LABOR SHORTAGE: Recruiters of short-handed textile factories in Lujiang Village, south China's Guangdong Province, line the street with employment information boards on February 18 (LU HANXIN)

Following the end of Chinese Lunar New Year holiday on February 15, factories in southeastern areas of China have reported shortages of workers. The phenomenon has become increasingly common over the past years, but official confirmation in early January of the first absolute decrease in the working-age population in three decades has triggered widespread concern about the country's growth potential.

Figures released by the National Bureau of Statistics (NBS) on January 18 showed the number of laborers between the ages of 15 and 59 dropped by 3.45 million to 937.27 million in 2012. The working-age population accounted for 69.2 percent of the country's total population in the year, down 0.6 percentage points from 2011.

It is the first time the country has recorded an absolute drop in the working-age population in "a considerable period of time," said NBS head Ma Jiantang at a press conference. Mainly due to the falling fertility rate, he expected the country's labor pool would shrink "steadily and gradually" over a long period or "at least until 2030."

Scholars warn that China's demographic dividend, or "population bonus" as some economists call it, is disappearing, as the economy is reaching its Lewis turning point, the moment in development when the surplus pool of inexpensive labor enters a deficit and further capital accumulation increases wages.

Impacts

The demographic dividend refers to an increase in the rate of economic growth due to an increased proportion of working-age people. It is a window of opportunity in the development of a society or a nation that opens as fertility rates just begin to decline, with faster rates of economic growth and human development becoming possible when combined with effective policies and markets.

Cai Fang, a demographer and Director of the Institute of Population and Labor Economics of the Chinese Academy of Social Sciences, said that there are two factors to judge whether a country has the demographic dividend—the labor force volume and the dependency ratio. The latter is an age-population ratio of those not in the labor force and those in the labor force.

China enjoyed a demographic dividend until the ratio of productive population to dependent population began to reverse, Cai said. A report released by the China Development Research Foundation predicts that China's labor force will decrease by more than 29 million from 2010 to 2020.

"Simultaneously, the dependency ratio will grow and so China's demographic dividend will disappear," Cai said.

According to Cai, the potential growth rate, a theoretical measure, is decided by the input of the labor force, capital and improved production rates. "The disappearing demographic dividend will significantly affect these three factors," he said.

Cai warned that China's potential growth rate would fall to 7.2 percent between 2011 and 2015 and 6.1 percent in the next five-year period, compared with 10.5 percent in 2006-10.

Disappearance of the demographic dividend will not only cut the labor force but also slow the growth of capital investment.

Cai explained that in the past China had a low dependency ratio and labor burden, so the country could maintain a high savings rate and high investment, while the situation in the future will be to the contrary. "The labor shortage will make the returns on capital investment decrease progressively, which will make capital investment drop," he said.

Tao Dong, Credit Suisse's chief regional economist for Asia, echoed Cai. "When the demographic dividend disappears, the increase of worker's salaries will move the factories living on cheap labor to some other countries and regions and China's role as the world's factory is going to change. This will impose a great impact on China's economy," Tao said.

In the past three decades, Tao said, China's economic development has been mainly based on massive low-cost labor, which is going to shrink as China approaches the Lewis turning point. "The upgrading of the industrial structure is a must for the future economic growth. The quality of workers should be upgraded as well to keep up with modern requirements. The government should invest more in vocational training," he suggested.