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Until recently, China's competitiveness was based on one key ingredient: an abundance of cheap, low-skilled labor. That's no longer assured. Awkward surpluses and shortages of workers are now cropping up in unexpected parts of the economy. Low-skilled rural workers willing to migrate to industrializing parts of the country are increasingly in short supply, while millions of university graduates compete tooth and nail for scarce white-collar jobs, often accepting lower pay and fewer benefits than their degrees would have earned them just a few years ago.

China's population of 1.3 billion was once considered an inexhaustible human capital resource. But the 2010 census, which was made public on April 28, shows that the population grew 5.8%, or half the amount recorded when the central government conducted its last census 10 years ago. What's more, trends suggest that the country's working population is also shrinking. The proportion of Chinese who are 15 years old or younger declined 6.3% (to more than 222 million), while the over-60s increased 2.93% (to more than 177 million). Experts now warn of widespread labor shortages, possibly as soon as 2013.

It's hard for any analysis of China's labor market not to fixate on the vast numbers. In 2010, for example, around seven million students graduated from universities, of which about one-fifth could not find jobs, according to a report by the China Monitoring Center for Labor Market Information. At the same time, demand for China's hundreds of millions of blue-collar workers exceeded supply for the first time in 10 years.

But there's another story running in parallel to those statistics. Experts say a mismatch between the skills job seekers have to offer and what companies need is growing. For policy makers in Beijing, that's a concern. As they encourage the economy's shift to higher-value-added goods and services, addressing the mismatch is a tall order, especially while delicately balancing the demands and expectations of a new generation of workers.

Raising the Bar

Much of the focus is on the country's legions of factory workers, whose numbers are said to be decreasing steadily. "There has indeed been a sharp lack of migrant workers after the last Spring Festival [marking the beginning of the Chinese new year in early February] -- many went home for the holidays and simply did not come back to work," says Yuan Zhigang, dean of Fudan University's School of Economics and director of the Employment and Social Protection Research Center. One of the reasons why, he says, is the growing reluctance among migrant workers to accept their old meager pay packages at a time when the country's economy is booming.

What's more, he adds, many workers are able to find work closer to their homes, since rural Central and Western China are beginning to industrialize and catch up economically with other parts of the country. That's an attractive proposition, particularly now as the cost of living is rising in Eastern China where migrants workers have traditionally sought jobs. With growing options, workers are demanding higher wages to make migrating worthwhile. Between 2009 and 2010, minimum wages rose more than 22% on average nationwide. Shanghai led the way with a minimum wage of RMB 1,120 (US$173) a month.

But some workers believe the bar could be raised higher still. Born in the 1980s and 1990s under the single child policy, "this generation is completely different from their parents in what they expect from life. They want to stay in the cities they migrate to and receive better treatment there," says Yuan.

Recognizing worker discontent as a threat to social stability, the government has responded with laws requiring companies to shoulder more and more employee costs. That includes social insurance, which has risen from a flat RMB 200 a month per worker to more than 50% of salary in some cities. Such changes are tough for China's labor-intensive industries. According to Aon Hewitt Associates, a global HR consultancy, the biggest signs of strain can be found on the Southeast coast, the old heart of export manufacturing where many factories are closing or operating at a loss.

Wang Xinkui, deputy chairman of the All-China Federation of Industry and Commerce, notes that rising costs are a big concern among his organization's members, who are primarily from local private companies. "In the past, labor was cheap because farmers had zero wages; they were happy with anything over zero," he says. "Industry got used to this extremely low price, and it's taking them a while to adapt to new realities."

He says for some companies, like Taiwanese high-tech manufacturer Foxconn, one solution is to move inland, where labor is still plentiful and cheap. For others, however, what they would gain in terms of a new and cheaper labor pool by moving, they would lose in higher transport costs as well as no longer being located near complementary industries. "Very few will go all the way to Western or Central China, which has only 4% of manufacturing," says Wang. "It's not really a quantitative problem in [terms of] the number of workers available. If the wages go up enough, there are still workers willing to come to the cities."

What Money Can't Buy

But rising labor costs are not the main concern for many companies. Rather, it's finding the skills they need. The greatest shortage currently is for skilled, blue-collar workers. According to the China Monitoring Center report, the gap between demand and supply for all levels of technicians and engineers ranged from 60% to 90% in 2010. It's a problem that money can't seem to fix. Research by HR consultancy Aon Hewitt Associates in Shanghai has found that senior engineers can earn up to RMB 4,000 a month and technicians around RMB 3,000 a month. That's higher than the entry-level salaries of many university graduate wages. Yet technical colleges struggle to fill their classrooms.

Part of the problem is that the poorest manual workers do not have disposable incomes to invest in further education, says Wang. "I worked on a government program to train nannies and nurses. We spent a lot of money to pay for the courses so that it was free for the workers. But even then, no one came. For migrant workers, every day spent in school was a loss of a day's wages. In the end, we had to pay people to get training."

Meanwhile, many technical colleges require applicants to have resident permits for the cities where they want to take classes, which migrant workers generally don't have, points out Yuan of Fudan University. Another barrier is that in many circles, receiving a qualification from a technical college is seen as a second-rate alternative to receiving a university degree and getting a crack at making a better life for themselves away from home. As for city dwellers, technical colleges have had an even frostier reception.

Meanwhile, the number of students graduating from universities last year was more than eight times greater than in the late 1990s, when national policy started expanding higher education. Last year, 8.9 people out of every 1000 were university graduates, compared with 3.6 ten years ago. "Universities have gone from a form of elite education to a mass education product," says Yuan.

"Cultural and economic factors have resulted in a polarization of education in China," says Wang. "There's a concentration of people at the bottom and top levels, and few in the middle."

However, blue-collar workers will be just as, if not more, essential for China's economic trajectory. "Wage increases for migrant workers will contribute to more consumption and eventually the development of service industries," predicts Yuan. But while it's good for workers "to gain more bargaining power, I don't think we should rely on policy to force up wages endlessly. It's more important to improve productivity per worker through training."

Wang agrees. "Our current development is not sustainable," he notes. "Wages keep going up, but that is not matched by an increase in productivity per worker. We're in danger of getting stuck at the middle-income trap of US$3,000 to US$5,000 per capita. There are many precedents of this phenomenon among developing countries, such as Mexico and Brazil."

Graduates, Graduates Everywhere

But China's transition to a tertiary-industry economy is slow and difficult. Yuan observes that the ring of more developed countries around China, such as Hong Kong, Taiwan and Singapore, dominate the region's service sector. Domestically, the service sector has more or less been overtaken by state-owned monopolies, which are less competitive and more resistant to change than many of their regional counterparts. To address that, "a whole host of painful changes are needed," says Yuan.

Consequently, the amount of tertiary-industry job openings has been falling, from 72% to 59% over the past 10 years, according to the China Monitoring Center report. Secondary-industry job openings, however, have been rising, from 25% to 38.7%, thanks in large part to manufacturing and China's export boom.

Yet whatever the sector, there's one thing uniting employees: The country's job seekers -- including the swarm of recent university graduates -- don't have the skills they need. Peter Zhang, head of compensation at Aon Hewitt Associates China, says the sectors focused on domestic consumption, such as pharmaceuticals, fast-moving consumer goods and automobiles, are facing particularly severe labor shortages. "Applicants rarely offer anything outstanding that immediately strikes employers as useful," he notes. Companies are responding by beefing up internal training but that, too, carries risks -- job-hopping is common in China, and turnover rates are as high as 19% in the first six months of a new contract at many companies.

Yuan says the country's educators are partly to blame. While China's economic landscape has changed rapidly, universities haven't kept up, leaving graduates ill-prepared for the job market. "The university system is structured to offer courses based on the teachers they have rather than market needs," says Yuan, "It's a totally different mentality from the West, which works back from market needs to design courses." So while there's a surplus of graduates in general in China, the gaps are glaring, including in fields like civil engineering and high-level financial analysis.

Expectations also need managing. "There are severe problems in the quality of graduates, both in terms of their education and attitudes to work," says Zhang. "The gap between what graduates have to offer and what they expect in return from a company, in terms of salary and promotions, is the biggest factor in their high turnover rates." The reality today is that only top-tier graduates have a shot at the elite jobs traditionally associated with a university education.

A Shanghai-based personnel executive at state-owned China Construction Bank (CCB), one of the most sought-after employers in any city, says the company receives over 10,000 applications for around 500 to 600 jobs a year. "Those without a Shanghai hukou [resident permit] are not even considered. It's cruel, but it's the easiest way to narrow down the selection," she says.

Even for local graduates, the hiring process is heavily biased toward top universities. In CCB's case, around 400 jobs with starting salaries of RMB 5,500 a month are allocated to a first round of campus recruitment at the country's 17 top-tier universities every year. Successive rounds of recruitment at other universities -- of which there are around 600 -- offer fewer places at lower salaries.

The way Yuan sees it, the solution to the graduate problem, like that of the migrant problem, lies in educational reform. "The most important thing the government needs to do is cultivate human capital, and focus on not just the numbers of workers but on how they are trained," says Yuan.