enterprises nationwide should be at least around 10%, and the corresponding employment capacity will also decrease by around 10%.

Recruiting for small and medium-sized enterprises relies heavily on job search websites. According to the active corporate user count on BOSS Zhipin, in the first quarter of 2022, there were 4.1 million companies. By the end of the year, it decreased to 3.6 million, a decrease of 12.2%, the largest decline ever. [Baiguan: As we explained in a previous post, this perspective may overestimate the degree of de-registration since BOSS Zhipin went through a security review in most of 2022, during which they could not take in new users.] This also indicates that approximately 10% of companies have deregistered, ceased operations, or suspended hiring.

3.3 Since the outbreak of the epidemic, the overall scale of youth unemployment in China can be estimated as follows:

Based on the research above, there are approximately 15 million vocational school and university graduates who have not found employment in the past three years. At the same time, around 10% of companies have laid off employees, which includes approximately 25 million young people aged between 16-40 years old. In addition, according to research conducted by Professor Lu Feng of Peking University, there have been at least 23 million migrant workers who have returned to their hometowns due to unemployment in the past three years. If 60% of them are considered as young people, then this group also accounts for around 14 million young people.

So overall, since Covid, there have been approximately 54 million young people who have lost their jobs.

However, this is only an estimate of the employment mobility status, which means it is difficult to accurately calculate the final scale of unemployment. Among these unemployed individuals, a considerable portion may have found new jobs or achieved re-employment through flexible forms of employment (for example, the number of active Didi drivers has increased by over 12 million in the past three years, and the number of food delivery riders, express deliverymen, and couriers has increased by approximately 8 million per month).

Considering that the employment of young people is concentrated in emerging industries of the 21st century, such as the internet, education, real estate, and finance, which have been most affected in the past three years, the above inference should not be too far-fetched.

3.4 The employment problem will become more severe in the next few years.

So, is the problem of youth unemployment temporary and will it be naturally resolved in a couple of years? From various data, the employment problem in China will be more serious in the future, and there are three reasons.