China’s dodgy unemployment number

It may be the most important indicator in China but it sure ain’t reliable according to a new study:

Unemployment rates in countries across the world are typically positively correlated with GDP. China is an unusual outlier from the pattern, with abnormally low, and suspiciously stable, unemployment rates according to its official statistics.

This paper calculates, for the first time, China’s unemployment rate from 1988 to 2009 using a more reliable, nationally representative household survey in China. The unemployment rates we calculate differ dramatically from those supplied in official data and are much more consistent with what is known about China’s labor market and how it has changed over time in response to structural changes and other significant events.

The rate averaged 3.9% in 1988-1995, when the labor market was highly regulated and dominated by state-owned enterprises, but rose sharply during the period of mass layoff from 1995- 2002, reaching an average of 10.9% in the subperiod from 2002 to 2009. We can also calculate labor force participation rates, which are not available in official statistics at all. We find that they declined throughout the whole period, particularly in 1995-2002 when the unemployment rate increased most significantly.

…The primary deficiency is that the official Chinese unemployment rate is calculated as the share of total registered unemployed people over the total labor force, which is known to underestimate total unemployment. That underestimation is likely to be particularly severe in China for three reasons:

(1) a large fraction of the population lacks local household registration (Hukou) status and hence many unemployed people are not qualified to register with local employment service agencies,

(2) even qualified unemployed people may lack the incentive to register because of very low levels of unemployment benefits, and

(3) the total number of registered unemployed people are aggregated bottom-up within the bureaucratic system, thus subject to aggregation errors and potential data manipulations (Giles et al., 2005 and Liu, 2012).

Also, the total labor force, which is the denominator in the calculation of unemployment rate, is also subject to error for many reasons. One recent article that reviewed the quality of Chinese labor statistics claimed that the official unemployment rate is “almost useless” (Cai et al., 2013). Another important and related labor market indicator – the labor force participation rate – is not even reported in official statistics.

As Andrew Forrest likes to say “a bet against China is the only guarantee of loss I’ve seen for a long time”.