SHANGHAI UNIVERSITY

FINAL PROJECT REPORT

Title Unemployment in china

Name Ha Nguyen Linh Chi

Student Number 21165031

Group Member Effort Score for each group member

Linh Chi 9/10

wichaya 10/10
Wijdane Jeddou 10/10
Economic model and theories to explain how the unemployment issues

economically affect China:

Background Study:
It is crucial to consider unemployment in order to understand the micro and macro dynamics and develop
strategic plans which will stabilize the economies of the nation and enhance economic growth and
development [1]. According to Akutson, Messiah and Dalhatu, unemployment is a serious situation in most
developed and developing countries as it leads to economic and social issues. Some common economic issues
are denying the nation of tax revenue in the form of income tax and wastage of productive hours. The social
issues of unemployment are usually depression, lack of self-respect and other vices such as robbery and
prostitution [2]. The nature of unemployment is dependent on the structures of the country and the category of
which the country falls under whether it is developed, developing or undeveloped [3]. The unemployment
reveals the ineptitude of a country to utilise its abundant labour resources [4]. It emphasizes that there are
many people who are readily available, active and capable of adding to productivity output but remain as
jobless. The classical theory explains that unemployment is a short term demand and supply of which free-
market force will automatically deal with it and restore maximum occupation in the economy [5]. The
Keynesian theory holds the view that unemployment is normally triggered by insufficiencies in total demand
over specific periods within the labour market such that adequate jobs are created to accommodate people
who want to work. The Marxist theory also explains that unemployment is as a result of the capitalist system
where the means of production are owned by the bourgeoisie and the proletariat are exploited through
alienation and that unemployment can be reduced by replacing capitalism with socialism [6]. The influence of
unemployment on economic growth has long been a pertinent question in most economies [7]. Most
developed, developing and undeveloped nations are facing the same essential macroeconomic issue which is
reducing unemployment and increasing economic growth. The robustness of a nation is measured by its
economic growth with unemployment as one of the imperative macroeconomic variables which indicates the
ability of a republic to make full use of its labour resources [3] [8].

Problem Statement:
Most developed and developing nations' priority is to decrease the level of unemployment through policy
plans which aim to increase the desire in entrepreneurs to create more jobs for the nation to realize great
economic progress [1]. Economic growth and unemployment are among the most significant macroeconomic
variables and indispensable fundamentals in every strategic economic fiscal and monetary policies of every
prosperous economy [3]. It is assumed that an upsurge in productivity output will cause the rate of
unemployment to reduce as it will require additional human capital to meet the production [9]. In 1978, China
was categorized as one of the deprived republics in the world with a real capita GDP of one-fortieth that of the
United States of America and one-tenth of that of Brazil. Later, the improved real per capita GDP of about 8%
per annum have transformed China’s economy to have a real per capita GDP of one-fifth of the United States
of America and at par with Brazil real per capita GDP [10]. Thus, China achieves an annual gross domestic
product growth of about 10% within the last decade and they suggest that the influential factor to this massive
improvement is the increased in population growth of China, which involuntary creates room for larger human
capital stock with diverse professional skills and abilities that can help increase the productivity output of the
nation [11]. Therefore, the data revealed that there was mutually short term and long term stable equilibrium
among the unemployment rate, economic progress and inflation [12].

The Concept of Unemployment:

The phenomenon of unemployment has been expounded from diverse viewpoints in the economic literature.
The International Labor Organization (ILO) defines unemployment based on three important conditions which
must be met simultaneously and these conditions are; not working, ready to get employed and searching for a
job [13]. Therefore, unemployment includes individuals who meet the recommended age to engage in
economic activities and meet the conditions of being without work that they are not self-employed or engaged
in any job that fetches them income. However, there are exceptions for individuals who are currently not
working but will start work within the reference time frame and for individuals who are on an impermanent
suspension [14]. Unemployment has been classified into different types and these are voluntary and
involuntary redundancy, frictional and cyclical redundancy, seasonal and technological redundancy, and
structural and hidden redundancy [3].

Unemployment Trend in China:

The annual unemployment rate of China is within the range of 3.76% and 4.89% in 2007 and 1991
respectively. This suggests that from 100 people who are actively searching for jobs, only 4 to 5 people are
unable to secure employment. It also shows that the fall in unemployment rate is not high but moderate and it
emphasizes how the economy of China is able to contain most of the available human capital or labor force.
Although, there is some linear additional upsurge in the rate of unemployment from 2010 where the
unemployment rate was 4.12% to the year 2018 where the unemployment rate was 4.71%. However, it can be
perceived that the linear increase in the unemployment rate in each year from 2010 to date is reasonable. The
trend of the unemployment rate in China from 1991-2018 is interesting because of its instability shown in the
graph below. There were many different rates of changes in the unemployment rate for a period of 27 years.
From the graph, it can be seen that China experienced its highest unemployment rate of 4.89% in 1991. The
rate began to decrease from 4.39% in 1992 to 4.34% in 1994. Then, it rose to 4.55% in 1995 to 4.7% in 1999.
In 2000, the rate began to decrease to 4.53% and continued to fall until it reached the lowest unemployment
rate of 3.76%. From 2010, the rate rose from 4.2% to 4.7% in 2018.

The Economic Growth in China:

From 1979 to 2017, China has transformed its economy from the state of a poor developing country to a state
of being one of the most powerful developed markets in the world. According to the World Bank, China
became one of the fastest growing, expanded and sustained economy in the world as it had an approximate
10% increase in the average annual real productivity output. According to the annual time series data available
at World Development Indicator, the annual economic growth (GPD) rate of China is within the range of
14.23% and 6.7% which represents the highest and the lowest economic growth (GPD) rates respectively
from 1991 to 2018. Though the rate of economic growth (GPD) is changing, in 1992 China had experienced
its highest increase in economic growth (GPD) rate with a change of 4.93%. This shows that there was a lot of
labor output which led to an increase in production. Nevertheless, between 2003 and 2004 China experienced
its lowest change of economic growth (GPD) rate with a rate of 0.07%. Which indicates there was little output
which led to little addition to 2003 economic growth (GPD). From the graph, it can be observed that China
experienced a 9.3% economic growth (GDP) rate in 1991 which later increased to 14.22% in 1992. Economic
growth continued to decrease from 13.86% in 1993 to 8.34% in 2001. It then began to rise from 9.13% in
2002 to 14.23%, which was the highest economic growth (GDP) rate, in 2007. In 2008, China then
experienced the highest decline in economic growth (GDP) rate of 9.65%.

There is a high positive correlation between the economic growth (GDP) rate and the decrease in
unemployment rate. It can be observed from the graphs that when the rate of unemployment falls, the
economic growth (GDP) rate rises and vice versa. Therefore, reducing the unemployment rate will remain as
one of the nation's priorities in order to solve the related issues such as depression and poverty and achieve
economic growth in China.

Using the theories to analyze the economic issues:

After getting to know the models and theories that will help us answer the questions mentioned in the midterm
report.
By knowing that unemployment, or in order to be called Jobless there's 3 conditions that one must meet
which are; not working or studying, ready to get employed, and searching for a job.
The first condition is clear and doesn't need explanation, the second "ready to get employed." it should be
noted that this readiness include the physical and mental readiness, for example
one can't make as a builder if he's a physical form not strong, and also one can't work as a lawyer or
accountant or any desk office that require a problem-solving skill, if he's or she's not mentally ready, and the
last condition "searching for a job»; someone who does not put in the work to search for a job, can't be called
Jobless or be included in the unemployment rate, maybe some other adjectives could be more meaningful.
And thus if we want to know why did the labor force decrease during the pandemic covid-19, is the partly
because in the normal years the main source of increasing the labor force are graduate students who just
finished their studies and joined the labor force.2020 was a bit different due to the pandemic, those students
that were supposed to graduate, got their graduation postponed which affected the statistic, and due to the
same pandemic people lost their jobs which resulted in an increasing in the unemployment rate.
In order to say whether the unemployment situation is considered good or not, we must first know how the
different theories explain the unemployment.
We know that unemployment is a dysfunction in the market, for the classical theory they explained it as a
short term demand and supply desequilibre that the free market will solve on its own without the need of
intervention of the Government.
And that's what classics think in most of the economic issues, for example according to classics the free -
market will solve the unemployment, cause since a large portion of people doesn't work thus their buying
capability will decrease, and since the demand is increasing so will the price and thus the production will need
to decrease until a point where they need to produce more because the demand is on the rise and they will be
forced to employ more people and the dysfunction won't be a problem anymore. Now there's a lot of issues
with this theory, like there's no assurance that the price will be lowered, and by lowering production they will
release more people because the production doesn't need them. So many things could go wrong with this
theory and the best example is the 1929 crisis, which proved that the market can't recover on its own and an
intervention is needed to insure safety of the market.
Second we have the Marxist theory, that blame the capitalist system of the unemployment, in fact in the
Marxist theory there's no employment, according to them everyone must work, this theory has a good side but
a lot of bad ones, a good side is everyone will be insured a job, the bad sides is that everyone will have a job
NO MATTER WHAT even if a job that can normally be finished by one person, they will employ 2-3 people
to do it and this will lead to ghost workers to increase, and motivation to work to also decrease, since the
worker will not feel he's job is important, and will also lead to creation of useless jobs, useless can be a harsh
word, but the person that waits in the elevator to press the button to the floor you're going is not a very
important job, or the person that press a button in the parking lot to give you the ticket is also not a very
important job, of course by saying "useless" we mean the job not the person doing it, they must very have
bored with their jobs and if they can replace it they would do it.
The capital system also has these kinds of jobs, but certainly less than the Marxist or the socialism.
And lastly the Keynesian, they explain the employment as normally triggered by Insufficient in total demand
over specific periods within the labor market, and the best solution to solve the unemployment is the
intervention of the government, in other words government should spend more on infrastructure,
unemployment benefits and education to Increase consumer demand, because as the demand increase so will
the production and thus increasing employment. This theory does not consider inflation as a bad thing, in fact
in some situations it may be a good thing, like for exports, if the inflation is high, the currency value will
decrease which will make our goods cheaper to the world.
Nevertheless, for Keynes' theory inflation is unavoidable so better make the most out of it by spending on
infrastructure and other sectors that will lead to economic growth.
For China, a socialism country their unemployment rate is relatively low, but because of the huge population
it's a problem even if it reaches 1%. Before the pandemic the Chinese's unemployment rate varied from 3% -
4% from 1991 until 2018, never breaking to 5% the first time was after the pandemic in 2020, which is very
logical as most of the countries suffered from the same thing.
So we can say that China always suffered from unemployment and it's always been a serious problem for the
Chinese government whether before or after the pandemic.
In an attempt to solve this unemployment problem, China has adopted many policies, macroeconomic policies
to be exact such as:
Fiscal, Taxation, and Financial Policies
Developing non-profit Public Posts
Social Security Policy
Improving the Public Employment Service System
Unemployment Monitoring Policy
And during the pandemic:
Reducing corporate burdens and stabilizing the job positions of businesses
Social insurance like:
● Reducing or exempting employer contributions to social insurance.
● Returning unemployment insurance contributions paid by enterprises.
● Providing social insurance subsidies, unemployment insurance benefits and financial aid.

Summary:
With all those policies and measures they would help the economic growth first, and then reduce the
unemployment rate, the policies that took place before the pandemic proved that they are effective, since the
unemployment rate stayed low, and for measures that were put during the pandemic they will need more time
to see if they served their objectives, especially that the pandemic is not over yet and is still damaging the
Chinese economy.

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https://mpra.ub.uni-muenchen.de/96228/12/MPRA_paper_96228.pdf