China’s Burgeoning Graduates—Too Much of a Good Thing?

Over the past decade many Americans became convinced that China’s economic rise came at their expense. The outsourcing of manufacturing jobs to take advantage of cheap Chinese labor was perceived as having contributed to stagnating middle class wages and the large bilateral trade imbalances. While the logic was always a bit tenuous, China’s cost advantages have eroded in recent years with manufacturing wages having increased by 70 percent since 2009. This has allowed the United States to claw back some production, although most of China’s lost manufacturing has gone to lower cost sites in developing Asia. Yet China’s challenge to America’s economic dominance may not be over, having simply shifted from an abundance of low-skill labor to a glut of college graduates.

Nearly 7 million students are expected to graduate from China’s institutions of higher education this year, up from less than a million in 1999 and two and a half times the number graduating in the United States. In 2004 China overtook the United States in both the number of students enrolled and the number of degrees awarded annually. And by 2020 the Chinese government expects, perhaps unrealistically, to have a total of 195 million college graduates in the labor force, compared with a total projected labor force of 167 million in the United States.

The result of this dramatic expansion of higher education has been predictable: higher unemployment and lower wage growth for Chinese graduates as supply rapidly exceeded demand. Over the latter half of the past decade, the wage premium paid to college graduates fell by 19 percentage points, while unemployment among recent graduates has risen to over 16 percent. Status-conscious graduates resist taking available but low prestige manufacturing jobs, instead holding out for office jobs in government or state-owned enterprises. Unfortunately, despite exhortations from its leadership about “innovation-driven development,” China’s economy still cannot generate enough demand for high-skill labor to absorb the surge in recent graduates.

The weakness of the graduate labor market is matched by the tightness of the labor market for those with less education. Non-college graduates are more willing to take blue-collar jobs and therefore have unemployment rates as low as 4 percent. This has led wages in manufacturing and construction to grow more rapidly than those in many high-skill industries over the past several years, with many factory jobs now paying more than entry-level office positions. The result has been the deterioration of China’s export competitiveness and partially explains the contraction of its current account surplus from over 10 percent of GDP before the financial crisis to around 2 percent now.

The bleak situation for recent graduates contrasts with robust demand for those with several years of experience. Whereas unemployment for recent graduates is over 16 percent, unemployment for graduates of all ages is only 3 percent, indicating that unemployment among older, more experienced graduates is negligible. Moreover, they can expect relatively high pay. Mid-career bank associates, for example, can expect to make between $25,000 and $50,000 a year, compared with an average annual manufacturing wage of less than $7,000.

Some students are avoiding the chokepoint of entry-level jobs by studying abroad, including 400,000 last year alone. Studying abroad not only endows students with a uniquely differentiated skill set, but it allows them to take advantage of the more plentiful supply of entry-level jobs in the countries in which they study. In the past, only 30 percent of students who went abroad for school came back to China after completing their education, but the attractive opportunities have now begun to draw experienced graduates back, including 330,000 last year.

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April 17, 2014