China’s Jobless Growth Miracle

BEIJING – Chinese Prime Minister Li Keqiang recently cited job creation as vital to his country’s “ultimate goal of stability in growth.” His observation could not be more accurate. In fact, one of the most baffling features of China’s economic rise is that, even amid double-digit GDP growth, employment grew at a measly 1.8% average annual rate from 1978 to 2004. Households, it seems, have largely missed out on the benefits of economic development in China.

The superficial explanation of the discrepancy between GDP growth and job gains attributes the gap to the restructuring of inefficient state-owned enterprises (SOEs), which caused public-sector employment to plummet, from 112.6 million to 67 million, from 1995 to 2004. But there is a more fundamental cause: China’s bias toward industrialization. China’s government has long viewed industrialization as the key to modernization. During Chairman Mao’s Great Leap Forward, scrap metals were melted to meet wildly optimistic steel-production targets and thus to propel rapid industrial development. Today, the government promotes industrial and infrastructure projects that, by encouraging investment and generating tax revenues, enable the economy to meet ambitious – though no longer harebrained – growth targets.

The problem is that the manufacturing sector does little to create jobs, largely because relatively high productivity growth in the sector – averaging more than 10% annually over the last two decades – constrains demand for more workers. By contrast, China’s services sector has registered only about 5% annual productivity growth, and thus is a much more effective engine of job creation.

In fact, services are responsible for the lion’s share of employment in most advanced economies. But, whereas 80% of the American labor force was employed in service industries in 2012, only 36% of China’s workers worked in the sector. To bolster employment in services, China’s government must loosen its regulatory grip, ease barriers to entry in branches like telecommunications, and encourage labor mobility.