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China’s demographic pains – Labour unwanted

To counter the drag of an ageing population on growth, Beijing is planning to gradually raise the legal retirement age.  

Alongside other structural and regulatory reforms, these efforts could easily bring more than 200 million workers into the labour force (find a fuller discussion here and here). However, age discrimination in China’s labour market is hampering these efforts by reducing labour market efficiency. This could damage the economy and the government’s ambition to become a global technology power. 

Age discrimination in China’s labour market

Age discrimination – or ageism – is prevalent in the Chinese labour market. While ageism at work exists in many countries, it tends to be focused on those in the labour force aged 45 and older. In China, ageism starts at 35 – a trend dubbed locally as the ‘curse of 35’. That is far earlier than in many other countries, including the US, whose Age Discrimination in Employment law protects workers aged 40 and over.

Ageism is not illegal in China. Even the government practises it by only recruiting people younger than 35, according to Article 18 of the Provisions on Recruitment of Civil Servants. Not surprisingly, many companies take the government’s lead and do the same.

With ageism, employers stereotype younger workers as being more productive (and cheaper) than older ones, though there is no evidence for the productivity advantage.

Research shows that an individual’s productivity follows an inverted U-shaped trend: It starts low early in a career, then increases as the person gains experience, before peaking and dropping off towards retirement. Furthermore, a worker’s productivity peaks at around 40 years or a little later, meaning firms that impose an age cut-off point for hiring could miss out on highly productive workers.

Damaging the labour force

The ‘curse of 35’ glass ceiling limits labour mobility and gives rise to job insecurity as workers approach that age. The socio-economic impact can be far-reaching: Young Chinese are delaying marriage (see Exhibit 1) and avoiding having children.

This, in turn, has aggravated the ageing population problem and negated government efforts to boost the birth rate (China scrapped the one-child policy in 2016 and adopted a three-child policy in 2021; see Exhibit 2).

Ageism implicitly shrinks the labour force. In 2022, there were about 962 million people of working age (15-64), of which 430 million were aged 35 to 49. That is 45% of workers potentially targeted and removed from their jobs as a result of ageism.

Damaging innovation

Ageism works against Beijing’s goal of developing China into a global technology power, upgrading the economy and putting it on a sustainable path for long-term development. The average age when major inventions and scientific breakthroughs occur has risen over time: innovation no longer comes predominately from younger workers.

With China transitioning to a knowledge-based economy, physically demanding jobs such as those in low-end manufacturing are already on the decline. Experience has become more important in determining work performance than physical ability.

Evidence from China and other countries shows that older workers outperform their younger counterparts in various services and sectors by virtue of having more experience and a greater sense of responsibility.

Research from China shows that perceived age discrimination in an organisation can adversely affect an employee’s inclination to be innovative. Ageist practices that constrain the career advancement of middle-age and older workers could hamper innovation and hence the direction of national strategic development.

An attitude problem

In China, older workers often receive a seniority wage premium. This disincentivises employers to hire older workers. This was the case in the Maoist-era planned economy when the state sector offered life-time employment. Workers’ pay and promotion were based largely on seniority, regardless of performance.

However, since Deng Xiaoping’s economic liberalisation in the1980s, the salary premium has fallen. Market reforms have tied wages in the private sector to workers’ economic value or productivity rather than seniority.

The rising cost of ageism

The Chinese economy has moved on, and so must the ageism attitude. The cost of shutting out older, more experienced workers is rising when the population is ageing and the working-age population is shrinking.

When ageism struck workers aged 35 to 44 in 2010, it affected a cohort with relatively low human capital as only 20% had finished high school. By comparison, in 2020, one third of the cohort had a high-school education or higher.

Outlawing ageism in employment could fix this. The state media has repeatedly called for an end to the ‘curse of 35’ through legislation, and the public’s desire for such legislation is gaining traction.

Ending employment ageism will be a crucial step in addressing the problem of a withering pool of labour.

Disclaimer

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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