Analysis of the reasons for the sustained slowdown in China’s labour productivity growth

1. Introduction

Labor productivity is a vital metric of economic efficiency and national competitiveness (Salimova et al. [1]). As the world’s largest developing country, changes in China's labor productivity significantly impact its economic growth and social progress (Chen & Groenewold [2]). Although China’s labor productivity has grown substantially since the reform and opening up, its growth rate has slowed down notably since 2010 (CEIC Data [3]). Existing literature has analyzed the decelerating trend. For instance, Li et al. [4] attributed it to demographic changes, while Wang & Szirmai [5] emphasized industrial restructuring. However, few studies have examined the specific reasons behind the slowdown across different industries.

This article aims to conduct a systematic analysis of the reasons for the sustained slowdown in China’s labour productivity growth based on up-to-date data. It will identify the general trends and industry-specific factors impacting manufacturing, services, agriculture and transportation. The novelty lies in the cross-sector comparative analysis and targeted policy recommendations. The hypothesis is that the slowdown results from multiple intertwined factors pertaining to China’s development stage.

The methodology combines quantitative data analysis with a qualitative review. Statistical data from official sources will delineate productivity trends. Industry-level and historical comparisons will reveal structural imbalances. Subject literature will supplement the quantitative findings. The key sources are China’s National Bureau of Statistics (NBS), World Bank, OECD and relevant economic journals. The results are expected to derive tailored strategies to improve China’s labour productivity in the new era.

2. Overall analysis

2.1 The slowing trend in China’s labour productivity growth

Labour productivity refers to the output or added value created by a unit of workers throughout a set period, which serves as a vital metric to assess economic productivity. The growth of labour productivity reflects the quality and potential of economic growth of a country (Walheer [6]).

Figure 1: Growth rate of China’s labour productivity, 2011-2022

(CEIC Data [3])

According to the CEIC Data [3], the yearly growth rate of China’s labour productivity dropped from 9.420% in 2011 to 4.827% in 2022, which indicates that the output value created by the same unit of labour force is decreasing. In light of the COVID-19’s impact, China’s labour productivity growth rate once dropped to 2.760% in 2022 (see Figure 1).

2.2 Overall reason analysis

In general, the reasons for the sustained slowdown in China’s labour productivity growth are multifaceted.

(1) Aging population

Since the 21st century, China’s population structure has undergone significant changes, with an increasing proportion of the elderly population and a decreasing supply of labour. According to the data from the National Bureau of Statistics of China (NBSC) [7], the population aged 60+ accounted for 18.7% of China’s total population in 2021, with an increase of 5.4% compared to 2011. Meanwhile, the working population aged 15-59 accounted for 63.3% of the total population, with a decrease of 7.8% compared to 2011. This means that every 100 working age population in China had to support 31 non-working age population, with an increase of 12 compared to 2011. The growing older population not only decreases the number of workers, but also impacts their skills and capacity to innovate.

(2) Slow upgrading of industrial structure

The Chinese economy remains primarily driven by the manufacturing industry, but the growth of labour productivity in this industry has substantially decelerated. Data from the NBSC [7] shows the average yearly increase in labour productivity in China’s manufacturing industry fell from 10.9% in 2011 to 4.6% in 2021. Concurrently, the service and high-tech industries, which tend to exhibit higher labour productivity levels, still have a relatively smaller proportion. In 2021, the added value of China’s service and high-tech industries occupied 54.5% and 14.4% of China’s GDP respectively, with an increase of 9.6% and 3.7% respectively compared to 2011.

(3) Insufficient technological innovation

The Chinese economy has historically depended on exports and investment for growth, while underprioritising technological innovation. This has resulted in China’s weaker competitiveness in core technologies and greater vulnerability to external disturbances. Data from the World Intellectual Property Organization (WIPO) [8] shows that China ranked 14th on the Global Innovation Index in 2021. While China placed 5th for innovation inputs, it ranked 30th for innovation outputs. This signifies substantial space remains for China to enhance the productivity of its innovation efforts.

(4) Institutional and policy obstacles

The Chinese economy has also confronted institutional and policy obstacles, including an imperfect financial system, unequal market access, and inadequate resource distribution (Hong [9]). These obstacles have constrained market competition and incentive mechanisms in China, and reduced the production efficiency and innovation motivation of both enterprises and individuals. According to data from the World Bank [10], China ranked No.46 in the global business environment in 2021, ranking at the middle level among 190 economies. This indicates that there is still great room for improvement in China’s business environment.

In summary, the reasons for the sustained slowdown in China’s labour productivity growth are multifaceted, which needs to be analysed and addressed from multiple perspectives.

3. Comparative analysis of the current situation of labour productivity growth in various industries

3.1 Industry

Figure 2: Growth rate of China’s industrial labour productivity, 2011-2021

(NBSC [7])

Industry is a pillar of China’s economy and a major contributor to China’s labour productivity. According to the NBSC [7] the average yearly growth of China’s industrial labour productivity dropped from 10.9% in 2011 to 3.6% in 2021. In 2020, due to the influence of the COVID-19, this indicator was -6.7% (see Figure 2).

There are three major reasons for the slow growth rate of industrial labour productivity in China.

(1) Overcapacity

According to the State Council of China [11], the capacity utilisation rate of China’s steel, cement, and flat glass was 53.6%, 43.4% and 52.7% respectively in 2021, far below the international standards. Overcapacity not only causes resource waste and environmental pollution, but also lowers the profits and investment willingness of enterprises.

(2) Insufficient technological innovation

China’s industry still focuses on low-end manufacturing, lacking core technologies and independent brands. According to the data of the WIPO [8], China ranked No.14 in the Global Innovation Index, No.5 in innovation input, and No.30 in innovation output in 2021. This indicates that China still has large room to further enhance its innovation capabilities.

(3) Slow structural adjustment

China’s industry is still dominated by traditional industries, while the proportion of emerging and high-tech industries is still relatively lower. According to data from the NBSC [7], the added value of China’s high-tech industries accounted for 14.4% of its GDP in 2021, with an increase of 3.7% compared to 2010, but still lower than the level of developed countries.

3.2 Service industry

Figure 3: Growth rate of labour productivity in China’s service industry, 2011-2021

(NBSC [7])

The service industry is an important driving force for the Chinese economy, and also an important contributor to China’s labour productivity. This industry includes transportation, warehousing, postal services, accommodation, catering, wholesale, retail, finance, scientific research and technological services, and other industries (Ma et al. [12]). According to the NBSC [7], the yearly growth of labour productivity in China’s service industry dropped from 9.6% in 2011 to 2.6% in 2021. Due to the impact of the COVID-19, the growth of labour productivity in China’s service industry once fell to 3.1% and 2.6% respectively in 2020 and 2021 (see Figure 3).

There are several reasons that affect the growth rate of labour productivity in China’s service industry.

(1) Low quality and efficiency

Despite the ongoing enlargement of China's service sector, its quality and efficiency are still not high. According to data from the World Bank [10], the labour productivity level of China’s service industry in 2021 was $39,000 per person, only 28.8% of that of the United States. Meanwhile, there are also gaps in China’s service industry in terms of innovation ability, digital level, and international competitiveness.

(2) Unoptimised structure and layout

Although the proportion of China’s service industry continues to increase, its structure and layout are still not optimised. According to data from the NBSC [7], in 2021, the value-add of China’s modern service industry constituted 46.3% of the total value-add of China’s service industry, representing a 7.8% uptick versus 2010. However, this remains below the levels observed in developed countries.

(3) Imperfect policies and systems

China’s service industry is likewise faced with some imperfect policies and systems, such as unfair market access, heavy tax burden, insufficient talent training, etc. These issues limit market competition and incentive mechanisms, and reduce the production efficiency and innovation motivation of both enterprises and individuals (Kan et al. [13]). According to data from the World Bank [10], China ranked No.46 in the global business environment in 2021, which shows that China still has a lot of room for improvement of the business environment.

3.3 Agriculture

According to the NBSC [7], the average annual growth rate of China’s agricultural labour productivity dropped from 6.4% in 2011 to 3.7% in 2021. In 2020, this indicator once declined to 1.7% owing to the impact of the COVID-19 (see Figure 4).

Figure 4: Growth rate of China’s agricultural labour productivity, 2011-2021

(NBSC [7])

The reasons for the slow growth rate of China’s agricultural labour productivity are as follows.

(1) Resource constraints

China’s agriculture is constrained by soil, water, weather and other resources, which poses challenges for achieving intensive production. Data from the NBSC [7] shows that China’s arable land area was 1.96 billion acres in 2021, a reduction of 80 million acres compared to 2011. Water usage per 100 acres of arable land was 80,000 cubic meters, with an increase of 8,000 cubic meters versus 2011. This indicates the efficiency of agricultural resource utilisation remains relatively low in China.

(2) Insufficient technological innovation

China’s agriculture still relies mainly on traditional methods and lacks the application of advanced technologies and equipment. According to the NBSC [7], there were only eight large and medium-sized tractors per 100 mu of arable land in China, while there were three combine harvesters per 100 mu of arable land in 2021. The data shows that the level of agricultural mechanization in China is still low.

(3) Unreasonable structure and layout

China’s agricultural production remains focused on food crops, while cash crops and characteristic crops account for a smaller proportion. According to the NBSC [7], the planting area of grain crops in China accounted for 67.3% of China’s total planting area in 2021, with a decrease of 1.7% compared to 2011. The sown area of cash crops accounted for 32.7% of China’s total sown area of crops, 1.7% higher than that in 2011. The data indicates that the adjustment of China’s agricultural structure is still slow.

3.4 Transportation

According to the NBSC [7], the average yearly growth rate of labour productivity in China’s transportation industry dropped from 7.6% in 2011 to 2.6% in 2021. In 2020, this indicator once fell to negative 0.5% (see Figure 5).

Figure 5: Growth rate of labour productivity in China’s transportation industry, 2011-2021

(NBSC [7])

There are generally three major reasons for the slow growth rate of labour productivity in China’s transportation industry.

(1) Insufficient infrastructure

Although China’s transportation industry has made significant progress in infrastructure construction, there are still shortcomings in this industry. For example, China still lags behind many developed countries in railway density, road quality, port efficiency, airport safety, and other aspects (Zhang [14]).

(2) Insufficient technological innovation

China’s transportation industry has achieved certain achievements in technological innovation, but there are still gaps and shortcomings in this aspect. Meanwhile, due to trade frictions and technological blockades, China’s transportation industry still faces the risk of relying on external supply in some key areas and links.

(3) Unreasonable structure and layout

Although the proportion of China’s transportation industry continues to increase, its structure and layout are still unreasonable. According to data from the NBSC [7], the added value of railway transportation in China accounted for 17.4% of the added value of China’s transportation industry in 2021, with an increase of 3.6% compared to 2010. The added value of road transportation accounted for 54.9% of the added value of the transportation industry, with a decrease of 2.5% compared to 2010. The added value of water transportation accounted for 8.9% of the added value of the transportation industry, with a decrease of 1.7% compared to 2010. Moreover, the added value of air transportation accounted for 6.2% of the added value of the transportation industry, with an increase of 0.5% compared to 2010. The data indicates that the structural adjustment of China’s transportation industry is still slow.

4. Future trends

The future direction of China’s labour productivity depends on various factors, such as population structure, industrial structure, technological innovation, institutional reform, market competition, international environment, etc. (Chen & Groenewold [2]). Different institutions tend to have different perspectives on the future growth trend of China’s labour productivity.

According to a report by the World Bank [10], China’s labour productivity will maintain a high growth rate of around 5.4% between 2020 and 2030, but it will gradually decrease to around 2.9% between 2030 and 2050. This is mainly due to the influence of population aging and economic transformation. China’s labour supply will peak around 2025 and then begin to decline. At the same time, China’s economic structure will shift from being dominated by manufacturing to the service industry, which will affect the level and growth potential of China’s labour productivity.

Based on the World Bank Group & Development Research Center (DRC) of the State Council [15], China’s labour productivity will maintain a rapid growth rate of about 6.1% between 2020 and 2035, but will slow down significantly to about 3.4% between 2036 and 2050. This is mainly due to the impact of technological innovation and institutional reform. China will raise the level of labour productivity and the quality of growth by strengthening investment in science and technology, improving education quality, optimising industrial structure, deepening market-oriented reform, and other means. However, with the expansion of economic scale and the improvement of income level, China will face more internal and external challenges and risks, and need to respond more flexibly and effectively.

Moreover, according to the OECD [16], China’s labour productivity will maintain a stable growth rate of about 4.8% between 2020 and 2030, but will gradually slow down to about 2.6% between 2031 and 2060, due to the impact of economic convergence and environmental constraints. China will narrow the gap with developed countries and achieve sustainable development by accelerating technological progress, increasing resource allocation efficiency, and promoting green development. However, with the decline in economic growth rate and the intensification of environmental pollution, China will face more social and ecological pressures, and need to develop in a more balanced and coordinated manner.

In short, different research institutions have different predictions on the future direction of China’s labour productivity, but they all believe that China’s labour productivity will maintain a certain degree of growth in the coming decades and gradually stabilise.

5. Solutions

Based on the above overall analysis and comparative analysis, China is recommended to take some measures to solve the sustained slowdown in China’s labour productivity growth.

5.1 Improving the skills and education level of workers

Improving workers’ skills and education level can increase the growth rate of labour productivity, reduce unemployment and poverty rates, and promote economic growth and social development (Salimova et al. [1]). Therefore, improving the skills and education level of workers is a fundamental way to improve labour productivity and a necessary condition to address future challenges. The education level and expertise of labourers shape their productive capacity and innovative potential, which may impact their prospects for employment and incomes.

5.2 Optimising the industrial structure

In recent years, China has made certain progress in optimising its industrial structure, with the increasing proportion of the tertiary sector (NBSC [7]). However, deficiencies remain in the sophistication, diversity, and alignment of China’s industrial structure. As such, China must continue optimising its industrial structure. This is a critical path for China to boost its labour productivity and realise economic restructuring. The industrial structure determines the quality and potential of economic growth, and affects the efficiency and effectiveness of resource allocation (Salimova et al. [1]).

5.3 Introducing new technologies and innovations

China has made significant achievements in introducing new technologies and innovations, but there are still big gaps in the level, field, and effectiveness of new technologies and innovations in China. China is recommended to introduce new technologies and innovation, which is an important way to improve labour productivity. New technologies and innovations can improve the level and quality of labour productivity by providing more efficient production tools, optimised production processes, and more innovative products and services (Akbari et al. [17]).

5.4 Improving systems and policies

There are deficiencies in the perfection, transparency and stability of China’s systems and policies. Institutions and policies determine the rules and efficiency of economic operation, and affect the incentives and constraints of market competition and innovation (Chen & Groenewold [2]). Therefore, China needs to continuously improve its systems and policies from the above aspects, so as to improve its business environment. This is an important way to improve China’s labour productivity.

6. Conclusion

Through the overall analysis of China’s labour productivity and comparative analysis of labour productivity of different industries, this report found that China’s labour productivity growth rate has faced a significant slowdown in recent more than 10 years, owing to aging population, slow upgrading of industrial structure, insufficient technological innovation, and institutional and policy obstacles, and other reasons. China’s labour productivity varies across industries, with structural and horizontal imbalances between manufacturing, service, and agricultural industries. China’s labour productivity will maintain a certain degree of growth in the coming decades and gradually stabilise. To continuously improve its labour productivity, China is recommended to improve workers’ skills and education level, optimise its industrial structure, introduce new technologies and innovations, and improve its systems and policies.