China’s Labor Market in the "New Normal"

As China implements reforms under the "new normal," maintaining stability in the labor market is apriority. The country's demography and labor dynamics are changing, after benefitting in past decadesfrom ample cheap labor. So far, the labor market appears to be resilient, even as growth slows, drivenin part by expansion of the services sector. Migrant flows and possible labor hoarding in overcapacitysectors may also help explain this. Yet, while the latter two factors help serve as shock absorbers—contributing to labor market stability in the short term—if they persist, they may delay the neededadjustment process, contributing to an inefficient allocation of resources and curtailing productivitygains. This paper quantifies to what extent structural trends and the reform pace affect employmentgrowth under the new normal. Delays in reform implementation would weaken growth prospects inthe medium term, running the risk that job creation will fall below policy targets, leading to labormarket pressures in the future. In contrast, successful transition might require faster reforms, includingin the overcapacity and state-owned enterprise sectors, supported by well targeted social safety nets.