As Edward alluded in his introductory post for 2008 many of the main contributors of this blog were hard at work monitoring the ongoing events in global financial markets. We still are. However, we are also social scientists and this space is still a very important place in our minds where especially the scientific progress within the realm of demographic research commands a center role. As such, I am going to unilaterally venture a new tradition here at DM and one which I hope that I will be able to carry forward. In this way, the authors of this blog do in fact get a steady stream of links and references to research conducted in the sphere of economics and demographics. It is only because of the well-known shortage of time that these rarely reach the front pages here. This, I hope, is now going to permanently change. So, without further ado let us commence.
In this first edition of the research digest I am going to present a couple of papers which investigates a number of the hypotheses we are working with.
The Labour Supply of Older Americans - Alicia H. Munnell and Steven A. Sass (2007) Center of Retirement Research Boston College.
This paper summarizes what is known about the labor supply of older men defined as those 55 and over. The topic is of great interest because older individuals will comprise a much greater portion of the population, so their labor supply will have a significant impact on national output, tax revenues, and the cost of means-tested programs. Most importantly, a greater proportion of older individuals will need to work than do at present, because retirement income systems are contracting and working longer is the only way for most to ensure financial security in their old age. The focus is on men, because women’s work patterns reflect the increasing participation of cohorts over time as well as the factors that affect retirement behavior.
What is particularly interesting in this paper is of course whether the factors identified in the study represent factors that can be extrapolated to other countries and thus whether we can identify some universal points on the labour supply of ageing workers. As always, cultural differences may exert a considerable influence here and in a scientific light the issue of causality might be particularly difficult because it is difficult to see where culture begins and where it ends. Not surprisingly, the paper's conclusion is situated in the context of US regulatory context and here the paper notes that while the partipation of older men (say 55-64) has risen since the mid 1990s it is unlikely to grow at the same pace. The authors field a projection that by 2030 about 75% of men aged 55-64 will be in the labour force up from 70% today but, as the authors note, not near the 80% in the 1960s and 1970s where social security for the elder was not available to same degree. More importantly though in the context of the global forces of ageing the following excerpt describing the 'nature' of the elderlies' labour supply is quite important ...
Even today, with the elimination of the earnings test after the Normal Retirement Age and an actuarially fair Delayed Retirement Credit, the majority of workers continue to claim their benefits as soon as they become available. Another important factor is the increased mobility of older workers, which exposes them to the vagaries of the labor market. Extended and difficult job searches as well as the prospect of low wages may cause many older workers to simply give up. Moreover, older people have a strong preference for part-time work and flexible schedules, which to date employers have been reluctant to accommodate. Finally, 15 percent to 20 percent of older people are probably not healthy enough to work beyond age 62.
Now, the detail highlighted in bold is by no means unsignificant. In order to show this we need to remember that the US population pyramid remains one of the exceptions to the rule of rapid ageing amongst the developed economies. If we thus go to Japan the paper by Munnell and Sass seems to provide some kind of support for the hypotheis that one of the key tendenies of falling wages in a Japanese context quite simply is that as the workforce ages and once we get to the situation Japan is in with a median age of 42-43 (and counting) the ratio of part time jobs to regular jobs will increase thus in itself surpressing the aggregate income level.
Population ageing, Labour Demand and the Structure of Wages - Margarita Sapozhnikov and Robert K. Triest (2007) Center for Retirement Research at Boston College
One consequence of demographic change is substantial shifts in the age distribution of the working age population. As the baby boom generation ages, the usual historical pat tern of
there being a high ratio of younger workers relative to older workers is increasingly being
replaced by a pattern of there being roughly equal percentages of workers of different ages. One might expect that the increasing relative supply of older workers would lower the wage premium paid for older, more experienced workers. This paper provides strong empirical support for this hypothesis. Econometric estimates imply that the size of one’s birth cohort affects wages throughout one’s working life, with members of relatively large cohorts (at all stages of their careers) earning a significantly lower wage than members of smaller cohorts. The cohort size effect is of approximately the same magnitude for men and for women. Our results suggest that cohort size effects are quantitatively important and should be incorporated into public policy analyses.
Once again we get some interesting indications as to what happens to the aggregate wage structure of society as the ratio of older experienced workers to young workers climb. As the paper emphasises this is all about relative cohort sizes and how this affect macroeconomic variables. As with the paper above the this paper also enters the discussion of the marginal utility derived from working in old age relative to retiring where society obviously has a distinct interest in nuturing the former.
These results imply that older workers will face increasingly unfavorable relative labor market conditions as their ranks become crowded by the baby boom generation in the near future.
Is There Really a Retirment Savings Crisis? - Alicia H. Munnell, Anthony Webb, and Francesca Golub-Sass (2007) Center for Retirement Research at Boston College
The National Retirement Risk Index (NRRI) has shown that even if households work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes, nearly 45 percent will be ‘at risk’ of being unable to maintain their standard of living in retirement. That is, these households are projected to have replacement rates — retirement income as a share of pre-retirement income — that fall more than 10 percent short of a target rate designed to maintain their pre-retirement living standard.
As is implied by the snippet above this small brief enters the discussion of dissaving and asset price declines as the baby-boomers retire. Often, this discourse has furthermore been framed in the context of a global process of dissaving and subsequent 'asset-price meltdown' as a result of the joint process of ageing amongst the world's developed economies. I shall not enter this discussion here. The brief in question does however highlight the inescable truth that given the main underlying reason for the observed life cycle of saving and consumption to smooth consumption so that retiremen living standard does not deviate from work life standard households and savers will need to adjust.
Thus, a good report card for older households in 1992 is fully consistent with an NRRI of 32 percent for those 51-61 in 2004. And, unless households begin to save more or work longer, the NRRI will continue to increase as the Social Security Normal Retirement Age rises to 67, the shift from defined benefit plans continues, retirement periods become longer with increased life expectancy, and the one-income couple virtually disappears. Yes, there really is a retirement savings crisis.
Capital Income Flows and the Relative Well-Being of America's Aged Population - Barry P. Bosworth, Gary Burtless, and Sarah E. Anders (2007) Center for Retirement Research at Boston College
One way to assess the effectiveness of a nation’s pension system is to measure its success in bringing the incomes of the aged close to those enjoyed by the nonaged. The comparability of income estimates for the aged and nonaged depends, however, on the relative accuracy of the income reports for the two populations. Unfortunately, some income items that are particularly important to the elderly, including occupational pensions, income derived from financial assets, and returns on homeowners’ net equity in their principal residence, are either unreported or significantly underreported in household surveys. In this paper we assess the effects of unmeasured and underreported income flows on the relative incomes of the aged and near-aged.
This paper is a monster and very ambitious in the sense that what it really does is to provide recommendations for national income estimates and household survey methodology. What I am particularly interested in is the point that by including income earned from transfers and dividends (and other secondary asset income) the standing of the aged cohort is increased relative to the younger cohort who naturally earns the majority of its income from wages. This is very interesting I feel since the conclusions can be used to derive some general tendencies of the life cycle of aged cohorts in the sense that these will attempt to put their assets to work in order to yield cash flows. Recently, I treated this and related issue in the context of Japan where the main point was that the income earned by Japanese savers came from foreign assets. Whether this is the case in the US is dubious. Obviously, the US economy is still able to provide domestic return for its savers, at least for now. However, the evidence from this paper highlights one very important potential transmission mechanism that runs from the life cycle behaviour of ageing cohorts to international capital flows. The key here is the extent to which we observe a decline in home bias as the domestic economy steadily looses steam as a result of the effect of demographic changes ripples through. If the decline in home bias as we are currently seeing in Japan is universal we end up in a rather interesting situation since as the ratio of aged to young economies in the world is set to change in favor of the former how are all those savers going to earn yield and what will it mean for those few economies who are young. Can they be expected to keep their markets open?
Ok, that was enough for now. As the astute reader will have observed this first edition of the Research Digest was compiled by papers from the Center for Retirment Research at Boston College. This is a coincidence since the recent slew of refereces to hit my inbox was from this particular source. As I said in the introdution I hope that I will be able to do these on a semi-regular basis.
Saturday, March 29, 2008
Wednesday, March 19, 2008
China's Demography and Economic Development
By Claus Vistesen
Well Edward's recent post has certainly stirred up a nice batch of interesting and thoughtful comments. Here I would simply like to add my own two cents worth to the general overview. Now as Edward has already noted, back in August 2007 Keith Bradsher had a good article in the NYT in which he makes the much cited connection between rising wage costs and rising import prices from China thus pointing to end of global labour arbitrage and what has been known as the Great Moderation. Of course, the picture is a bit more complex than this or as Scott Peterson notes in a recent comment, it may simply be a question of China trying to move up the value chain;
The paper is about more than that however and opens up the very pertinent question as to how China is to integrate the rural regions with its coastal urban counterparts and how to manage the flow from one end of the value chain to other. At the heart of this rapid depletion of Chinese labour resources is then first and foremost the very rapid economic development which in itself has feasted upon the cheap labour supply. However, in the background of all this the one-child policy has surely and steadily exerted its effect and now the curves might just be intersecting.
And the result? Well, there now seems to be mounting evidence that growth is being increasingly accompanied by ensuing effects on wages costs, with inflation grapping a tight hold not least because the composition of China's population is changing at a time where China is thundering ahead at double digit speeds. China's demographic profile and by derivative its fertility patterns are notoriously difficult to get a hold on. In a paper from March 2007 (Population and Development Review) four Chinese scholars embark on the formidable task of extracting an overall pattern from the very heterogeneous nature of Chinese fertility regimes as they vary between provinces ...
The difference between policy and actual action has been frequently cited in a Chinese context as couples have attempted to circumvent the official policies to have more than one child. However, on the other hand it also seems that especially fertility rates in urban are persistently underestimated. The picture we are left with is that the TFR is (and has been for around a decade) in the region of 1.5 (with the pessimists tending towards 1.3 and the optimists 1.7). In the grand scheme of things these numbers are not so important when it comes to pointing out a path for China's population in the immediate future. What we know is that China is now set to age very rapidly and that the composition of the population will undergo a change of historical proportions as China - irrespective of what happens to economic development now - is set to join the league of economies with a steadily rising median age. In fact, China's size here aids us tremendously in our analysis as immigration to mitigate the effects is completely out of the question due to the size of the Chinese population.
All this does not of course spell doom for China but it does mean that China is now entering a new stage of its economic development process. As Edward points out and as is echoed by this piece by one of the blogosphere's main China savants Michael Pettis this means that the number of young workers (aged 15 to 19) is now set to steadily decline as a proportion of China's population. We also know that the demographic changes will come very swiftly now and there do not seem to be many remedies on the table at this point. And those that we have are simply not adequate I am afraid - and to pick (perhaps unfairly) on one - I could refer to Yi Zeng's paper from June 2007 in which he sketches the 'options' for a fertility transition bringing China out of the vice of below-replacement fertility.
If we leave aside the rather dubious point that Chinese women are programmable robots who can actually be submitted to such a transition we also need to consider the speed with with the current process is moving along. The suggestion above simply denotes an understanding of the demographic transition which is wholly out of sync with the way it actually works in the real world. I won't be picking extensively on this paper and if anything we should be acknowledging the fact that this is actually narrated as a problem which needs to be addressed. Yet, we also need to understand that given the trajectory of China's demographics and its rampant growth rates any actions, on this front, taken in a post 2015-2020 perspective will literally be subject to such long term projections before they may have a concrete effect that it does not, in a scientific or policy related context, makes sense to discuss their merits.
So what the hell am I getting at here?
In the main, I have tried to take sketch, or take proprietorship of, the part of the discourse on China's economic development and its role in the global economy which should be specifically related to demographics. But how does it link in with the general narration of China in the global economy? Well, demographics are not destiny and you should not leave this note thinking that this is what I am advocating. However, there is mounting evidence that once fertility (TFR) drops into the 1.5 region and stays there for a prolonged period the forces of demographics steadily and rapidly begin to take center stage as one of the main macroeconomic explanatory variables.
In China's case this becomes rather preoccupying. In this way and if we return to my introductory remarks I would argue that the rapidly changing demographic profile of China quite simply is at odds with all those changes we believe China is to make in order to, as least partially, lead the process of global macroeconomic adjustment. In fact, there may be a rather worrying precedent for the process China is now set to enter. If we consequently peer a bit to the West from the Chinese mainland we run into Russia and then further on the Eastern European economic edifice. What we have seen in this region since the end of 1980s is a process by which these countries have been in a veritable race against time to move up the value chain fast enough to escape the burden of completely lopsided demographics as fertility collapsed in the beginning of the 1990s and outward migration steadily began to drain their labour markets (Russia is an exception here). This process is now set to come to a very abrupt standstill prompted by the simple fact that these countries are now out of road in terms of having qualified labor to continue to process.
Moreover, the process itself has been one which rampant inflation and wage costs have followed in the heels of the build-up of large negative external positions. And what is at the heart of this then? Well, surely it is not all about demographics but in the main I think it is. In essence these countries have quite simply not had the demographic profiles to support the massive expectations of growth opportunities which were vested on them in an external context and whatever importance we ascribe to institutional reform (and nobody can argue that this is unimportant) the speed by which this has happened has left traditional reforms completely helpless in keeping up.
Allow me then to end this piece on a rather ominous note. I don't deny for a minute that China needs to correct, not for a minute and 'yes Virginia, exchange rates do indeed matter'. However, the global economy also has a distinct stake in not allowing China to enter on a road like the one we have seen in Eastern Europe. It takes a strong back bone to act as the global importer of last resort and at the heart of that backbone is a strong demographic profile. Yet, if China now is on the path of engaging in a breathtaking race against time to fulfill the obligations to become the new consumer driven nation of the world we at least need to look at what the potential consequences could be. One common fallacy in this respect would be how an appreciation of the Yuan would have a mitigating effect on inflation and overheating pressures. Of course, this is what theory tells us and I think that everybody can see that a revaluation is badly needed at this point. But such an adjustment process would also require that China invested more of its reserves in the domestic economy as well as foreign money and goods would come pouring in at a pace which itself could stoke a lot of bubbly tendencies. At the end of the day, I may be too pessimistic here.
Recent data out of China show that income is growing and that domestic demand is booming as a consequence. That is good. But if the process is too fast and too abrupt lingering inflation is likely to take hold and that would not be welcome by any standards. In a more immediate context I have this year's Olympic games as a sort of litmus test. There is no doubt that China will race through this at her traditional pace but what happens afterwards?
Post script ...
China and her economy obviously command a lot of attention in the general debate, and as ever it is difficult to find the time to read everything. I therefore suggest you go for quality. Brad Setser and his global imbalances watch is a must and even though Brad and I have our little ongoing "exchange rates v demographics" argument I still think that he is indispensable. Another author you need to read here is Michael Pettis (who recently had a guest posting spell on Setser's blog). Michael writes exclusively on China and you would be hard pressed to find a better one-stop source. Finally, this small space tracks the quarterly journal China in the World Economy and last (and you can decide for yourselves whether it is by any means least or not) Edward and I have our small China Economy Watch which we will be updating on an ad-hoc basis.
Well Edward's recent post has certainly stirred up a nice batch of interesting and thoughtful comments. Here I would simply like to add my own two cents worth to the general overview. Now as Edward has already noted, back in August 2007 Keith Bradsher had a good article in the NYT in which he makes the much cited connection between rising wage costs and rising import prices from China thus pointing to end of global labour arbitrage and what has been known as the Great Moderation. Of course, the picture is a bit more complex than this or as Scott Peterson notes in a recent comment, it may simply be a question of China trying to move up the value chain;
In fact, China may not in fact be lacking labour as such but there does indeed seem to be a lack of young labour with respect to ensuring the continuation of the Chinese growth model where investment and cheap factory capex have been the main driver. It still is of course but now the ill-wanted companion of inflation now seems to be slotted in on the passenger seat threatening to pull the gear lever and the steering wheel to make the car stray off the road. Paraphrasing Edward in his quote of Keith Bradsher the following is a fine summation of the problem at hand ...
It seems that now that China has raised the standard of living for a sizable chunk of its workers, the rest of the work force isn't willing to accept the difficult working conditions that gave China its manufacturing cost advantage. This puts China in the same stage of workforce condition as Western countries. By that I mean that holders of capital can't find workers willing to take jobs at the wage on offer, so the country must either import workers willing to work at that wage as the US has done with agricultural workers, or outsource the work to foreign labor. Since bringing foreigners in is politically and practically nonsensical for China, the work goes overseas.
"Plant owners’ refusal to hire blue-collar workers over 35 or 40 is colliding with the demographic reality of China’s one-child policy".The evidence presented so far seems to be confirmed if we move into the world of academic journals. Indeed a recent paper published in 'China and the World Economy' entitled A Counterfactual Analysis on Unlimited Surplus Labor in Rural China precisely starts out by what it terms "debunking" the myth of the unlimited supply of surplus labor from Rural China.
The paper is about more than that however and opens up the very pertinent question as to how China is to integrate the rural regions with its coastal urban counterparts and how to manage the flow from one end of the value chain to other. At the heart of this rapid depletion of Chinese labour resources is then first and foremost the very rapid economic development which in itself has feasted upon the cheap labour supply. However, in the background of all this the one-child policy has surely and steadily exerted its effect and now the curves might just be intersecting.
And the result? Well, there now seems to be mounting evidence that growth is being increasingly accompanied by ensuing effects on wages costs, with inflation grapping a tight hold not least because the composition of China's population is changing at a time where China is thundering ahead at double digit speeds. China's demographic profile and by derivative its fertility patterns are notoriously difficult to get a hold on. In a paper from March 2007 (Population and Development Review) four Chinese scholars embark on the formidable task of extracting an overall pattern from the very heterogeneous nature of Chinese fertility regimes as they vary between provinces ...
At both the prefecture and province levels, policy fertility ranges from the one-child rule to a policy that allows two children and more. At the same time, birth control regulations drafted and implemented by China’s provinces allow numerous kinds of exemptions to the one-child rule, based on considerations ranging from the demographic to the political. These results highlight the complex nature of Chinese birth control policymaking and implementation. Both regional and demographic distributions of policy fertility show that the mode of the policy falls into the category of 1.3 to 1.5 children per couple (38 percent of the prefectures and 53 percent of the population, respectively). The majority of the Chinese population (more than 70 percent) live in areas with a policy fertility level at 1.3 to 2.0 children per couple.
(...)
Based on local fertility policies and corresponding population distributions, we estimate that the overall average fertility targeted by the fertility policies for China as a whole is 1.47 at the end of the 1990s. This level is far below replacement.
The difference between policy and actual action has been frequently cited in a Chinese context as couples have attempted to circumvent the official policies to have more than one child. However, on the other hand it also seems that especially fertility rates in urban are persistently underestimated. The picture we are left with is that the TFR is (and has been for around a decade) in the region of 1.5 (with the pessimists tending towards 1.3 and the optimists 1.7). In the grand scheme of things these numbers are not so important when it comes to pointing out a path for China's population in the immediate future. What we know is that China is now set to age very rapidly and that the composition of the population will undergo a change of historical proportions as China - irrespective of what happens to economic development now - is set to join the league of economies with a steadily rising median age. In fact, China's size here aids us tremendously in our analysis as immigration to mitigate the effects is completely out of the question due to the size of the Chinese population.
All this does not of course spell doom for China but it does mean that China is now entering a new stage of its economic development process. As Edward points out and as is echoed by this piece by one of the blogosphere's main China savants Michael Pettis this means that the number of young workers (aged 15 to 19) is now set to steadily decline as a proportion of China's population. We also know that the demographic changes will come very swiftly now and there do not seem to be many remedies on the table at this point. And those that we have are simply not adequate I am afraid - and to pick (perhaps unfairly) on one - I could refer to Yi Zeng's paper from June 2007 in which he sketches the 'options' for a fertility transition bringing China out of the vice of below-replacement fertility.
(...) the author concludes that China needs to begin a gradual modification of its fertility policy as soon as possible. He proposes a three-stage "soft-landing" strategy for fertility policy transition: (1) a 7-year initial smooth transition period; (2) from approximately 2014-15 to 2032-35 a universal two-child policy combined with late childbearing in both rural and urban areas; (3) after 2032-35 all Chinese citizens would be free to choose family size and fertility timing. This strategy will enable China to have much more favorable demographic conditions and socioeconomic outcomes, as compared to keeping the current policy unchanged.'
If we leave aside the rather dubious point that Chinese women are programmable robots who can actually be submitted to such a transition we also need to consider the speed with with the current process is moving along. The suggestion above simply denotes an understanding of the demographic transition which is wholly out of sync with the way it actually works in the real world. I won't be picking extensively on this paper and if anything we should be acknowledging the fact that this is actually narrated as a problem which needs to be addressed. Yet, we also need to understand that given the trajectory of China's demographics and its rampant growth rates any actions, on this front, taken in a post 2015-2020 perspective will literally be subject to such long term projections before they may have a concrete effect that it does not, in a scientific or policy related context, makes sense to discuss their merits.
So what the hell am I getting at here?
In the main, I have tried to take sketch, or take proprietorship of, the part of the discourse on China's economic development and its role in the global economy which should be specifically related to demographics. But how does it link in with the general narration of China in the global economy? Well, demographics are not destiny and you should not leave this note thinking that this is what I am advocating. However, there is mounting evidence that once fertility (TFR) drops into the 1.5 region and stays there for a prolonged period the forces of demographics steadily and rapidly begin to take center stage as one of the main macroeconomic explanatory variables.
In China's case this becomes rather preoccupying. In this way and if we return to my introductory remarks I would argue that the rapidly changing demographic profile of China quite simply is at odds with all those changes we believe China is to make in order to, as least partially, lead the process of global macroeconomic adjustment. In fact, there may be a rather worrying precedent for the process China is now set to enter. If we consequently peer a bit to the West from the Chinese mainland we run into Russia and then further on the Eastern European economic edifice. What we have seen in this region since the end of 1980s is a process by which these countries have been in a veritable race against time to move up the value chain fast enough to escape the burden of completely lopsided demographics as fertility collapsed in the beginning of the 1990s and outward migration steadily began to drain their labour markets (Russia is an exception here). This process is now set to come to a very abrupt standstill prompted by the simple fact that these countries are now out of road in terms of having qualified labor to continue to process.
Moreover, the process itself has been one which rampant inflation and wage costs have followed in the heels of the build-up of large negative external positions. And what is at the heart of this then? Well, surely it is not all about demographics but in the main I think it is. In essence these countries have quite simply not had the demographic profiles to support the massive expectations of growth opportunities which were vested on them in an external context and whatever importance we ascribe to institutional reform (and nobody can argue that this is unimportant) the speed by which this has happened has left traditional reforms completely helpless in keeping up.
Allow me then to end this piece on a rather ominous note. I don't deny for a minute that China needs to correct, not for a minute and 'yes Virginia, exchange rates do indeed matter'. However, the global economy also has a distinct stake in not allowing China to enter on a road like the one we have seen in Eastern Europe. It takes a strong back bone to act as the global importer of last resort and at the heart of that backbone is a strong demographic profile. Yet, if China now is on the path of engaging in a breathtaking race against time to fulfill the obligations to become the new consumer driven nation of the world we at least need to look at what the potential consequences could be. One common fallacy in this respect would be how an appreciation of the Yuan would have a mitigating effect on inflation and overheating pressures. Of course, this is what theory tells us and I think that everybody can see that a revaluation is badly needed at this point. But such an adjustment process would also require that China invested more of its reserves in the domestic economy as well as foreign money and goods would come pouring in at a pace which itself could stoke a lot of bubbly tendencies. At the end of the day, I may be too pessimistic here.
Recent data out of China show that income is growing and that domestic demand is booming as a consequence. That is good. But if the process is too fast and too abrupt lingering inflation is likely to take hold and that would not be welcome by any standards. In a more immediate context I have this year's Olympic games as a sort of litmus test. There is no doubt that China will race through this at her traditional pace but what happens afterwards?
Post script ...
China and her economy obviously command a lot of attention in the general debate, and as ever it is difficult to find the time to read everything. I therefore suggest you go for quality. Brad Setser and his global imbalances watch is a must and even though Brad and I have our little ongoing "exchange rates v demographics" argument I still think that he is indispensable. Another author you need to read here is Michael Pettis (who recently had a guest posting spell on Setser's blog). Michael writes exclusively on China and you would be hard pressed to find a better one-stop source. Finally, this small space tracks the quarterly journal China in the World Economy and last (and you can decide for yourselves whether it is by any means least or not) Edward and I have our small China Economy Watch which we will be updating on an ad-hoc basis.
Friday, March 14, 2008
China's Inflation and Labour Shortage Problem, It's The Fertility Stupid!
China's inflation accelerated to its fastest pace in 11 years in February as the worst snowstorms in half a century disrupted food supplies, adding to pressure on the government to step up administrative measures to try and slow the economy and on the central bank to raise interest rates. Consumer prices climbed 8.7 percent in February from February 2007 following a gain of 7.1 percent in January, according to the statistics bureau in Beijing earlier today.
What we do know is that from the late 1990s onwards China systematically introduced a very extensive labour and financial market reform process, and this certainly has served to unlease a huge amount of pent-up potential both interms of labour supply and sectoral shifts in economic activity, and it is this which has given us the sustained growth since the turn of the century.
What is interesting to note is how the recent uptick in inflation coincides almost exactly with the peaking of the 15 to 19 age group, as you can see in the chart below, and it is important to note that the decline in this age group will now continue as far ahead as the eye can see, and especially over the next several years is really going to be quite dramatic, as you would expect from the drastic one chile per family "torniquet" policy which was applied.
I have selected the 2022 horizon looking forward based on the fact that this is now known data. We can predict with a reasonable degree of accuracy just how many 15 year olds there will be in China in 2022, since they have now already been born. So we have a pretty good idea of China's new labour supply going forward. Obviously China can still get considerable growth by relocating the existing workforce across sectors to more productive ones. But the end of the labour intensive low economic value growth must now surely be in sight, and the big question is can China sustain inflation-free growth of the order of magnitude we have been seeing in recent years, bearing in mind that much of the recent growth in many of the higher growth developed economies - the US, the UK, Ireland, Spain - has been very labour intensive. My feeling is that it can't, this is why all those exhausted canaries swooning in Latvia have been so useful, and that we will see a slowdown in China which will not simply be cyclical, but rather structural. Possibly the moment of inflection (or tipping point) here will come around the time of the Olympic Games.
So, as I say the 15 to 19 age group has now peaked in China, and from here on in it is essentially downhill all the way, as far ahead as anyone can see. The truth is that no-one at this point in time knows what the consequences of this are going to be. But don't worry, since at least one thing is for sure: we are all just about to find out.
Postscript
Those interested in a more growth-theoretically oriented explanation of the argument in this post may find my "Has China's Economic Growth Passed It's Peak? post well worth reading.
And for a fuller explanation of the inflation dynamics problem in another context see my "Inflation in Russia: Too Much Money Chasing Too Few People?".
This is obviously very bad news indeed, and makes the Chinese problem look ominously like the ones we have been seeing in some East European economies and Russia. Obviously rising living standards which produce pressure on restricted global food prices don't help, nor does the strong flow of speculative funds entering China in the expectation of yuan revaluation. But to the discerning eye there is obviously a much more profound process at work here. The problem seems to be that China - despite its enormous size - is chewing up its labour reserves faster than new labour market entrants are arriving, and this is happening in large part due to the structural population break which has been produced by several decades of one child per family policy.
The issue is simply that China cannot continue to grow at anything like the double digit rate it has become accustomed to in recent years, in particular due to the growing constraints on labour supply. It should be remembered here that China has so far been focusing on low value work which is hugely labour intensive.
If you want some idea of what this means in practice, just look at this opening sequence from Jennifer Baichwal’s documentary "Manufactured Landscapes". And notice, apart from the scale of the enterprise, and the types of activity engaged in, the comparatively young age of most of the workers.
The New York Times's Keith Bradsher was in China last summer, and he pointed out that while there are no really reliable figures for average wages in China there is widespread evidence that factory owners and experts who monitor the labor market are noting how that businesses are having a hard time finding able-bodied workers and are having to pay the workers they can find ever more money.
For decades most labor economists saying that China’s vast population would supply a nearly bottomless pool of workers. So many people would be seeking jobs at any given time, this reasoning went, that wages would be stuck just above subsistence levels, probably for decades. As recently as four years ago, some experts estimated that most of the perhaps 150 million underemployed workers in the countryside would be heading to cities. The reality however has been quite different. Instead, from 2003 onwards sporadic labor shortages started to appear with growing intensity at factories in the Pearl River delta of southeastern China. Now those shortages seem to have spread to factories up and down the Chinese coast.
Only this week the Economist reports - in an article entitled Where is Everybody - that the vast annual migration of around 20m people that has been fuelling the manufacturing boom in southern China over the past two decades is rapidly diminishing.
The Guangdong Labour Ministry is reporting that 11% of the workers did not return after the January holiday period, and independent estimates put the number as high as 30%. Whatever the exact details, many factories are reeling. Wages were already rising (according to government figures by around 20% y-o-y) now they will surely go up further. Meanwhile, revenues are falling due to slowing demand from America and a reduction, following pressure from other countries, in China's complex system of export subsidies.
The Federation of Hong Kong Industries have also produced some gloomy looking figures. Members estimated 10-20% of the 70,000 factories in Guangdong province had closed in the past year, and they expected a similar number to close within the next two years. Two-thirds of those polled said they were unsure whether to invest more in the region; one-third planned to cut investment. Only one respondent was optimistic. As the Economist notes, not all of this is bad news by any means since to some extent the closures are the objective behin a recent government plan to force dirty, low-paying industries out of business or into poorer interior regions that have so far missed out on the country's growing industrial wealth. But then we have the inflation data, and we can see that there is more at work than a simple "facelift" operation.
When pressed Chinese officials are quick to say that there is no overall shortage of labor — rather, there is a shortage of young workers willing to accept the low wages that prevailed in the 1990s (see again the video clip above). Factories in cities like Guangzhou advertise heavily for young workers, even while employment offices consider it a success if someone over 40 can find any job in less than a year.
Keith Bradsher quotes Jonathan Unger, director of the Contemporary China Center at Australian National University in Canberra, to the effect that “Now they’re taking workers into their early 30s, but anything older than that and they think they can’t take the conditions, the 11-hour days.... as well as work on weekends, and a tedious life in factory-owned dormitories". and as Brasher says "Plant owners’ refusal to hire blue-collar workers over 35 or 40 is colliding with the demographic reality of China’s one-child policy". And on his vists to villages from tropical Gaoyao in the southeastern corner of the country to dusty Houxinqiu in the northeast, what he found most striking was how few young adults remained after so many had left for the cities. He cited a recent government survey of 2,749 villages in 17 provinces and autonomous regionswhich found that in 74 percent of villages, there were no workers fit to travel to distant cities. Of course this is what they are now noting in Guandong.
The Real Issue is Inflation and Rapid Growth
The big unknown in 2008 in China is what is going to happen happen to inflation. Most analysts are assuming that the application of a traditional set of policy measures - letting the yuan rise, raising interest rates at the central bank - will produce a very gradual slowdown in China. Having seen what I have seen in Eastern Europe, and looking at what is now happening in Russia, I have my doubts abou this.
The inflation problem they have is a very real one - as we are now seeing month after month -and at this point in time it is hard to see how they can adequately address it. Certainly unchaining the yuan could just as easily lead to an acceleration of inflows and an increase in the overheating problem as to any more benign outcome, and I would treat New Zealand (and India for that matter) as the "Canary in the Coalmine" (or if you prefer "smoking gun") here. So I would just like to put up a question mark on this count, and I would do this especially in the context of the underlying and strong structural break in the Chinese population pyramid which has been produced by many years of the one child per family policy. Looking at those other canaries - Latvia and Estonia (and then Russia) push-comes-to-shove time does seem to arrive a lot earlier than we had all been anticipating. As I say, 2008 could well be the year that inflation gets a hold on China. In which case the whole thing could simply continue overheating till it simply cannot anymore, and then we could see a quite severe slowdown, a slowdown which given China's size and growing economic importance could have an impact across the entire global economy.
The danger is that a feedback mechanism is created whereby rising wages (according to data from the statistics office Chinese wages are now rising at something like 20% year on year) feed into producer prices, which then feed into consumer price inflation, and so we go on. Certainly this weeks producer prices data was hardly reassuring, since producer prices climbed 6.6 percent in February, the fastest pace in more than three years, giving us yet one more indication that the "cheap Chinese labour" global disinflation process most likely has now come to an end.
What we really need to be noting here is the fact that China's demographic trajectory is virtually unique, especially in terms of economic growth and China's demographic transition, since it is surely the case that China was getting some sort of demographic dividend or other (in terms of having an increasing proportion of the population in the workforce) well before the recent growth wave really took off in the late 1990s.
What we do know is that from the late 1990s onwards China systematically introduced a very extensive labour and financial market reform process, and this certainly has served to unlease a huge amount of pent-up potential both interms of labour supply and sectoral shifts in economic activity, and it is this which has given us the sustained growth since the turn of the century.
What is interesting to note is how the recent uptick in inflation coincides almost exactly with the peaking of the 15 to 19 age group, as you can see in the chart below, and it is important to note that the decline in this age group will now continue as far ahead as the eye can see, and especially over the next several years is really going to be quite dramatic, as you would expect from the drastic one chile per family "torniquet" policy which was applied.
I have selected the 2022 horizon looking forward based on the fact that this is now known data. We can predict with a reasonable degree of accuracy just how many 15 year olds there will be in China in 2022, since they have now already been born. So we have a pretty good idea of China's new labour supply going forward. Obviously China can still get considerable growth by relocating the existing workforce across sectors to more productive ones. But the end of the labour intensive low economic value growth must now surely be in sight, and the big question is can China sustain inflation-free growth of the order of magnitude we have been seeing in recent years, bearing in mind that much of the recent growth in many of the higher growth developed economies - the US, the UK, Ireland, Spain - has been very labour intensive. My feeling is that it can't, this is why all those exhausted canaries swooning in Latvia have been so useful, and that we will see a slowdown in China which will not simply be cyclical, but rather structural. Possibly the moment of inflection (or tipping point) here will come around the time of the Olympic Games.
So, as I say the 15 to 19 age group has now peaked in China, and from here on in it is essentially downhill all the way, as far ahead as anyone can see. The truth is that no-one at this point in time knows what the consequences of this are going to be. But don't worry, since at least one thing is for sure: we are all just about to find out.
Postscript
Those interested in a more growth-theoretically oriented explanation of the argument in this post may find my "Has China's Economic Growth Passed It's Peak? post well worth reading.
And for a fuller explanation of the inflation dynamics problem in another context see my "Inflation in Russia: Too Much Money Chasing Too Few People?".
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