Peak Demographics

China's working age population is set to peak in 2013, according to the Economist Intelligence Unit's latest demographic projections. However the impact of this milestone on the country's economy will be different from the experience of other, predominantly rich countries that have already undergone the process. While ageing, the country's urban workforce will continue to grow. It will also become much better educated.

In the developed world, ageing is most commonly associated with shrinking workforces relative to the rest of the population, giving rise to pension cuts, postponed retirement and higher taxes on the young. As an economy still in transition, China need not fret about such issues. For a start, China's state pension system is far from generous and its coverage low. Rather, the country's biggest fear is that of worsening labour shortages—a phenomenon that was first reported in the mid–2000s and was subsequently the subject of much attention in the national media. There are two good reasons why these fears are overblown.

Rural fuel

First, China is still in the midst of a massive urbanisation drive. When the working-age populations of Germany and Japan, the world's largest ageing economies, began to shrink in 1999 and 1995 respectively, the process of massive rural-to-urban migration had already matured. The proportion of the population residing in urban areas, or the urbanisation rate, had more or less stabilised at 73% and 65% respectively.

In contrast, China's urbanisation rate will only reach 55% this year and is likely to continue rising by around one percentage point (or 13m people) every year, according to our projections. China will only reach Japan's level of urbanisation by 2022 and Germany's by 2030. Thus, even though China's working-age population will shrink overall, the urban working-age population will only peak in 2029 after reaching 695m—135m higher than it was in 2012.

The flip side of this trend is a shrinking rural population. However, China's rural population has been diminishing for three decades without much adverse impact on agricultural output. That is because its countryside is overpopulated: there are too many farmers working too little land. Indeed, China has even managed to boost agricultural output over the years by investing in machinery and technology.

It is difficult to pinpoint exactly how many more workers the agricultural sector can afford to lose before a large impact on farm output is felt. However, most economists agree that another 100m or so is achievable. Coupled with the fact that the primary sector only accounts for 10% of GDP, it becomes clear that, when it comes to maintaining economic growth, the urban workforce is really the only one that matters.

From factories to classrooms

Second, China's labour shortages have largely been misdiagnosed. Much ink has been spilt attributing the lack of young workers for unfilled factory vacancies to demographic factors. Yet the number of Chinese aged 16–24 increased from 196m to 210m between 2000 and 2010. The rise in urban areas is even greater. Where, then, did all the young workers go? The answer is simple: they went to school.

The proportion of junior secondary school graduates continuing on to senior secondary school surged from 51% to 88% between 2000 and 2010. At the same time, the proportion of Chinese aged 16–19 that were either employed or seeking employment (the labour participation rate) fell from 57% to 34%. The relationship is clear: rising enrolment rates at schools have played a major role in postponing entry to the workforce.

The surge in school enrolment implies that the supply of young workers entering the job market will not only remain stable as China passes its demographic turning point, but might even grow. Enrolment rates cannot rise forever, and all the would–be teenage workers that were absorbed by the schooling system over the past decade will enter the workforce sooner or later.

As China's youth becomes better educated, the coming decade will witness the emergence of a two-tiered workforce. One tier will consist of graduates looking for office jobs. The other will remain the country's "traditional" source of labour: relatively low–skilled rural migrants seeking work in factories and construction yards. The latter group will, however, have aged substantially, creating new challenges for managers and HR departments across the country.

China's workforce challenge is thus twofold: policymakers need to ensure that there are enough white-collar jobs for graduates, while employers of low-skilled workers will need to come to grips with hiring and managing an older workforce. Failure to do so will have serious consequences. An educated class disillusioned by high unemployment is something China can ill afford at a time of rising social tensions. At the same time, an inability to replace young workers with older ones could spell the end of the golden age of China's mighty manufacturing sector.

Yet, if the demographic transition is managed successfully, there will be just cause to celebrate. The Chinese economic miracle has pulled more than 200m people out of poverty over the past 30 years. In the last ten, it has allowed 60m children who would otherwise never have finished secondary school to do so. The next task will be to ensure that their studies have not been in vain.

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