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What next for the workshop of the world?

The implications of China’s declining working age population

China FlagOn 18 January, the National Bureau of Statistics in China revealed that the economy’s working-age population shrank by 3.45m in 2012. Now, this is a decline of just 0.6% and it should be noted that part of this decline was brought about by a change in the definition of working age (reducing the upper bracket from 64 to 59), however it marks a point commentators have been talking about for many years – the end of the demographic transition in China. 

The demographic transition describes a period when the size of the working age population increases relative to dependents – those too young or too old to work. The demographic dividend is the potential boost to the economy this can bring. In China, the transition has kept wage rates low as supply outstripped demand and also increased savings rates as workers needed to spend relatively less caring for children or older relatives.

So what could China’s leaders do?

The one-child policy could be relaxed, although it permits around 1.47 children per female once exemptions are included and its effects would not be felt for at least another 15 years. Moreover, as Chinese women becomes more wealthy and better educated, birth rates are likely to decline naturally. An alternative, to  encourage people to move from rural areas - where 47% of the population still lives - to urban areas, would be an amendment of the hukou household registration system. This currently limits migrant worker access to public benefits such as  housing, social security and schooling for their children. 

But could demographic change also help move China along the path to more sustainable growth that the new leadership favour?

The contracting supply of workers will exert further upward pressure on wages and place downward pressure on the savings rate, factors which are likely to translate into higher rates of consumption and lower rates of investment respectively.

In other words, exactly where the State Council want to take the economy.