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Foreign observers watch China’s economic growth with a (shifting) mix of fascination, awe and concern. China has averaged nearly ten per cent annual GDP expansion for the past decade, and yearly growth is nearly 12% for 2007. Beyond the macro economic picture, China’s stunning rise is clear in so many ways, from massive infrastructure investments and foreign currency reserves, to hugely well choreographed preparations for the 2008 Olympics and 2010 World Expo, and fast-rising “soft power” through cultural, foreign aid, investment and political influence in Asia, Africa and elsewhere. Few expect that Chinese economic growth will slow sufficiently to change these trends. Meanwhile, we increasingly hear about the loss of competitiveness and living standards in the advanced economies. Perhaps not surprisingly, “China” has become a fear in itself for many in the United States, Europe and elsewhere. Given such over-dramatic assessments, we want to share a more nuanced view of China’s context and trajectory and – the purpose of our report – to facilitate understanding of the future impact of Chinese labor market reforms on the workforce and on foreign and Chinese businesses.
While China is indeed changing our world, we must be aware that it faces multiple big concerns of its own. Each of these factors – massive economic transition, increasingly unequal income distribution, high unemployment, economic imbalance such as rising inflation, and a fast ageing workforce – already undermine the national labor market and, in combination, can significantly limit Chinese economic growth over time. Of all China’s worries, there is little doubt that the growing shortage of skilled workers – leading to severe recruitment and retention problems – is one of the most pressing, and certainly is at the very top of foreign and local business concerns. Continued economic growth in China, and the success of foreign and national firms, will depend to a large extent on well functioning labor markets, as well as productivity improvements. China faces a severe dearth of qualified personnel across a huge range of activities, from basic manufacturing to professional services and more basic tertiary activities. Skill shortages in middle and senior management and other key areas have become the true “pacing item” for business growth in China despite its huge workforce. Effectively, China is at full employment for skilled, technical and managerial talent – indeed latent demand would burst far beyond the current limits of supply. Meanwhile, the changing structure of the economy has big implications for China’s future needs. Services now account for over 60% of all new jobs in China, with wholesale and retail trade plus hotels and catering now offering as many job opportunities to Chinese workers as all its manufacturing and construction activities put together. China’s Future Labor Market Adecco Institute White Paper 3 3 Research conducted for the Adecco Institute by the Shanghai Academy of Social Science finds that the labor market faces 5-10 year supply constraints in five key areas of skilled labor: management talent, English language skills, R&D personnel, senior and secondary technically skilled workers, and holders of professional certificates. China lacks a pipeline of well-prepared young people and, increasingly, businesses in China face the same Generation Y attitude problems as in Europe and North America. Meanwhile, firms have to deal with very high staff attrition rates and significant wage inflation. The consequences of such trends are real enough for companies, with signs that China’s cost basis is changing fast relative to other countries in Asia. China is in the midst of its biggest ever modernization of labor laws and labor market regulations, some of which come into force on 1 January 2008. These new laws will move China closer to globally inspired labor regulations which reflect global best practice, emphasizing fixed and open-term employment contracts enforceable by law and with more developed dispute resolution mechanisms. These new laws are a priority at the highest political levels in China, and are reaching a key juncture, though of course there will not be a truly flexible and deregulated Chinese labor market in the short term.
China’s labor reforms are mainly geared towards individual employment protection rights, with proposed laws in four areas, half of which have already been passed: labor contracts, employment promotion, labor dispute conciliation and arbitration, and social security. While many Chinese workers are unaware of the passage of new laws that aim to protect them by emphasizing written contracts, equal pay and long-term job security, international business has been keenly following the whole process – and some foreign business leaders and chambers of commerce in China were quick to express a range of concerns. However, many foreign companies are now much more positive about the changes – particularly if enforcement proves effective. In our view, while the new laws may contribute to raising unit labor costs over time in China – partially through salary rises – and make it harder to lay off unneeded workers, there will be significant benefits to foreign firms from the new framework. The pattern of the new laws provides strategic roadmap for the next 10-15 years, giving corporate leaderships more clarity and certainty about the future direction of Chinese labor regulations. The reforms will help to slow the rapid rate of workforce turnover and bring more procedural transparency to labor dispute resolution. They provide better protection for trade secrets and confidential firm information, while at the same time offering incentives for employers to invest in vocational training for workers (a “no leave” clause). They expressly permit many forms of “flexible work” and third-party "labor placement", subject to reasonable safeguards. Perhaps most importantly, the Chinese government will enforce the new labor laws China’s Future Labor Market Adecco Institute White Paper 3 4 across all provinces in a more consistent way than hereto – and this would be one of the most spectacular, confidence-building, reforms in the new China.
Overall, therefore, we regard the new Chinese labor law framework as well balanced between protection and flexibility, as generally a good “outcome”, and as an interesting example of China’s increasing openness to “look and learn” from international best practices and then adapt these to China’s circumstances. Thus, parts of the new labor laws – particularly in relation to provisions concerning Labor Contracts (as well as some of the proposals in relation to Dispute Resolution) – possess clear German and British flavors. Of course there are legitimate worries about whether Chinese firms will comply with the new legislation. But our sense is that the laws are aimed at local firms more than at foreign firms, and that should fuel optimism on fair enforcement over time. Having looked at the China’s economic trajectory, skills shortages and the impact of major new labor laws, we explore how best to address China’s personnel challenges. Some aspects are deeprooted and require sustained government efforts and changes in public policies, others center on action by companies themselves.
At macro level, China lacks basic tools such as a proper measurement system for employment and unemployment, e.g. a detailed job vacancy survey, which weakens academic research outcomes and government economic decision-making, and fuels public and international misconceptions about the state of the Chinese labor market. China’s national social insurance system serves to restrict the free movement of labor, and thus needs reform, as people are reluctant to shift from a high level of coverage in public sector enterprises to the private sector, complicating the recruiting problems of the private sector where less than 10% of workers have pensions, health, and work accident insurance provision. Not least, China can take huge strides in raising labor force quality by improving education and technical training. As in Europe, university graduates’ “employability” would rise faster if China focused on improving education quality rather than quantity. In both Europe and China, governments, schools, universities and companies must start to build bridges from the school world into the world of employment. The hermetic seal between these two worlds is a big driver of skills shortages later on. At company level, all firms need carefully to analyze how to get the right employees, and how to retain them. There is no one right answer, but certainly great value in a menu-approach: in China, good recruiting is half the battle for talent, using diverse sources such as referrals, a targeted campus presence, openness to state sector candidates, and to returnees to China who have studied or worked abroad. China’s Future Labor Market Adecco Institute White Paper 3 5 Meanwhile, companies must look at retention. Why do employees leave? Many are motivated by higher salaries, and wages must be reviewed frequently in a talent market as hot as China’s. Yet high attrition rates are closely correlated to employees having weak direct managers and perceptions that their career development opportunities are limited. Valuable incentive tools in China are things such as: on-the-job training programs, supplementary benefits, career development options, mentoring and a positive working environment. In-house leadership development will become increasingly vital. For the medium-term, the best leadership development strategy in China is to “build” instead of “buy” talent, and to localize talent. Our research identified excellent examples:
Carrefour China, Volkswagen Shanghai, Microsoft, and McKinsey & Company. Last but not least, there is a major role today in China for “capabilitybuilders” to help train the workforce and raise skill levels. Staffing firms, for example, not only offer flexible solutions for firms and options for workers, they can also be suppliers of practical workrelated training and certification, as in Europe and North America. In this regard, China is also paying increasing attention to lifelong learning as a key tool to help ensure better skills in the workforce.
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