China: Youth Unemployment Could Drag on Growth
byAlex Ng
Bottom line: China's whopping youth unemployment rate, which stood at 19.3% in 2021, is a worrying sign for the long-term performance of the economy. While China has a tertiary enrollment rate that matches that of the developed nations, its population and its youth could prove to be over-educated, and there is a mismatch between job requirements and the relevant skills attained by the younger parts of the workforce. This structural mismatch between job requirements and labor skills, which results in high youth unemployment, could prove to be a major obstacle for China's development.
6Figure 1: 2021 Youth (15-24) Unemployment Rate (%)
Source: OECD, World Bank, China National Bureau of Statistics, Continuum Economics
China's youth unemployment rate, which stood at 19.3% in 2021 and has been on the rise over the past four years, is above the rate in major developed economies such as Japan and the U.S. High youth unemployment can be a damaging sign for the economy and has adverse implications for social stability as well as President Xi Jinping's common prosperity goal.
Figure 2: Tertiary Enrollment Rate 2020 (%)
Source: World Bank, Continuum Economics
Chief Culprit: Skills Mismatch and Social Expectations
We believe that the chief reason for the high youth unemployment lies in the great mismatch between job requirements and labor skills. China has a high tertiary enrollment rate (58%) that outpaces the world average and chases after the advanced economies in this respect. While the mass youth population is college-educated, the jobs available in the economy, despite some hype and emphasis on a knowledge-based economy, remain largely in the secondary sectors such as manufacturing jobs and non-tech service sectors. Additionally, the tech industry has slowed hiring in the wake of the 2021 regulatory crackdown. This means that the economy and job environment have disappointed many of those educated youth, who would rather keep searching for jobs than work what they see as irrelevant, relatively low-skill jobs.
The mismatch is exacerbated by woeful social expectations. Compared to other economies such as Germany, which has a significant population who are educated in technical schools and still earn a respectable salary in the manufacturing and service sectors, social expectations in China are largely against technical vocational schools. Academic colleges and universities are the preferred destinations and are deemed more prestigious by the mass population and the young population, notwithstanding the fact that there is a lack of job positions that require such advanced academic training. The result is a giant gap between expectations of job seekers and job requirements.
Impacts of High Youth Unemployment
High youth unemployment has several adverse long-term impacts on the economy. Aside from decreasing labor income and hence consumption expenditure, high youth unemployment means that there are excess resources in the economy that are not fully utilized. The youth unemployment situation, if extended, also means that the unemployed youth are not gaining the necessary job experience and training to prepare for the next levels in their career, which leads to a vicious cycle of lack of skills and prolonged unemployment. Furthermore, the discouraged youth can become increasingly discontented toward the labor market and the society, which can become a destabilizing force in the society.
Lastly, such demoralizing impacts on the young population income are hardly in accordance with President Xi's “common prosperity” goal. Instead of sharing the prosperity of economic development, the highly educated youth are clearly left behind and have to endure the low income levels associated with unemployment.