China 360

Chinas labor force:

What happens when Chinas
workers retire?
July 2013

Since opening up its economy some 30 years ago,

China has grown to become second only to the US in
terms of economic size and its vast labor force has
been one of the key drivers of this economic growth
cycle. Throughout this period, China has been able
to meet the demands for agricultural, industrial, and
service labor by tapping into its expanding workforce.
But what happens when the same labor force that
was responsible for building and contributing to
modern China reaches retirement age? Given the
drop in Chinas birthrate, will there be enough new
entrants to the workforce to meet demand? What
are the implications for the factory of the world as
a shrinking domestic workforce becomes the new
reality?
This issue of China 360 examines Chinas current
demographic shift, and looks at the potential impact
on people and businesses operating in China. Along
with challenges there are also opportunities, and this
issue will identify possible solutions to mitigate the
impact of the demographic changes that will take
place in China.

Labor boom led Chinas economic

development
Starting in the 1950s, Chinas fertility rate rose to
around six children per female, causing its population
to almost double over the next 30 years: from 580
million people to over one billion.1 Today, Chinas total
population is approximately 1.34 billion, of which
980 million people are actively employed.2
Over this period, Chinas growing workforce was not
only able to meet the increasing needs of Chinas
fast-growing industries, but also underpinned
growth in Chinas GDP due to the ability to spread
workers across jobs, sectors, and industries to match
appropriate demand.
From the 1950s to around 1980, the agriculture
or primary industry was the most significant
sector within Chinas economy. However, in the
1970s, manufacturing emerged as a substantial
contributor to GDP, and Chinas labor force was highly
transferable within these industries.
At this time, China benefited not only from the sheer
size of the population, but also because the majority
of its people were within the key working age range
of 15 to 64.3 This was Chinas demographic dividend
and it signified a period of time that China was able
to tap into its supply to match demand for labor to
produce products for China and the world.

China Census

Ageing China: Changes and challenges. BBC News http://www.bbc.co.uk/news/world-asia-19630110

Salt, Bernard. Demographics. In Australia & China: Future Partnerships 2011, 14-21. KPMG and
the University of Sydney China Studies Centre http://www.kpmg.com/au/en/issuesandinsights/
articlespublications/pages/australia-china-future-partnerships-2011.aspx

2013 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG
International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Impact of a shrinking labor force

In many respects, the demographic dividend was an important factor behind Chinas growth. But what happens
when this workforce stops growing, and can no longer keep up with demand?
Chinas working-age population and forecast, 1950-2050

Population
(millions)

1,200
1,000
800
600
400
200
0
1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

Sources: United Nations http://data.un.org/Search.aspx?q=China%u2019s+working-age+population+from+1950-2050; KPMG analysis

Statistics show that in 2015, the number of workers

in China will begin to flatten out, and by 2025 Chinas
labor supply is forecasted to decrease. The workingage population forecast (above) shows a reduction
of approximately 200 million people from 2020 to
2050, or roughly 20 percent.4 Although a long-term
phenomenon, this reduction in the labor force will
almost certainly create a headwind for very high rates
of growth in the economy.
As China moves beyond its period of demographic
dividend, many areas of the economy and society
will undoubtedly feel an impact; some of these are
outlined below.
Wages: As Chinas labor supply begins to decrease,
workers wages should rise. Since 2004, Chinas
average annual wage increase has been 14.3 percent
and 18.3 percent in the public and private sectors,
respectively.5 Rising incomes have led to higher
living standards and are primarily responsible for the
emerging consumption-driven economy in China.
At the same time, however, higher labor costs
have created challenges for businesses across the
economy. As competition for labor intensifies and
costs rise, companies will need to adapt accordingly;
recent years have seen many labor-intensive
manufacturing activities relocate to inland provinces
or overseas.
Productivity and skills mismatch: Chinas
productivity in all three of its sectors agriculture,
industry, and services has increased rapidly

since 1970. In the past, China has benefited from

labor force flexibility; China has been able to boost
workforce productivity by effectively transferring
workers from agriculture to industrial sectors, where
applicable skills could be quickly learned.
Today, however, the challenge has shifted toward
moving low-skill workers to high-skill manufacturing
or service industries. This presents a greater
challenge for employers: in order to match supply
with market demand, training and other technical
skills must be efficiently utilized to transform lowskilled workers to fill high-skilled operations and
service jobs. Challenges in filling more specialized
positions will likely put further upward pressure on
costs.
Foreign direct investment: China has been
experiencing record-setting foreign direct investment
(FDI), with FDI to China easily surpassing the
USD100 billion per year mark for each of the past few
years.6 One of the biggest questions about Chinas
demographic challenges is whether China will remain
attractive to foreign investors as a destination for
investment.
It is worth noting, however, that FDI to China has
remained high despite rising costs, a stronger
currency and economic challenges in FDI source
nations over the past few years. In addition, FDI has
already begun diversifying into new sectors (including
R&D and services). Taking into consideration Chinas
attraction as an important end-market, it is likely that
China will continue to be a top location for FDI going
forward.

United Nations http://data.un.org/Search.aspx?q=China%u2019s+working-age+population+from+1950-2050

Chen, Xin. Labor force at turning point. China Daily http://www.chinadaily.com.cn/china/2012-11/06/content_15877133.htm

Investment in China: Numbers and Trends (Fourth Quarter, 2012). KPMG http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Pages/Investment-in-China-Numbers-andTrends-201303.aspx

2013 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG
International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

The graying of China

The labor force reduction and productivity shift
amongst workers is not the only issue China is
faced with: China is also a nation that is graying at
a rapid pace. This graying has been caused in part
by policies put in place to address Chinas dramatic
population growth from the 1950s to the late 1970s.
Chinas one-child policy, improved mortality rates, and
people having children later in their lives are some
of the factors leading to a striking shift in Chinas
demographic make-up.
Chinas one-child policy was initially applied in
1979 and is still in effect today, albeit with some
modifications. The policy effectively restricts
urban couples to only one child, while providing
some flexibility, such as for ethnic minorities, or

if a husband and wife are both single children

themselves.
In the mid-1970s China also launched a later, longer,
fewer campaign (later marriage and age at first
birth, longer inter-birth intervals, and fewer births).
Combined with the one-child policy, these two
policies were correlated with a substantial drop in the
fertility rate. From the early 1980s until today, fertility
rates have dropped from nearly six to 1.8 births per
woman, which is one of the lowest in the developing
world. These rates have stayed relatively flat for the
past 20 years or so.7 The number of offspring per
family for population maintenance is 2.1,8 therefore
all else being equal, Chinas population would shrink
over time.

Population (millions)

Chinas demographic shift, 1950-2050

500
450
400
350
300
250
200
150
100
50
0
1950

1960

1970

1980

1990

2000

2010

2020F

2030F

2040F

Over 60 years old Actual

Under 15 years old Actual

Over 60 years old Estimate

Under 15 years old Estimate

2050F

Sources: United Nations http://data.un.org/Search.aspx?q=China%u2019s+working-age+population+from+1950-2050; KPMG analysis

Declining mortality rates is another reason why the

workforce demographic is shifting in China. When
the Peoples Republic of China was established in
1949, Chinas life expectancy was only 35 years.9
Due to advances in science, medical technology,
and extension of basic healthcare to everyone in

China, health conditions and life expectancies have

drastically improved. Life expectancy is now around
75 (nationally, higher in large cities such as Shanghai),
and Chinas life expectancy is expected to further
increase to 80 years by 2050.10

Bloom, David E., David Canning, and Gnther Fink. Population Aging and Economic Growth, 2008. http://www.hsph.harvard.edu/pgda/WorkingPapers/2008/PGDA_WP_31.pdf
One child policy pressurized by aging population. Xinhua News Agency http://www.china.org.cn/china/features/content_18320523.htm
Bloom, David E., David Canning, and Gnther Fink. Population Aging and Economic Growth, 2008. http://www.hsph.harvard.edu/pgda/WorkingPapers/2008/PGDA_WP_31.pdf
10
Han, Dongping. Chinas past century: On CPCs 90th birthday. China Daily http://www.chinadaily.com.cn/opinion/2011-07/01/content_12817726.htm
8
9

2013 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG
International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

As a percentage of the population, in 2010,

approximately 70 percent of Chinas population was
between the standard working age of 15 to 60 (73
percent of Chinas population was actively employed),
while 19 percent was under the working age of
15, and only 11 percent was above the age of 60.11
However, by 2050 the number of citizens age 60
and over is forecast to increase roughly threefold,
which would place Chinas retirement age population
population above 400 million people, greater than the
entire US population.12
Not only are fewer children being born and then
entering the workforce, a substantial segment of the
population will begin to enter the senior years of their
lives and they are expected to live longer.

A large and growing elderly population provides

numerous challenges to the economy and society:
first and foremost there will be a greater amount of
healthcare needs for the larger elderly population.
In China, it is traditional for a younger working class
person to take care of their elderly family members.
Thus, a larger elderly population, with limited access
to healthcare coverage, may cause the younger
generation to save more for such expenses, which
would influence the savings rate amongst the
working age population. A higher savings rate could
mean a lower propensity to take risks or start small
businesses, and impact consumer discretionary
spending.

Chinas population shift

2010

19%
Under 15

70%

11%

15-60

Over 60

2050 est

12%

55%

33%

Under 15

15-60

Over 60

11
12

China Census; United Nations

Retirement age will be pushed back. China Daily http://www.china.org.cn/china/2011-03/22/content_22190715.htm

2013 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG
International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Potential responses
Chinas demographic challenge, although a threat to
Chinas productivity, entrepreneurial activity, and GDP,
will not present immediate problems. Since these
changes are expected to happen over a long period
of time, the market has an opportunity to react and
adjust accordingly. In addition, one can also examine
other countries that have seen similar demographic
shifts, and understand how they have coped
with such changes. Below we examine some
potential responses that may (or may not) be of
relevance to China:
Automation and mechanization China is
already the global leader in robotics purchases,
as it prepares itself for an industrial shift towards
cost management, a strategy pursued by Japan,
which has been facing a graying population scenario
for some time already. Greater automation and
mechanization (e.g. of agriculture) has the potential
to eliminate many more jobs than Chinas long-term
demographic shift, but also lower costs and continue
to attract foreign direct investment participation.
For example, Foxconn (an Apple products
manufacturer located in Shenzhen) has already
begun to implement their plan to install one million
robots over a three-year span, to replace high cost
workers, at an estimated value of USD7.1 billion.13
Mechanization and automation will not be a 1:1
swap with labor. Foxconn recently commented that
despite their plan to apply one million robots to their
workforce, some of the one million plus laborers will
be repositioned in technical or engineering positions
to maximize efficiencies.14
Meeting productivity/efficiency in Chinas
new growth sectors The service industry is
predicted to become Chinas primary growth driver
in the future. To meet the resourcing needs of
this sector, investments in training, retraining or
reskilling of workers will be required. This could
present opportunities for local and foreign education
institutions, such as offering specialized degrees and
certification programs.

One sector-specific opportunity is the geriatric care

industry within the healthcare sector, an area that is
already drastically understaffed in China. In addition,
the demand for beds and healthcare facilities for
the chronically ill will likely see high rates of growth.
The investment and training to handle the needs
of a graying society could present tremendous
opportunities for private sector participation and
investment.
Immigration/importation of labor China
historically has been a labor exporter, and not a major
destination for immigration (unlike Australia or the
US, for example). The US has been relatively open
to immigration, and this influx of younger, working
age people has helped sustain a younger workforce.
Germany, however, is currently bracing itself to lose
13 percent of its workforce over the next 15 years.15
Germany is trying to combat its aging workforce and
an ongoing labor shortage by promoting immigration
and job growth from outside its borders.16 Over
the longer term, China may consider more flexible
immigration measures as part of a package of policies
to address the demographic shift.
Delay retirement age Chinas current retirement
age is 50 years old (for female workers), 55 years
old (for female civil servants) and 60 years old (for
men).17 The retirement age was established years ago
when Chinas life expectancy was much shorter, and

13

Apples Revolutionary Move Into Robotic Manufacturing. Seeking Alpha http://seekingalpha.com/article/658711-apples-revolutionary-move-into-robotic-manufacturing

Kan, Michael. Foxconn to speed up robot army deployment. PCWorld
http://www.pcworld.com/article/2043026/foxconn-to-speed-up-robot-army-deployment-20000-robots-already-in-its-factories.html
15
Elliott, Larry, and Julia Kollewe. Germany faces up to problem of ageing workforce. The Guardian
http://www.theguardian.com/world/2011/mar/17/new-europe-germany-retirement-pensions-exports;
NationMaster.com http://www.nationmaster.com/country/gm-germany/lab-labor
16
Elliott, Larry, and Julia Kollewe. Germany faces up to problem of ageing workforce. The Guardian
http://www.theguardian.com/world/2011/mar/17/new-europe-germany-retirement-pensions-exports
17
Retirement age will be pushed back. China Daily http://www.china.org.cn/china/2011-03/22/content_22190715.htm
14

2013 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG
International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

today these retirement ages are earlier than in many

other countries. In the US the official retirement age
is being raised gradually, from 65 to 67 in 2026,18
while Japans mandatory retirement age is currently
set at 60. Japans retirement age is in the process
of being revised, and will increase once every three
years, starting in 2013, until it reaches 65 in 2025.19
Germany is also revising its retirement age from 65
to 67 between now and 2029.20
How best to tap into the experience and skills of the
older generation is likely to be a key area of focus for
China over the next few decades.
Offshoring Offshoring is the process of moving
jobs to self-owned or third-party facilities in an
overseas location. As noted above, this process has
been underway already in very labor intensive sectors
(such as garment manufacturing) for some time. Over
time this trend is likely to impact additional sectors.
As Japanese and Korean companies have done
in previous decades, we may see Chinese export
manufacturing enterprises pursue or intensify similar
strategies of moving production offshore.
Population control measures The current
population control measures have been in effect for
over 30 years. These controls have clearly been a key
driver for keeping the birth rate steady at around 1.8
for the past 20 years.21 If China relaxed population
controls, this would likely help to redress the
impending decrease in the labor force, although not
for several decades: children born today will not enter
the job market until the 2030s.

Contact us
For more information, contact:
Thomas Stanley
COO, Global China Practice
KPMG China
Email: thomas.stanley@kpmg.com
Tel.: +86 21 2212 3884
Robert Ritacca
Research Manager, Global China Practice
KPMG China
Email: robert.ritacca@kpmg.com
Tel.: +86 10 8508 5109

Read on...
For all issues of China 360

18

Ageing and Employment Policies Statistics on average effective age of retirement. OECD
http://www.oecd.org/els/public-pensions/ageingandemploymentpolicies-statisticsonaverageeffectiveageofretirement.htm
19
Schreiber, Mark. Mandatory retirement takes a leap forward. The Japan Times
http://www.japantimes.co.jp/news/2013/03/24/national/mandatory-retirement-takes-a-leap-forward/
20
S. Korea to make retirement age of 60 compulsory. SINA http://english.sina.com/world/2013/0423/584720.html
21
Bloom, David E., David Canning, and Gnther Fink. Population Aging and Economic Growth, 2008. http://www.hsph.harvard.edu/pgda/WorkingPapers/2008/PGDA_WP_31.pdf

2013 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG
International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.