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Can the Three-Child Policy Fix China’s Future Labor Shortage?

Summary

Key industries such as construction and manufacturing have been pinpointed as weak links in the future Chinese economy. With an imminent aging population crisis on the horizon, Beijing has unveiled a new three-child policy that supersedes the current two-child policy. The question remains, 'can the three-child policy really fix this issue or are policymakers too little too late?'

China’s infamous one-child policy had been a hallmark of CCP efforts to control population growth for decades. However, over the last half decade, there has been a general shift in attitude with the adoption of the two-child policy in 2016 and, now, the implementation of a three-child policy.

Policymakers have recognized that an imminently aging population may inhibit Beijing’s ambitious economic benchmarks for the remainder of the 21st century. Poignantly, as Chinese supply chains continue to move up the value chain and shift more workers into higher skilled positions, core labor-intensive industries like construction and manufacturing will face a high likelihood of labor shortages. As such, the adoption of a three-child policy has been viewed by many as a last ditch attempt to rectify future demographic issues and their subsequent economic fallout. 

However, skepticism is running high regarding whether this new policy will be effective in countering China’s future labor constraints. Even since the one-child policy was lifted in favor of two children, China’s population trajectory has shown a declining birthrate. Chinese parents are finding themselves having less children due to high childcare costs, a lengthy average Chinese work schedule, and other factors. So, while the expansion of the two-child policy to that of a three-child policy may appear significant on paper, Beijing will need to provide further incentive to the Chinese people before it sees a “baby boom.”

China’s Imminent Aging Population Crisis

What Was China’s One-Child Policy?

At the heart of labor shortage concerns lies declining birth rates. China’s population shortfall can be traced back to the 1970s and the implementation of strict family planning policies. During the 1970s, the leaders of the Chinese Communist Party (“CCP”) worried that an unchecked and fast growing population growth could derail economic development by stretching resources too thinly. To curb this growth, the CCP implemented the notorious one-child policy, which limited one child per family and stood in place for decades as a control measure against formerly skyrocketing birth rates.

Families that broke the rule by having two or more children were met with harsh punishments on each instance, including fines that were often many multiples of the average annual income. Additionally, as each locality enforced rules differently, forced abortions and sterilizations were also commonly used to enforce the one-child policy. As a result of strict family planning enforcement, birth rates dropped significantly from a peak of 6.3 births per woman in 1970. Fast forward to the present, and these strict family planning policies have come back to haunt the CCP as people born before the one-child policy begin retiring from the workforce and there are fewer people in the later generations to replace them.

What Impact Did China’s Two-Child Policy Have?

Although the one-child policy was eased to two children per family in 2016, Chinese birth rates still remain significantly lower than what the CCP seeks. The high cost nature of raising children along with the rising prices of housing in most of China’s major cities have created a scenario where children are oftentimes viewed as a financial burden. The combination of schooling expenses, higher standards of living, and social pressures to spend extensively on extracurricular activities for children have obstructed the ability for policy relaxation to increase China’s birth rate. 

Comparison of Fertility Rates

Source: The World Bank, The China Guys

The need for the three-child policy continues to manifest due to the uneven growth of the Chinese population. Recent data from 2020 shows that China’s birth rate has dropped to a mere 1.6 children per woman, which is similar to that in Japan – a country notorious for its aging population. Data from 2020 also showed that childbirths dropped by 18%, which signals the fourth consecutive year in which birth rates have declined in China, as well as the failure of China’s two-child policy to stimulate population growth.

Also particularly worrisome is the decline in the country’s working-age population, which consists of individuals between the age of 15 and 59. Since 2010, this demographic has dropped from 70.3% of the total Chinese population to 63.4%. By contrast, the number of people aged 65 and above has continued to climb from 8.9% to 13.5% of the total population. 

How Does an Aging Population Impact the Economy?

If the population distribution follows its current trajectory, China will be on track for an aging population crisis. However, more importantly for the CCP, the working age population will become too small to uphold economic growth. Alongside a reduced labor pool arises many economic issues. First, a strained labor force commands higher wages, which in turn places pressure on inflation. Second, reduced productivity leads to less supply and creates more inflationary pressure. Third, a smaller hiring pool in certain sectors could lead to significantly faster rates of automation, leading to temporary unemployment for those seeking jobs in affected sectors. On the other hand, for firms that lack capital to automate and lack sufficient laborers, they may simply be unable to meet demand and go out of business.

2020 Sector Contributions to GDP

Source: National Bureau of Statistics, The China Guys

Two sectors of particular concern are construction and industry. Both are labor intensive and built upon the ability to mobilize China’s massive population as a relatively cheap labor source to meet productivity requirements. Adding fuel to the labor shortage fire is the concern that many young people simply do not want to work in these sectors. 

While more capital- and knowledge-intensive sectors of the economy are flourishing as well, China has historically derived more than 30% of its annual GDP from its secondary industry, or construction and industry. This staple of the Chinese economy has also been outsourced around the world to build large infrastructure projects that ultimately funnel profits into state-owned enterprises and back into the Chinese economy. As such, ensuring an ample future labor force to maintain these areas will be key to maintaining China’s continued growth.

The Case of Denggao Electric

While the current Chinese population age distribution is relatively stable, there are still glimpses of a more worrying future in certain sectors of the economy. One contemporary example is the company Denggao Electric (“DGG”), which produces parts for power plants, electric grids, and railways all over China. From about 2013, competition for available labor has pushed up the costs for manufacturers like DGG. From 2013-2018, the firm had continually bumped up wages from 15 percent to 30 percent within a five-year time span while also offering a slew of benefits in a bid to entice qualified candidates to the company. However, even with these incentives, DGG still failed to attract enough qualified workers and ended up turning to the Chinese government to fund its pivot to less innovative product manufacturing and automation systems.

The example of DGG is just a glimpse into the broader environment of the Chinese economy if it cannot fix its labor shortage. For policymakers in Beijing, the hope is that a three-child policy can drive China away from this future where companies must spend considerable capital to find and retain qualified employees while concurrently having to downsize operations to less innovative manufacturing projects, and in the worst case scenario, receive subsidies from the Chinese government to stay afloat. 

China’s Three-Child Policy

What Is China’s Current Population Control Policy?

The three-child policy, announced on May 31, 2021, is a loosening of the previous two-child policy. Where the two-child policy failed to increase the national birthrate, the recently instituted three-child policy aims to provide a comprehensive set of supportive measures which are seen as conducive to increasing the country’s population. Meanwhile, it also addresses adequate care for the aging segment of the population. Within those measures, the CCP has promised to lower educational costs for families, bolster tax and housing support, focus on supporting the legal interest of working moms, and provide educational programs on the benefits of “love” and “marriage.” 

The extracurriculars industry is a poignant example of the additional support that the CCP is providing prospective parents. Beijing has recently begun a crackdown on tutoring firms and test prep centers who have been accused of price manipulation and non-transparent, manipulative marketing tactics. Back in March, strict caps were placed on tutoring fees. Then, in late May, fifteen tutoring firms were slapped with US$5.73 million in fines for false advertising.

Why Is Beijing Targeting Tutoring Firms?

The desire of Chinese couples to see their children succeed within China’s ultra-competitive education system and the expensive nature of this academic journey has been pinpointed as one of the key discouragements for Chinese couples to have more children. In fact, as the average Chinese household spends more than 50% of their budget on educational expenses, these supportive actions from Beijing show strong potential to incentivize childbirth where the two-child policy failed.

Remedying the Failures of the Two-Child Policy

The two-child policy in comparison did not address many of the systemic issues within China’s society that has led to plummeting birth rates. In 2015, when the two-child policy was announced, a list of incentives were also offered to encourage married couples to take that next step towards having a second child. These incentives took different forms depending on what provincial authorities thought was appropriate within their own provinces. 

In Liaoning province, officials sought to provide leniency on taxes, social security and housing for couples who had a second child. In Hubei province, similar incentives were provided that encouraged businesses and government bureaus to give more generous maternity leave packages and flexible hours for newly returning mothers. However, these incentives still failed to address the engrained issues of high costs of living, expensive educational services and predatory tutoring services. The CCP’s acknowledgement of these engrained issues within Chinese society is what has prompted the three-child policy to be more directed and substantive in encouraging births amongst Chinese couples.

Can the Three-Child Policy Induce a Baby Boom?

The existence of a future labor shortage will be a direct result of whether the three-child policy can deliver its intended outcome. While Beijing has already launched supportive actions nationwide to incentivize childbirth, it is too early to tell if the three-child policy will bring its intended results. Increased childbirth will likely warrant more action from Beijing than a simple crackdown on tutoring firms before any significant progress in birthrate stabilization is seen. For example, families have also remarked that general education and living expenses have created obstacles to having more children.

While the two-child policy and its supportive measures failed, Beijing is now more directly pressured by demographic imbalances, and as such may move more quickly. Otherwise, the economic effects of an uneven demographic-led labor shortage could spell trouble for the economic ambitions of the country in the latter half of the 21st century.

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