The Collapse of the Chinese Labour-Supply System in the Short and Long Term

Written by Hanbing Chen (BSc Economics)

China’s economy, long supported by a robust labour supply system, is now grappling with significant strain as a pronounced economic slowdown has excreted unprecedented pressure on the workforce, particularly young professionals and recent graduates. The once-reliable labour supply system is showing clear signs of collapse, creating ripples that extend beyond individual livelihoods to threaten the stability of a labour structure that has underpinned decades of economic growth.

As the supply of labour increasingly outpaces demand in key industries, unemployment and underemployment rates among young professionals are reaching critical levels. The total labour force participation rate has also dropped from around 70% to 66% within the last decade (CEICdata.com). The structural imbalance between educational output and market demand highlights deeper systemic issues: a rigid policy-making framework struggling to adapt to the challenges of globalisation, the rise of automation, declining foreign investment, and the lingering impacts of the Covid-19 pandemic. The question arises: is the current labour crisis merely the result of these recent disruptions, or does it stem from long-standing structural weaknesses, during China’s transition to a capitalist economy and its reformation of the education system?

This article examines the short- and long-term factors contributing to the collapse of China’s labour supply system under recessionary pressures. By exploring education systems, labour market transition, student responses, and existing government policies, this analysis aims to unravel the complexities of China’s labour market and assess the broader socioeconomic consequences of this disruption. Understanding these dynamics is essential for forecasting the future of China’s economy, which holds significant implications for global supply chains and technological innovation.

The education system

Figure 1: College admissions from 1977 to 2015 (Guo, Huang & Zhang, 2019)

China’s higher education system has expanded rapidly over the past two decades, with the annual enrolled college students increasing from 2 million to more than 5 million. Currently, China produces more than 12 million graduates annually from universities and vocational institutions (Ministry of Education, 2023). The increased volume of a highly educated workforce, capable of driving the nation’s transition from manufacturing to high-tech and service industries, has also intensified competition for high-skill, high-income jobs, leaving many graduates struggling to secure suitable employment.

Recent data reveals a widening gap between the number of graduates and the availability of jobs that match their qualifications. Employment rates for recent graduates have dropped significantly, with a youth unemployment rate of more than 20% (Statista, 2024). Traditional industries such as manufacturing and real estate, once key absorbers of labour, have failed to align with the qualifications of an increasingly educated workforce, resulting in widespread underemployment (Zhou, 2023). Newly emerging sectors like high-tech and green technology, which previously provided ample opportunities, have also contracted, offering fewer roles since the pandemic.

What makes the number of graduates increases so sharply comparing with the slipping increase of labour demand? It might be partly attributed to China’s unique cultural and historical context. Since the restoration of the Gaokao system in 1977, the national examination has been viewed as the fastest and most reliable pathway to a “successful life,” particularly during an era when higher education was rare. Graduates, regardless of whether they attended university or vocational school, were historically able to secure well-regarded jobs with competitive salaries. This trend remained largely intact until the mid-2010s, when opportunities for graduates, particularly in STEM fields, began to diminish. Previously buoyed by economic optimism and Confucian values emphasising education as a family priority (Deng, 2011), families who experienced the “Gaokao enthusiasm” of the 1970s and 1980s now expect their children to enjoy similar opportunities, despite the significant transformations in China’s economy over the past 50 years.

The large number of graduates also reflects the Chinese government’s emphasis on educational equity. Low tuition fees and extensive financial aid programs, such as the 57 billion yuan in student loans provided to nearly 6 million students in 2022 (Chinese Government Network, 2023), have made higher education accessible to lower- and lower-middle-class families. Many view this investment in education as a valuable long-term opportunity, even as the returns on higher education diminish. However, the growing disconnect between the number of graduates and labour market demand underscores an urgent need for better alignment between China’s education system and its economic needs. If left unresolved, this mismatch could exacerbate youth unemployment and undermine the effectiveness of the nation’s labour supply system. In the long term, such imbalances threaten economic growth and social stability, as evidenced by the student protests witnessed during the Covid-19 pandemic, caused by the growing pessimism and anti-establishment sentiment among younger generations.

Labour Market Transformation and Employment Trends

China’s labour supply system has undergone a significant transformation over the past few decades, shaped by rapid industrialisation, urbanisation, and infrastructure expansion (Cai & Wang, 2010). Initially, the system thrived on a large workforce engaged in manufacturing and infrastructure projects, establishing China as a global industrial powerhouse. However, as the economy transitioned toward technology-driven sectors and service industries, the labour market faced challenges in accommodating the increasing number of highly educated workers. Traditional roles demanding highly skilled labour have been progressively replaced by automation, while well-paid jobs with clear career progression opportunities remain scarce.

The collapse of China’s real estate sector has profoundly impacted employment, particularly in construction, finance, and related service industries. Once a driver of economic growth, the sector has faced a sharp decline due to tightened regulations, high corporate debt, and waning consumer demand following the collapse of Evergrande and its unfinished housing projects (Kruszczynski, 2024). Ripple effects have spread to associated industries, such as banking, manufacturing, and retail, further contracting job opportunities and destabilising regions reliant on real estate.

The manufacturing sector, long a cornerstone of China’s economy, is also undergoing significant shifts. Rising production costs and fluctuating global demand have pushed factories toward automation, reducing reliance on human labour. This transition has limited access to mid-level manufacturing jobs, traditionally a fallback for less specialized university and vocational graduates. Additionally, global economic pressures and trade tensions have led companies to relocate operations to countries like Vietnam and Bangladesh, further diminishing job opportunities in a sector that historically absorbed a large portion of China’s workforce.

The technology sector, once a leader in global innovation and a haven for STEM graduates, has also experienced hiring slowdowns amid economic uncertainty. The reduced availability of jobs in tech-related fields has pushed many overqualified candidates into lower-paying roles in unrelated sectors. This shift has created a ripple effect across the job market, exacerbating competition at all skill levels.

The situation has been exacerbated by the widespread neglect of labour laws in China, particularly among private companies. Many businesses have the capacity to hire more employees but choose not to, instead requiring existing staff to work longer hours without additional pay. The Chinese government has shown little interest in addressing this issue, as its focus remains on stimulating the economy. Consequently, most private firms operate with minimal regulatory oversight due to the lack of worker bargaining power and the absence of labour unions (Taylor & Li, 2007).

Student Responses and Coping Mechanisms

In response to these challenges, many young Chinese professionals have shifted their employment priorities. An increasing number of graduates are turning to the public sector, often referred to as “iron rice bowl” jobs, which promise job security and stable income in an uncertain labour market. According to the Ministry of Human Resources and Social Security (2024), civil service applications reached a record high in 2023, with over 2.6 million applicants competing for just 37,000 positions—a selection rate of less than 1.5%.

Simultaneously, a growing number of students are pursuing advanced degrees, such as master’s and PhD programs, as a strategy to delay entry into the workforce. Graduate program applications surged to over 4.6 million in 2023, marking a 20% year-on-year increase (Ministry of Education, 2023). While advanced degrees are seen to enhance competitiveness, the oversupply of highly qualified candidates has raised concerns about heightened competition in academia and the long-term impact on the job market.

For many graduates, temporary, flexible, or gig-based work in the informal economy has become the only viable option. Positions in the gig economy, such as delivery, ride-sharing, and freelance work, provide short-term relief but often lack job security, social protections, and opportunities for career advancement. This transition from stable employment to precarious work threatens long-term income stability and career development, potentially creating lasting socioeconomic challenges for an entire generation.

Government policies

The Chinese government has introduced a range of policies aimed at stabilising the labour market and promoting job creation. Recognising the social and economic risks of prolonged youth unemployment, these measures are designed to incentivise companies to hire recent graduates, enhance skill development, and stimulate employment in emerging industries. However, these interventions have produced mixed results, as underlying structural issues in the economy continue to limit their effectiveness.

One of the government’s key strategies has been to provide subsidies and tax incentives for companies that hire graduates. These programs, particularly targeting small and medium-sized enterprises (SMEs), aim to alleviate financial pressures on businesses and encourage the creation of entry-level jobs. In addition, some local governments have implemented initiatives offering financial rewards to firms prioritising the hiring of local graduates, an effort to reduce regional disparities in employment opportunities. While these measures have provided short-term relief, they remain limited in scale and have only modestly impacted overall employment figures amidst broader economic challenges.

The government has also intensified efforts to direct graduates toward state-owned enterprises (SOEs) as a part of the civil servant system, which have traditionally provided higher job security and acted as a buffer during economic downturns. By recruiting graduates into SOEs, the government temporarily eases employment pressures. However, this strategy fails to address structural inefficiencies in the private sector and is constrained by the increasing debt burdens of local and central governments, which limit the public sector’s capacity for sustained expansion (Liang, et al., 2017).

To address long-term workforce challenges, the government has also sought to reshape China’s demographics through population policies. Adjustments to the one-child policy—first allowing two children in 2016 and three in 2021—were intended to mitigate labour shortages and sustain economic growth by encouraging larger family sizes. By increasing the working-age population, these policies aimed to support labour supply, strengthen the tax base, and spur demand in sectors like education, healthcare, and childcare. However, their impact has been limited due to prevailing pessimism about future economic performance and social mobility, with the birth rates consistently decreasing.

Despite their proactive nature, these policies are constrained by deeper economic and political issues. The reliance on state-driven solutions often leads to inefficiencies, as the private sector continues to experience slower growth and limited capacity to sustain high levels of employment. Moreover, these interventions do not fully align with the aspirations of young graduates, who seek positions with long-term career potential rather than temporary or low-growth roles.

Social-economic consequences

High levels of unemployment and underemployment among young graduates have created a generation grappling with significant economic and social uncertainty. One immediate concern is the impact on consumer behaviour. Unemployed or underemployed young professionals often delay major life decisions, such as purchasing homes, getting married, or starting families (González-Val & Marcén, 2018). This delay not only reduces consumer spending but also further strains critical sectors like real estate and consumer goods. Such stagnation creates a vicious cycle, exacerbating the economic recession and deepening market contractions in these industries.

The psychological and social consequences of this labour market strain also pose risks to China’s social stability. A growing segment of educated youth is becoming increasingly disillusioned with the limited opportunities available to them. Many graduates feel that their significant investment in education has failed to translate into fulfilling employment. This dissatisfaction fosters frustration and could lead to social unrest, eroding trust in the government’s ability to provide economic stability and undermining national cohesion.

Also, long-term underemployment and a reliance on informal or gig-based work threaten the productivity and skill levels of China’s workforce. Graduates working in roles unrelated to their qualifications risk experiencing “skill degradation,” where their expertise diminishes due to underutilisation. Thus, the time and resources invested in higher education end up being a waste of public funds and taxpayer money.

Furthermore, shifting employment trends could have profound demographic and societal implications. With fewer young people achieving financial independence, the strain on China’s already burdened social welfare systems is likely to intensify, especially as the population continues to age. If younger generations remain economically unstable, their capacity to support an aging population will be significantly compromised, creating additional pressures on social security and pension systems.

Overall, the collapse of China’s labour supply system underscores the urgent need for a comprehensive reassessment of how the country supports and sustains its workforce. Without strategic interventions, the challenges faced by today’s graduates could have long-lasting repercussions, threatening economic growth, social stability, and China’s position in global supply chains for years to come.

Conclusion

The collapse of China’s labour supply system under economic recession exposes deep-rooted structural challenges. Rising graduate unemployment and a mismatch between educational outcomes and market demands have left a generation facing uncertainty, demanding both immediate interventions and systemic reforms.

Short-term measures like subsidies, vocational training, and entrepreneurship support can offer immediate relief. However, for long-term economic stability, it is crucial to rebuild economic confidence, strengthen labour laws, re-attract global investments, and create sustainable jobs in the private sector.

Comprehensive reforms that align education with market demands, granting universities greater autonomy in enrolment management and tuition, and emphasise technical and vocational training are critical to addressing underemployment and enhancing workforce productivity. Proactive action will strengthen China’s economic resilience, safeguard social stability, and secure its role in the global economy.