China’s Official Unemployment Rate: An Unusual Outlier or a Lie?

Want to predict a country’s level of unemployment? Take a look at its per capita gross domestic product (GDP). As a basic economic principle, unemployment rates should be positively correlated with per capita GDP. However, the official unemployment rate reported by China does not match its per capita GDP at all. No matter how the Chinese per capita GDP changes, the official unemployment rate in China always appears abnormally low and suspiciously stable, as if it is somehow avoiding the same fluctuations that are typical of per capita GDP measures.

Researchers Shuaizhang Feng, Yingyao Hu, and Robert Moffitt think that the current household survey that China uses for calculating unemployment rates is not representative. To determine its actual unemployment rate, these researchers set out to calculate a more accurate read on unemployment in China.

In their new paper Long Run Trends in Unemployment and Labor Force Participation in China, the researchers calculate an alternative unemployment rate for China from 1988 to 2009 using a more nationally representative household survey in China, the Urban Household Survey, which collects data from non-agricultural households and more accurately describes the conditions and standards of living of these households. As a result, this alternative unemployment rate is positively correlated with China’s per capita GDP and reflects the changing economic development periods in China.

During this time period, China experienced great social and cultural change, including massive increases in urban populations, entrance into the World Trade Organization (WTO), and periods of layoffs due to the dismantling of state owned enterprises (SOEs). Unemployment and labor force participation trends correspond with three periods of great change in China:

• From 1988 to 1995, the Chinese labor market was characterized by an economy dominated by SOEs. During this period, the unemployment rate was low, with an average of 3.9 percent, as newly calculated by Feng, Hu, and Moffitt. This is higher than China’s official average of 2.5 percent.
• From 1995 to 2002, SOEs transitioned from employing 60 percent of China’s workforce in 1995 to 30 percent in 2002. SOE layoffs led to rural populations migrating to cities in search of jobs. During this time, the unemployment rate rose rapidly, about one percentage point each year. However, China’s official unemployment rate rose only three to four percent, reflecting none of the workforce volatility.
• The third period began after unemployment peaked in 2003. In 2001, China became a WTO country, which helped improve labor demand. However, unemployment still remained high, averaging 10.9 percent from 2002 to 2009, as calculated by Feng, Hu, and Moffitt. Yet, China’s reported official average lagged far behind at an average of only 4.2 percent.

Differences between the officially reported rates for these time periods and the authors’ estimated unemployment rates are reflected in the chart below:

The researchers found that unemployment rates also differed by demographic group and by region. Older, educated men faced higher unemployment rates. Some regions also struggled more than others during the economic and structural transitions. Regions with the greatest number of SOE layoffs, such as Northeast, South Central, and Southwest China, saw the largest increases in their unemployment rates between 1995 and 2002. For example, 42 percent of total SOE employment was laid off in the Northeast region in 1995.

Feng, Hu, and Moffitt’s research is an important first step in better understanding the Chinese labor market over this recent period of economic transformations and macroeconomic developments. Further investigation will provide a more complete picture of China’s unemployment fluctuations and how transformative economic developments impact employment in a developing country of China’s size and stature.

Article Source: Feng, Shuaizhang, Yingyao Hu, and Robert Moffitt. “Long Run Trends in Unemployment and Labor Force Participation in China,” National Bureau of Economic Research Working Papers, 2015.

Featured Photo: cc/(Robert S. Donovan)