## _wp1326

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---

### I. Introduction
- China’s large pool of surplus rural labor has played a key role in maintaining low inflation and supporting China’s extensive growth model.
- The paper frames China’s development within Sir Arthur Lewis’ model: surplus labor in a low productivity sector (agriculture) limits industrial wage increases until the surplus is exhausted; when exhausted, the economy crosses the Lewis Turning Point (LTP).
- Implications of crossing the LTP:
  - The extensive growth model reliant on factor input accumulation could not be sustained.
  - China would need to invest less, but in better, capital—shifting to a more “intensive” growth model with greater reliance on improving total factor productivity (TFP).
  - Rebalancing toward private consumption could raise output in countries within the supply chain (mainly emerging Asia) and commodity exporters, with more limited spillovers to advanced economies (IMF, 2011).
  - Rising labor costs will affect prices and corporate profit margins in China, with implications for trade, employment and price developments in trading partners.
- Empirical approach:
  - Estimates China’s excess labor supply using a general procedure developed in Rosen and Quandt (1978, 1986) and Rudebusch (1986).
  - Explicitly attributes roles to population composition, labor force participation, and productivity.
- Paper organization:
  - Section II: recent trends in China’s labor market.
  - Section III: empirical framework.
  - Section IV: baseline results.
  - Section V: scenario analysis around a central baseline forecast.
  - Section VI: conclusions.

### II. Recent Developments
- Mid-2000s episode and perspectives:
  - Reports in 2004 of migrant labor shortages in export-oriented coastal regions and large increases in migrant wages.
  - Shortage view: depletion of surplus labor and transition to a mature economy.
  - Segmentation view: rising migrant wages reflect labor market segmentation (hukou, limited portability of benefits, rising rural reservation wages), allowing coastal shortages and inland surplus to co-exist.
- Recent patterns and indicators:
  - Aggregate nominal wage growth has ranged between 12–15 percent annually for over a decade.
  - Corporate profits have remained high and even risen as wage growth has trailed productivity gains.
  - Urban employers report frictions (skill and geographic mismatch) rather than widespread scarcity.
  - Urban registration records indicate the margin between city demand and supply of labor has progressively narrowed and is now effectively closed (measure from National Bureau of Statistics).
  - Industry relocation to the interior has gathered pace since the global financial crisis.
  - Uptick in labor activism since the financial crisis consistent with strengthened bargaining power.
  - Government increases in minimum wages have contributed to wage rises.
- Demographic signals:
  - UN projects growth of the working age (15–64) population will turn negative around 2020.
  - Core 20-39 subpopulation’s growth rate shrank to zero in 2010 and is projected to decline faster than the overall working age population through 2035.
  - Share of dependents (aged 0–14 and > 64) troughed in 2010 and will rise to nearly 50 percent by 2035.
- Offsetting factors that could affect timing/severity of labor shortages:
  - Progress in hukou reform could spur rural labor to move to cities.
  - Training rural workers to meet industrial skill requirements could alleviate urban bottlenecks.
  - Raising agricultural productivity (e.g., mechanization) could release rural workers; agriculture employs nearly half the labor force but accounted for only about one-fifth of 2011 GDP.
- Summary assessment:
  - Labor market indicators are mixed: wage developments do not suggest exhaustion of surplus labor, while employment, industrial relocation and some policies signal tightening conditions.
  - Demographics more forcefully suggest an imminent transition to a labor-shortage economy.
  - Overall conclusion: China likely is on the eve of the LTP, but the timing of the transition is uncertain.

### Key statistics and observations (from text)
- Aggregate nominal wage growth: 12–15 percent (annual, over a decade).
- Migrant workers seeking jobs outside their home province: about 169 million (end-September 2012).
- Number of unemployed people: 21.5 million (end-2011), amounting to about 3 percent of the total labor force.
- Working-age defined as 15–64.
- Core demographic subpopulation referenced: 20-39 years of age.
- Dependency share projection: nearly 50 percent by 2035.
- UN projection: growth of the working age (15–64) population turns negative around 2020.
- Agricultural share of labor force: nearly half; agricultural value added about one-fifth of 2011 GDP.

### III. Empirical Framework and Estimation
- Modeling approaches:
  - Conventional simultaneous equation: labor market in equilibrium; real wages clear the market.
  - Disequilibrium approach: observed real wage does not clear the labor market; observed employment is the minimum of notional supply and demand; unemployment results from excess labor supply.
- Disequilibrium model specification (log-linear):
  - Labor demand (notional): L_D = α_1 + β_1 W + β_2 TFP + β_3 GDP_p + ε_1
    - W: natural log of gross real wages (nominal wages deflated by CPI).
    - GDP_p: natural log of real GDP-weighted growth rate of trading partners.
    - TFP: total factor productivity, calculated as the residual from growth accounting (TFP in level terms).
  - Labor supply (notional): L_S = α_2 + β_4 W + β_5 ln(H) + β_6 Wealth + β_7 U + ε_2
    - H: participation rate times population (scale variable).
    - U: unemployment rate; captures “added-worker effects”.
  - Observed quantity: L = min(L_S, L_D)
  - Indicator formulation links excess supply to an indicator I (e.g., unemployment) and parameter δ.
- Data and estimation:
  - Sample period: annual observations from 1992 to 2010.
  - Dependent variable: L = ln(total number of employees in urban and rural areas, including government, SOEs and private sector).
  - Key variables and sources:
    - L: Ln of total employment; millions — CEIC
    - W: Ln of aggregate annual nominal wages deflated by CPI; billion renminbi — CEIC
    - GDP_p: Ln of weighted average of real GDP growth in Chinese trade partners; percent — WEO, DOTS, staff calculation
    - TFP: Total factor productivity, residually calculated from growth accounting — CEIC, WEO, staff calculations
    - H: Participation rate times population; millions — UN, WDI
    - Wealth: Net household financial wealth; 100 million renminbi — Haver Analytics
    - U: Unemployment rate; percent — CEIC
  - Estimation method: Three stage least squares; only wage variable treated as endogenous.
  - Number of observations: 36
  - Pseudo R-squared: .82

### Estimated coefficients (reported)
- Labor Demand (2nd Stage, dependent variable: Employment)
  - Wages: -.063**  (.013)
  - GDP_p: .001  (.01)
  - TFP: .353**  (.036)
  - Constant: 7.3*  (.137)
- Labor Supply
  - Wages: .050**  (.007)
  - Wealth: -.018**  (.0002)
  - Unemployment: .0968**  (.033)
  - Participation Rate × Population: .0005**  (.0001)
  - Constant: 5.6**  (.101)
  - Indicator: .018**  (.0009)
- Interpretation highlights:
  - Demand wage elasticity: -0.063 (inelastic), consistent with labor costs being a low fraction of total firm costs.
  - TFP positive effect: .353.
  - Supply wage elasticity: .050, smaller than demand elasticity in absolute terms—consistent with large surplus labor.
  - Wealth reduces labor supply: -.018.
  - Unemployment positive: .0968, supporting added-worker effects.
  - Indicator δ positive and statistically significant (Indicator .018**), rejecting δ = 0 and supporting disequilibrium.

### Excess labor supply estimates and historical features
- Model-implied excess supply patterns:
  - China has had an excess supply of labor continuously since at least 1991.
  - A surge in excess supply around 2000–04 coincides with end of SOE reform and job-shedding.
  - Surplus labor fell continuously between 2004 and 2008, then rose abruptly in 2009–10 due to the global financial crisis.
- Specific estimates:
  - Model generates an excess supply estimate of around 160 million in 2007.
  - Peak of excess supply in 2010: 151 million (baseline projection referenced).

### IV. Baseline Forecast and Scenario Analysis
- Baseline forecasting assumptions:
  - Real wage adjustment depends on past real wages, contemporaneous and lagged inflation, and current NAIRU; inflation and NAIRU forecasts through 2017 drawn from IMF WEO and assumed to grow at the 2017 rate thereafter.
  - Household net wealth (NFW) forecast: NFW_t = NFW_{t-1}*(1+i) + α*Household_Saving_t; i is nominal deposit rate; α estimated from time series regression; household saving-to-GDP ratio follows WEO projections.
  - Demographics: population and working-age population from UN “constant fertility” variant.
  - TFP: level increases annually at the average of 2005–10 growth rate (3.9 percent) until 2017, then fixed at 2017 level.
  - Unemployment rate: WEO forecasts through 2017; fixed at 2017 rate (4 percent) thereafter.
  - Partner GDP growth: projections for eight largest trading partners from WEO and DOTS; after 2017 assumed fixed at 2017 level; export shares fixed at 2011 level.
- Baseline scenario forecast results (excess labor supply, millions):
  - 2010: 151 million (stated as peak)
  - 2015: 57 million
  - 2020: 33 million
  - LTP projected to emerge between 2020 and 2025 when excess supply turns negative.
- Drivers of baseline decline in excess supply:
  - Rapid decline follows projected path of dependency ratio (bottomed in 2010, rises thereafter).
  - Wealth evolution (reduces labor supply) and TFP (raises labor demand) are important contributors.
  - Historical job creation: about 350 million jobs created over the past 3 decades, yet a long period of excess labor supply remains.

### Scenario analysis — alternative policy and demographic scenarios (excess labor supply, millions)
- Baseline:
  - 2015: 57.1
  - 2020: 33.2
  - 2025: -27.8
  - 2030: -137.5
- B. Higher Fertility (UN high-fertility variant: +0.5 children vs constant fertility)
  - Working age population larger than baseline by 0 percent, 1.4 percent and 4 percent in 2025, 2030 and 2035 respectively.
  - Results:
    - 2015: 51.9
    - 2020: 36.0
    - 2025: -16.8
    - 2030: -126.3
  - Interpretation: LTP delayed relative to baseline; increase in excess supply small.
- C. Higher Labor Force Participation Rates (one-time increase from 0.82 to 0.85)
  - Context: participation fell from 0.87 in 1995 to 0.82 in 2010.
  - Results:
    - 2015: 92.3
    - 2020: 68.1
    - 2025: 5.31
    - 2030: -114.1
  - Interpretation: Higher participation has immediate impact and significantly delays the LTP; LTP emerges between 2025 and 2030 under this scenario.
- D. Financial Sector Reform (nominal deposit rates +5 percentage points)
  - Channel: wealth effect reduces labor supply via higher returns on deposits; simulated using Nabar (2011) saving response estimates.
  - Results:
    - 2015: 57.0
    - 2020: 10.5
    - 2025: -70.4
    - 2030: -220.5
  - Interpretation: Financial reform accelerates crossing of the LTP relative to baseline.
- E. Product Market Reform (TFP growth increased to 4.5 percent)
  - Channel: higher TFP raises firm profitability and labor demand.
  - Results:
    - 2015: 54.9
    - 2020: 11.6
    - 2025: -44.0
    - 2030: -153.7
  - Interpretation: Higher TFP accelerates decline of excess labor supply and emergence of the LTP; qualitatively similar to financial reform in this framework.
- Table 3 (condensed) — Excess Labor Supply Scenarios (millions)
  - Baseline: 2015: 57.1; 2020: 33.2; 2025: -27.8; 2030: -137.5
  - Higher Fertility: 2015: 51.9; 2020: 36.0; 2025: -16.8; 2030: -126.3
  - Higher Labor Force Participation: 2015: 92.3; 2020: 68.1; 2025: 5.31; 2030: -114.1
  - Financial Sector Reform: 2015: 57.0; 2020: 10.5; 2025: -70.4; 2030: -220.5
  - Higher TFP: 2015: 54.9; 2020: 11.6; 2025: -44.0; 2030: -153.7

### V. Policy Implications and Conclusions
- Central empirical result:
  - Excess supply of labor (currently in the range of 150 million) will fall to about 30 million by 2020 and the LTP will be crossed between 2020 and 2025, barring endogenous responses.
- Policy and market response effects:
  - Higher fertility and greater labor force participation delay depletion of excess labor.
  - Financial reform and higher TFP accelerate transition to a labor shortage economy.
- Uncertainty and caveats:
  - Quantitative estimates and scenario magnitudes are inherently uncertain and do not capture inter-scenario interactions.
  - Main takeaway: demographic forces play a dominant role in the imminent transition to a labor shortage economy; market and policy responses are likely peripheral.

*Source: _wp1326 (excerpts from the provided PDF content).*

### References .............................................................................................................

### _wp1326 - References

### I. Introduction
- China’s large pool of surplus rural labor has played a key role in maintaining low inflation and supporting China’s extensive growth model.
- The paper frames China’s development within Sir Arthur Lewis’ model: surplus labor in a low productivity sector (agriculture) limits industrial wage increases until the surplus is exhausted; when exhausted, the economy crosses the Lewis Turning Point (LTP).
- Implications of crossing the LTP:
  - The extensive growth model reliant on factor input accumulation could not be sustained.
  - China would need to invest less, but in better, capital—shifting to a more “intensive” growth model with greater reliance on improving total factor productivity (TFP).
  - Rebalancing toward private consumption could raise output in countries within the supply chain (mainly emerging Asia) and commodity exporters, with more limited spillovers to advanced economies (IMF, 2011).
  - Rising labor costs will affect prices and corporate profit margins in China, with implications for trade, employment and price developments in trading partners.
- Empirical approach:
  - The paper estimates China’s excess labor supply using a general procedure developed in Rosen and Quandt (1978, 1986) and Rudebusch (1986).
  - The empirical model explicitly attributes roles to population composition, labor force participation, and productivity.
- Paper organization:
  - Section II: recent trends in China’s labor market.
  - Section III: empirical framework.
  - Section IV: baseline results.
  - Section V: scenario analysis around a central baseline forecast.
  - Section VI: conclusions.

### II. Recent Developments
- Mid-2000s episode:
  - China’s labor markets drew attention in 2004 with reports of migrant labor shortages in export-oriented coastal regions and large increases in migrant wages.
  - Two perspectives:
    - Shortage view: depletion of surplus labor and transition to a mature economy (e.g., Garnaut 2006, Cai and Wang 2008).
    - Segmentation view: rising migrant wages reflect labor market segmentation (hukou, limited portability of benefits, rising rural reservation wages), allowing co-existence of coastal shortages and inland surplus (e.g., Chan, 2010; Zhang, Yang, and Wang, 2010; Knight, Peng, and Li, 2011).
- Recent patterns:
  - After a lull, rapid wage increases resumed, especially in inland provinces as companies relocate from the coast.
  - Aggregate nominal wage growth has ranged between 12–15 percent annually for over a decade.
  - Corporate profits have remained high and even risen in recent years as wage growth has trailed productivity gains—development inconsistent with the basic LTP premise.
  - Urban employers report frictions (skill and geographic mismatch) rather than labor scarcity as causes of localized wage increases.
  - Wage growth does not show systematic coastal vs. interior divergence consistent with coastal labor scarcity.
- Evidence suggesting tightening:
  - Urban registration records indicate the margin between city demand and supply of labor has progressively narrowed and is now effectively closed.
    - Note: the measure comes from the National Bureau of Statistics; it is unclear whether all firms are required to record demand or whether both informal and formal workers are recorded in the supply measure.
  - Industry relocation to the interior has gathered pace since the global financial crisis.
    - Industrial relocation to the inland may reflect expansion into the inland consumer base rather than coastal cost pressures.
  - Uptick in labor activism since the financial crisis is consistent with strengthened bargaining power accompanying a shrinking pool of labor.
  - Government increases in minimum wages to support household income and promote consumption have contributed to wage rises.
- Demographics signal an imminent transition:
  - UN projects growth of the working age (15–64) population will turn negative around 2020.
  - The core 20-39 subpopulation’s growth rate shrank to zero in 2010 and is projected to decline faster than the overall working age population through 2035.
  - After a period of “demographic dividends,” the share of dependents (aged 0–14 and > 64) troughed in 2010 and will rise to nearly 50 percent by 2035.
- Offsetting factors that could affect timing or severity of labor shortages:
  - Progress in hukou reform could spur rural labor to move to cities.
  - Training rural workers to meet industrial skill requirements could alleviate urban bottlenecks.
  - Raising agricultural productivity (e.g., mechanization to comparators’ levels) could release rural workers; agriculture employs nearly half the labor force but accounted for only about one-fifth of 2011 GDP.
- Summary assessment:
  - Labor market indicators are mixed: wage developments do not suggest exhaustion of surplus labor, while employment, industrial relocation and some policies signal tightening conditions.
  - Demographics more forcefully suggest an imminent transition to a labor-shortage economy.
  - Overall conclusion: China likely is on the eve of the LTP, but the timing of the transition is uncertain.

Key statistics and observations:
- Aggregate nominal wage growth: 12–15 percent (annual, over a decade).
- Migrant workers seeking jobs outside their home province: about 169 million (end-September 2012).
- Number of unemployed people: 21.5 million (end-2011), amounting to about 3 percent of the total labor force.
- Working-age defined as 15–64.
- Core demographic subpopulation referenced: 20-39 years of age.
- Dependency share projection: nearly 50 percent by 2035.
- UN projection: growth of the working age (15–64) population turns negative around 2020.
- Agricultural share of labor force: nearly half; agricultural value added about one-fifth of 2011 GDP.

### III. Empirical Framework
- Two modeling approaches for labor markets:
  - Conventional simultaneous equation (e.g., Lucas and Rapping 1969, Barro and Grossman 1971):
    - Assumes labor market is in equilibrium; real wages clear the labor market.
    - Unemployment results from labor market frictions (mismatch, preferences, government policies).
  - Disequilibrium approach (Quandt and Rosen, 1978; Quandt and Rosen, 1986; Hajivasilou, 1997):
    - Assumes observed real wage does not clear the labor market.
    - Observed employment is the minimum of notional supply and demand for labor.
    - Unemployment results from excess labor supply (supply exceeds demand at observed real wage).
    - Excess supply includes actual unemployed and underemployed, encompassing part of China’s migrant worker pool.
- Data note:
  - National Bureau of Statistics survey data: about 169 million migrant workers seeking jobs outside their home province as of end-September 2012.

*Source: _wp1326 - References (excerpts from the provided PDF content).*

### 4.1 percent).

### _wp1326 - 4.1 percent).

### Disequilibrium framework and model specification
- Motivation: Wage growth has trailed productivity growth for over a decade; rural share of the labor force near fifty percent; labor share of income low and declined some 20 percentage points over the last three decades (Aziz and Cui, 2007). These stylized facts motivate a disequilibrium framework that nests the equilibrium approach as a limiting case.
- Main equations (log-linear with additive stochastic errors):
  - Labor demand (notional):
    - L_D = α_1 + β_1 W + β_2 TFP + β_3 GDP_p + ε_1  (presented in text as equation (1))
    - W is natural log of gross real wages (nominal wages deflated by CPI).
    - GDP_p is natural log of real GDP-weighted growth rate of trading partners.
    - TFP is total factor productivity, calculated as the residual from growth accounting.
    - TFP is in level terms (footnote 3).
  - Labor supply (notional):
    - L_S = α_2 + β_4 W + β_5 ln(H) + β_6 Wealth + β_7 U + ε_2  (presented in text as equation (2))
    - H is participation rate times population (scale variable).
    - U is the unemployment rate; included to capture “added-worker effects”.
  - Observed quantity under disequilibrium:
    - L = min(L_S, L_D)  (equation (3))
  - Indicator formulation linking excess supply to an indicator I (e.g., unemployment) and an unobserved parameter δ:
    - L_S = L_S* + δ I*  (equation (4) in text; I is unemployment rate and I* is NAIRU)
  - Two indicator-created variables:
    - S_D and S_S definitions shown in equations (5) for which the indicator determines whether demand or supply is observed.
  - Final estimable system (equation (6)): supply and demand equations incorporate δ and indicator functions; δ enters both equations and identification is achieved because both system equations are over-identified.

### Data and estimation
- Sample period: annual observations from 1992 to 2010.
- Dependent variable: L = ln(total number of employees in urban and rural areas, including government, SOEs and private sector).
- Key variable definitions and sources (Table 1):
  - L: Ln of total employment; millions — CEIC
  - W: Ln of aggregate annual nominal wages deflated by CPI; billion renminbi — CEIC
  - GDP_p: Ln of weighted average of real GDP growth in Chinese trade partners; percent — WEO, DOTS, staff calculation
  - TFP: Total factor productivity, residually calculated from growth accounting — CEIC, WEO, staff calculations
  - H: Participation rate times population; millions — UN, WDI
  - Wealth: Net household financial wealth; 100 million renminbi — Haver Analytics
  - U: Unemployment rate; percent — CEIC
- Estimation method: Three stage least squares (δ appears in both supply and demand equations); assumes errors serially uncorrelated and possibly contemporaneously correlated; only wage variable treated as endogenous (footnotes 5 and 6).
- Number of observations: 36
- Pseudo R-squared: .82

### Estimated coefficients (Table 2) — standard errors in parentheses; significance: * 10 percent; ** 5 percent
- Labor Demand (2nd Stage, dependent variable: Employment)
  - Wages: -.063**  (.013)
  - GDP_p: .001  (.01)
  - TFP: .353**  (.036)
  - Constant: 7.3*  (.137)
- Labor Supply
  - Wages: .050**  (.007)
  - Wealth: -.018**  (.0002)
  - Unemployment: .0968**  (.033)
  - Participation Rate × Population: .0005**  (.0001)
  - Constant: 5.6**  (.101)
  - Indicator: .018**  (.0009)

### Interpretation of estimated coefficients and statistical tests
- Demand side:
  - Wage elasticity of labor demand is negative (-.063) and in absolute value less than one, consistent with labor costs being a low fraction of total firm costs.
  - TFP effect positive (.353), as expected; GDP_p positive but statistically insignificant (.001 (.01)).
- Supply side:
  - Wage elasticity of labor supply positive (.050) and smaller in absolute size than the wage elasticity of labor demand, consistent with a large pool of surplus labor.
  - Wealth coefficient negative (-.018), implying higher household net worth reduces labor supply (more leisure).
  - Unemployment positive (.0968), supporting “added-worker” effects.
  - Scale variable (Participation Rate × Population) positive (.0005).
- Disequilibrium test:
  - Estimated δ (coefficient on excess supply indicator) positive and statistically significant at the 10 percent error level (Indicator .018**  (.0009)).
  - Rejecting δ = 0 is evidence against the equilibrium model and in support of disequilibrium (text explains when δ = 0 the system reduces to standard equilibrium equations (7)).

### Excess labor supply estimates and historical features
- Model-implied excess supply patterns (text and Figure 4):
  - China has had an excess supply of labor continuously since at least 1991.
  - A surge in excess supply around 2000–04 coincides with end of SOE reform and job-shedding.
  - Surplus labor fell continuously between 2004 and 2008, then rose abruptly in 2009–10 due to the global financial crisis.
  - Model generates an excess supply estimate of around 160 million in 2007, encompassing the frequently cited 150–200 million estimate of the National Population Development Strategy Research Report (2007).
- Specific model estimates mentioned:
  - Excess supply estimate of around 160 million in 2007.
  - Peak of excess supply in 2010: 151 million (baseline projection referenced below).

### Baseline scenario forecasting assumptions and paths
- Real wage adjustment equation: real wages at time t depend on real wages in the past two periods, contemporaneous inflation, lagged inflation, and current NAIRU (equation shown in text).
  - Inflation and NAIRU forecasts through 2017 are drawn from the IMF World Economic Outlook (WEO), and both variables are assumed to grow at the 2017 rate thereafter.
- Household net wealth (NFW) forecast:
  - NFW_t = NFW_{t-1}*(1+i) + α*Household_Saving_t
  - i is nominal deposit rate; α is estimated from time series regression of NFW on household saving.
  - Household saving-to-GDP ratio follows WEO projections of China’s private saving-to-GDP ratio.
- Demographics:
  - Population and working-age population (15–64 years) from UN “constant fertility” variant (fertility rate through 2050 remains at the average rate in 2005–10).
  - Labor force forecasts derived from nonlinear regression of labor force on constant, working-age population and its square (Figure 5); regression adjusted R^2 = .998 (footnote 7).
- TFP:
  - TFP level assumed to increase annually at the average of its 2005–10 growth rate (3.9 percent) until 2017, and remain at its 2017 level thereafter.
- Unemployment rate:
  - Forecasts from WEO through 2017; from 2017 onwards unemployment rate assumed fixed at 2017 rate (4 percent).
- Partner GDP growth:
  - Real GDP projections of China’s eight largest trading partners weighted by export shares are from WEO and DOTS; real growth rates after 2017 assumed to stay at 2017 level; export shares fixed at their 2011 level.
  - The eight partners comprise the United States, the United Kingdom, the Euro area, Japan, Hong Kong SAR, Korea, Singapore and Emerging and Developing Economies (these accounted for over 92 percent of Chinese exports in each year of the sample — footnote 8).

### Baseline scenario forecast results (Figure 6 and text)
- Projected path of excess supply under baseline:
  - 2010: 151 million (stated as peak in text)
  - 2015: 57 million
  - 2020: 33 million
- Projection for LTP (Labor Turning Point):
  - LTP projected to emerge between 2020 and 2025, when excess supply turns negative (i.e., labor market moves into excess demand).
- Drivers emphasized:
  - Rapid decline in excess supply closely follows the projected path of the dependency ratio, which bottomed out in 2010 and is projected to rise rapidly thereafter (footnote 9).
  - Evolution of wealth (which reduces labor supply) and TFP (which raises labor demand) are important contributors to the baseline decline in excess supply.
- Historical job creation noted: about 350 million jobs created over the past 3 decades, but long period of excess labor supply remains.

### Scenario analysis overview (preview of alternative scenarios)
- The paper considers alternative scenarios to assess robustness of LTP timing to policy and demographic shifts:
  - High Fertility Scenario
  - Higher Participation Rate
  - Financial Reform
  - Product Market Reform (and other policy responses referenced)
- Table 3 and Figure 7 contain results for these scenarios (figures and table referenced in text).

*Source: IMF working paper content provided in the supplied PDF chapter/section.*

### 4. Product Market Reform

### 4. Product Market Reform

### B. Increase in the Fertility Rate
- Scenario: one-time permanent increase in the fertility rate using the UN’s “high fertility” variant to forecast working age population; all other variables left as in the baseline.
- Key mechanics:
  - Higher fertility raises potential labor force with a delay as larger cohorts join the workforce.
  - The UN high-fertility variant assumes 0.5 children more than the constant fertility variant.
  - The UN high-fertility variant lifts China’s fertility rate from about 1.6 to just around replacement-level fertility of 2.1.
  - Working age population in the high fertility variant is larger than baseline by 0 percent, 1.4 percent and 4 percent in 2025, 2030 and 2035 respectively.
- Results (excess labor supply, millions; see Table 3):
  - 2015: 51.9
  - 2020: 36.0
  - 2025: -16.8
  - 2030: -126.3
- Interpretation:
  - LTP is delayed relative to the baseline, but the increase in excess supply is small (from 33 million to 36 million in 2020; from -27 million to -16 million in 2025).
  - Modest high-fertility uplift explains the limited impact.

### C. Higher Labor Force Participation Rates
- Context:
  - Participation rates fell from 0.87 in 1995 to 0.82 in 2010.
  - Decline reflects growing share of older workers and potentially pension system stability.
  - One policy path: greater interprovince labor mobility (e.g., accelerated hukou reform).
- Scenario: one-time increase in the participation rate from 0.82 to 0.85 (the average rate of the last two decades).
- Results (excess labor supply, millions; see Table 3):
  - 2015: 92.3
  - 2020: 68.1
  - 2025: 5.31
  - 2030: -114.1
- Interpretation:
  - Higher participation has an immediate impact on labor supply and significantly delays the LTP.
  - With higher participation, excess supply persists beyond 2025 and the LTP emerges between 2025 and 2030.

### D. Financial Sector Reform
- Scenario: interest rate deregulation that lifts nominal deposit rates by 5 percentage points; simulated using estimates of the saving response to interest rates in Nabar (2011).
- Channel: wealth effect — higher deposit rates raise return on stock of wealth, lower flow into wealth as households meet saving targets more easily, reducing labor supply.
- Results (excess labor supply, millions; see Table 3):
  - 2015: 57.0
  - 2020: 10.5
  - 2025: -70.4
  - 2030: -220.5
- Interpretation:
  - Financial reform accelerates the crossing of the LTP relative to the baseline (excess supply in 2020 reduced to around 10 million).
  - Depletion of excess labor likely associated with higher wages and potentially raising labor’s share of income.

### E. Product Market Reform
- Scenario: product market reform that raises total factor productivity (TFP) via policies such as greater competition in services and investment in higher value-added activities.
- Simulation: one-time permanent increase in the growth rate of TFP to 4.5 percent (the average TFP growth in the last two decades).
- Channel: higher TFP raises firm profitability and thus labor demand.
- Results (excess labor supply, millions; see Table 3):
  - 2015: 54.9
  - 2020: 11.6
  - 2025: -44.0
  - 2030: -153.7
- Interpretation:
  - Higher TFP accelerates decline of excess labor supply and emergence of the LTP, qualitatively similar to financial reform in this framework.
  - Caveat: model specification assumes TFP affects only labor demand; alternative setups where productivity gains lower unemployment could yield smaller decreases in excess labor supply.

### Table 3 — Excess Labor Supply Scenarios (millions)
- Baseline:
  - 2015: 57.1
  - 2020: 33.2
  - 2025: -27.8
  - 2030: -137.5
- Higher Fertility:
  - 2015: 51.9
  - 2020: 36.0
  - 2025: -16.8
  - 2030: -126.3
- Higher Labor Force Participation:
  - 2015: 92.3
  - 2020: 68.1
  - 2025: 5.31
  - 2030: -114.1
- Financial Sector Reform:
  - 2015: 57.0
  - 2020: 10.5
  - 2025: -70.4
  - 2030: -220.5
- Higher TFP:
  - 2015: 54.9
  - 2020: 11.6
  - 2025: -44.0
  - 2030: -153.7

### VI. CONCLUSION
- Demographic shift: working age population will reach a historical peak and then decline; core cohort aged 20–39 has already begun to shrink.
- Central empirical result:
  - Excess supply of labor (currently in the range of 150 million) will fall to about 30 million by 2020 and the LTP will be crossed between 2020 and 2025, barring endogenous responses.
- Policy and market responses:
  - Higher fertility and greater labor force participation delay depletion of excess labor.
  - Financial reform and higher TFP accelerate transition to a labor shortage economy.
- Uncertainty and caveats:
  - Quantitative estimates and scenario magnitudes are inherently uncertain and do not capture inter-scenario interactions.
  - Main takeaway: demographic forces play a dominant role in the imminent transition to a labor shortage economy; market and policy responses are likely peripheral.

*Source: _wp1326 - 4. Product Market Reform*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1326.pdf_