The third plenary session of the CPC’s 18th Central Committee will open up a new chapter in China’s reform and opening up policy. Focusing on the land system, SOE reforms, social security and other fields, China’s future reform efforts will be directed at the nation’s infrastructural industry, land, labor, capital, and other markets for production factors. The labor factor, as a fundamental component of economic growth, driven by structural readjustment and policy calibration,will become an unlimited source of dividend for China’s future economic growth.

About five years ago, a fundamental structural change occurred in China’s labor market: enterprises cannot find sufficient workers; a shortage of labor force spread across the whole country. Whether China had reached “the Lewis’ turning point” became a hot topic for discussion in China’s academic community. It is an actual reality that the wages for the labor-intensive industries have been rising, reflecting short supplies of labor force. This is due to the structural problem in China’s labor market: only a local shortage in a certain sector. In most other sectors, oversupply is a pervasive problem. The university graduates’ jobless rate is one of the most typical oversupply problem. This local oversupply is the result of the nonalignment between the industrial restructuring and the labor supply structure.

1. Dual structure of labor supply: from the traditional to the new

The traditional dual structure of labor supply refers to the process of the flow of labor force from the rural areas to the urban areas. British economist Arthur Lewis divides the economic sector into two parts: the traditional and the modern. The modern part enjoys both high productivity and wages, and attracts a great quantity of surplus work force. During the process, there will be no rises in wages as the the demand for work force increases in the modern part because there is an oversupply of work force. In other words, over labor-demand in the modern part will not lead to rising prices, and the demand elasticity is nearly zero. Most developing countries have the similar experiences to a more or less degree.

On the other hand, compared with migrant workers’ rising wages and considering the inflation and policy factors, the real wages for  university graduates have not seen a considerable rise. The graduates’ employment situation reflects the current local oversupply in China’s labor market. Therefore, migrant workers and university graduates constitute the new dual structure in China’s labor market. First, the expansive supply of graduates labor force reveals the deficiencies in China’s education system. On the one hand the supply is not driven by the market; and on the other hand, graduates’ personal expectations are not consistent with the demand on the job market. Second, the underlying reason is that China’s industrial restructuring moves slowly. The knowledge and skill levels of the labor force moves far beyond the accommodating capacity of the current industrial structure.

2.The prospect of industrial restructuring and the new unlimited supplies of labor

The high-level labor supply of university graduates needs to be sustained by a modern industry. The under-demand for high-level supply results in oversupply. It is foreseeable that with the demand for high-level labor force grows as the result of the deepening industrial restructuring, the labor market’s accommodating capacity to graduates will also increase. The excessive work force and the would-be graduates will be an unlimited source of labor force. China will see another population dividend.
China’s graduates are now becoming ordinary work force. With greater efforts in industrial restructuring, industrial technology upgrading,  and the increasing universality of colleague education, graduates and talent with good education and high skills will be the major source of labor force in China’s labor market.

3. Birth control reform and potential sources of labor

The current birth control policy constrains the supply of labor force. On the other hand, the room for birth control reform provides a great dividend for future labor supply. The size and scale of this dividend may be bigger than that of the “baby boom”. Globally speaking, there is no other country except China that has this kind of dividend. If necessary, the Chinese government can unlock this new source of labor force through proper policy adjustment. The upcoming third plenum of the 18th CPC Central Committee might just be a juncture to initiate the policy adjustment.

Therefore, when the traditional dual structure has transformed into the new dual structure and with the upgrading of industrial structure, a new source of labor force will gradually take shape. Unlike “extensive supply”, “intensive supply” will not increase on a large scale as the demand for labor grows, ensuring that it will remain an unlimited source of work force. Birth control policy and policy elasticity will bring about a sustainable source of labor. Observing from a new perspective, we may find that there is a huge dividend in China’s market of labor force.

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