SOFIA RASO proposes a solution to reverse China’s declining birthrate and rejuvenate its aging population.
The Chinese government’s changes a mere six years ago to the previously devastating One Child Policy have been largely unsuccessful in inspiring the desired results of reversing China’s declining birthrate and rejuvenating its aging population. What is it worth to the Chinese government to correct the struggles of the current policy? The financial value to the government can be estimated in economic terms by examining the drivers of structural Gross Domestic Product (GDP) growth: labor force growth plus labor productivity growth. Unintended negative consequences from the policy changes are also inflicting a social cost upon Chinese women. Recent interviews and surveys of women in China and management of Chinese companies, conversations with my homestay mothers from when I lived in Kunming and in the rural village of Bangdong, and data analysis provided insights into a potential solution. A USD $5,000+ investment per annual birth by the Chinese government is necessary to stop the projected labor force decline and could help mitigate economic harm to China, enabling the government to fulfill a social obligation toward working Chinese women.
How We Got Here and the Problem Coming China’s Way
Despite the recent relaxing of family planning rules, the lingering effects of the One Child Policy under Deng Xiaoping continue to impact Chinese society today. In the 1970s, many countries around the world were worried about population growth. China, with its unique characteristics of a very large population and a strong government, took a heavy-handed approach to the problem. At the end of the 1970s, China was facing severe food shortages: 30% of the population was undernourished. Still fresh was the memory of the devastating famines during the late 1950s and early 1960s, which killed anywhere from 20 to 45 million people. In 1979, the Chinese government introduced a policy requiring couples from China’s ethnic Han majority to limit themselves to one child as a way to curb population growth. An analysis of Population Division data from the United Nations highlights that the Chinese labor force has seen its growth rate––2.8% per annum in 1970-1995, peaking at 3.1% during 1970-1975 and again 1990-1995––decline steadily. The labor force’s annual growth rate decreased to 1.2% between 1995 and 2015 and is on course to shrink at an annual negative growth rate of 0.1% by 2020. Using China’s current fertility rate (1.6 children per woman), analysis of the UN data suggests that shrinkage of the nation’s labor force will accelerate to a nearly 1% per annum negative growth rate by 2035. This assumes the official 1.6 children per Chinese woman fertility statistic is accurate, despite some questioning that it may be inflated.
Keeping Women Active in the Chinese Workforce
Chairman Mao’s view that women should be encouraged to work just as much as their male counterparts resulted in women comprising 48%-49% of the Chinese labor force population since 1950. However, underlying trends setting the stage for the future are worrisome.
According to the International Labor Organization, the labor participation rate of women in China, while still relatively high at 64% compared to other Asian countries, has been declining faster than that of Chinese men the past 20 years. An analysis of UN population data indicates that at constant fertility rates, the annual decline in working-aged women will be greater than that of working-aged men in the next 15-20 years, causing women as a percentage of the total labor force to sink well below the low end of the historic range. The worsening age distribution within the female labor force also suggests that this decline could continue for decades to come if nothing is done. The percentage of working-aged women in the oldest age distribution (60-64 years old) of total working-aged women for decades has been 6.3% or lower. However, in the last decade, that percentage has risen to 8.5%-9.0% and is set to soar to over 13% by 2030.
Thus, with the attrition rate already set to increase for such a significant part of the labor force, policies and programs that keep women actively engaged and bolster their participation rate are more vital than ever. As the education gap between Chinese men and women narrows, maintaining the presence of educated women in the labor force can have a meaningful impact on labor productivity as well. The difficulties between choosing to have a child and a career for women in China are numerous. High living costs, long work hours, and strongly increasing expenses to raise children, particularly in big cities, may deter women from having children. Gender pay inequality in China is a further impediment for working women to achieve their financial goals and a work-life balance, which would enable having children. There are many examples of employers ignoring laws meant to keep mothers in the workplace or even asking female hires to agree not to get pregnant for a period of time, at the risk of being fired without compensation. Additionally, women in China may fear returning to work post-maternity leave and being met with lower pay and even demotion.
More subtle difficulties in choosing between children and a career include the tug of filial piety. As members of the one-child generation become the sole breadwinners in their families, taking care of elderly parents while also managing the burden of raising a child has its obvious challenges. With the very strong migration from rural to urban areas in the past few decades, caring for the elderly is further challenged by the increased distances between these sole breadwinners and their parents. Provinces such as Chongqing have even drafted laws requiring a certain frequency of visits to elderly parents. The decision to get married, too, has become more complex. Once perceived as needing marriage to survive financially, women in China now have increased access to education and employment opportunities, which has led to a generational shift in younger women, particularly in urban areas, to be in less of a rush to get married.
With the #MeToo movement gaining traction in China and the “Feminist Five” occurrence, there is no doubt that concerns of gender-related workplace inequality could escalate if women do not feel supported by government policies to protect women’s rights in the workplace.
Personal Interviews Shed Light on a Potential Solution
As a teenage girl myself, in the early stages of forming my own career aspirations with nascent thoughts about my ideal future family structure, my recent summers in China naturally led me to speak with young and old women about their experiences since the days of the One Child Policy. I recall from my time spent in Kunming that my homestay mother, a university-educated and working woman herself, expressed feelings that while she wants her daughter to have a family, she also wants her to expand her education for a strong career foundation.
These personal conversations sparked my curiosity, so I sought to broaden my understanding of how current prime childbearing-aged working Chinese women have been impacted by the recent relaxing of family planning rules. I recently interviewed and surveyed over 30 such women across various regions of China. My line of questioning focused on how the change in policy has influenced not only their views on having children but also how it may have influenced the behavior of peers, family, and those affecting their career. Only 11 of my 37 interviewees noted that the recent policy change had impacted their desired timing of marriage and/or number of children. In fact, when the data is separated into women below and above 30 years old, a greater percentage of younger individuals said that the policy did not impact their family planning and marriage goals.
Furthermore, despite an attempt to rally patriotism by the People’s Daily to promote family planning as “not only a family matter but also a national issue” and pressures from the older generation to have larger families, my interviewees expressed that they have not felt any increase in pressure coming from family and friends to bear more children: only 3 of 37 respondents noted increased pressure to do so, with a similar response for both younger and older respondents.
Most telling from my interviews and survey results was the large majority of women indicating that they and/or their friends have seen employers’ behaviors change for the worse since the relaxing of China’s family planning restrictions: 23 of the 37 women interviewed noted adverse employer behavioral changes, with 10 of the 13 women under 30 years old and 13 of the 24 women over 30 specifying so. The women explained how employers’ concerns about disruptive and costly maternity leaves potentially increasing in frequency have manifested themselves in a decrease in job opportunities available to women and increased struggles to be promoted. One woman put it delicately: she stated that the change in the family planning policy has prompted companies to hold women, particularly unmarried women, to more “rigorous” standards. As the new policy weakens job opportunities for women, an unintended social consequence results from the lack of financial security due to the burden of having additional children.
Conversations with Employers Emphasize a Solution That Addresses Both Parties
While childbearing-aged women are obviously a main focus for any family planning policy, my interview results also highlighted another relevant group that needs to be considered: employers. To get the employers’ perspective on this issue, I interviewed the management of a few indigenous Chinese companies and global companies with operations in China. These interviews revealed that, in China, most all maternity costs are borne by the employer and that the average cost of maternity leave to the typical Chinese employer ranges from $1,200 to $4,200 (rural areas to Tier 1 cities). Some companies, particularly multi-nationals, are willing to pay more, but the large majority of companies pay only the compulsory amount to cover the standard 98-day maternity leave.
When a woman begins working at a company, the employer contributes each month to the government’s Social Security Bureau an amount equal to a small percentage of the woman’s salary. This maternity insurance is part of the five social insurances––pension, medical, unemployment, maternity, and work injury––compulsory for every company in China to pay to their employees. All insurance payments contain a company portion (which is the biggest contribution) and an individual portion, except maternity and work injury, which only have the company payment portion. When a woman takes maternity leave, the employer pays her full monthly salary for those compulsory 98 days and then gets reimbursed by the Social Security Bureau. The exact amount reimbursed varies based on the woman’s salary relative to her company’s average salary and a maximum payment threshold paid by the Social Security Bureau that reflects the average in the company’s region. My conversations with company officials made it clear that, in addition to potential workflow disruptions, the financial burden of maternity leave falls squarely on the shoulders of employers.
Harms of a Shrinking Labor Force
The structural potential GDP growth rate for China has already decreased by approximately 2% due to its slowing labor force rate. With current Chinese GDP of $12-$13 trillion, the 1% per annum labor force decline is worth roughly $120-$130 billion per year in present currency value. Therefore, it would be justified for the Chinese government to invest at least that much into its current prime childbearing-aged women to avoid the 1% decline in the future.
While quantifying the potential aggregate economic drag helps frame the magnitude of this issue at a high level, we must also consider concurrent societal, policy and other economic stresses from a shrinking labor force. China’s labor force is set to shrink not just in absolute terms but also in relation to its age dependency ratio. Further analysis of Population Division data from the United Nations suggests China’s population that is 65 years and older relative to the size of China’s labor force will balloon from 12.2% in 2010, and 18.5% currently, to 42% by 2040. This greatly increased dependency rate would increase burdens on China’s entitlement programs for pensions, healthcare, and education. With a smaller labor force to draw from for tax revenues, the government’s ability to fund these entitlement programs could lead to higher tax rates. Reforms of China’s hukou system, to which welfare benefits are linked, has recently opened up to be more inclusive of rural residents and migrant workers. In addition, the migration trend from rural to urban living in China will likely continue, further encouraged by such policy changes.
By 2040, China’s working-aged population will be approximately 822 million, down from its current approximate of 930 million. To prevent the 1% labor force decline, China will need approximately 8 million additional births. Given China’s total 2018 births of only 15.23 million––a notable drop from 2017’s rate of 17.23 million and the lowest since 1961 (China Bureau of National Statistics)––8 million incremental births is no small feat to accomplish, particularly since newborn children do not reach working age for another 20 years.
Further analysis of the UN’s population projections with current trends suggests that the number of Chinese women between 20 and 39 years old (prime childbearing years) is set to decline from the current 198 million to 187 million by 2025, followed by a precipitous drop to 163 million by 2030. A sharply declining population of prime childbearing-aged women further incentivizes the Chinese government to act sooner rather than later.
Lessons from Other Countries
Declining fertility rates and the risk of declining populations and labor forces are not unique to China. A half-century ago, only eight countries reported fertility rates below the replacement rate of 2.1 births per woman. As of 2015, a record ninety-eight countries were below the replacement rate. The sheer size of China’s population is unique, but lessons can be learned from other countries that have been relatively successful in maintaining or even increasing fertility rates in recent years. For instance, fertility in Europe is higher in countries where women are active participants in the workforce, and lower in those where they generally stay at home. Also contributing to higher fertility rates are less rigid family norms, with a higher percentage of births outside of marriage. I suspect the cultural change to a less rigid view of the family unit would be a lengthy, even multi-generational process. As China already has a general acceptance, if not outright promotion, of women in the workplace, keeping and ideally increasing women labor participation rates can be an area of focused investment to help stimulate higher fertility rates.
The initially counterintuitive logic of more women working providing a higher fertility rate appears to be linked to generous parental benefits and improved childcare conditions, such as in Sweden and France, where fertility rates for each country are, at 1.85 births per woman, among the highest among developed nations. Similar stimulus and support has occurred in Germany this past decade, where notable legislation included raising the parental leave allowance to two-thirds of income for the first year (along with two extra months that can be taken by both parents or caregivers at the same time). German parents were granted legal access to a nursery once the child turns one year old and the number of nurseries was subsequently expanded. Germany’s fertility rate increased from 1.36 births per woman in 2008 to 1.59 in 2016 (the latest data available), an impressive 17% increase and the highest in Germany in 43 years. In 2008, the Russian government launched a set of initiatives, which they renewed and refreshed last year, designed to boost the country’s birth rate, including offering cash rewards and mortgage subsidies to poor families in a bid to reverse a steady population decline. In its Maternity Capital program, low-income families can receive $175-$190 per month for their first child until the child reaches 18 months old. The program expanded last year to include a $5,200 lump sum payment for having a second or subsequent child born by 2021. While Russia’s fertility rate was already on an upswing from a dramatically low post-Soviet Union fertility rate reached in the late 1990s, the Maternity Capital financial incentives have likely contributed to Russia’s 28% increase in fertility rate since 2007, from 1.42 births per woman to its current 1.82.
Using $120-$130 Billion to Close the Birth Gap
China has some blueprints from other countries’ successes regarding size of spend per birth and type of spend that could be most effective. Programs that foster increased female participation in the workforce are critical. First, provide the increased government support for child care. Two, make it easier for employers to be comfortable hiring and retaining women, by reducing costs of maternity leave so having multiple child births does not outweigh their value-added in the workplace.
While one could argue the money should target only the incremental 8 million births needed, that could prove ineffective. Given the declining birth rates China has seen under the existing policies recently, the government cannot take for granted that the current birth rate (15 million) will not decline further. In addition, a policy covering all births, not just incremental ones, is more practical administratively, as it avoids the government having to know which number child this is for each woman.
Therefore, in using the $120-$130 billion, the government has over $5,000 of justified investment for each of the necessary 23 million births, an amount above and beyond the financial incentives per first birth in Russia, similar to Russia’s subsequent birth incentive. However, with the average income in China closer to $12,000, the over $5,000 would fall short of Germany’s parental leave allowance of two-thirds of a full year income. When you also consider the fertility rate increase in Russia and Germany growth 28% and 17% over similar time periods with these incentives is encouraging but is clearly not quite yet the eventual 50% increase in annual births China needs to see, it does suggest the over $5,000 needs to be spent very effectively and even may need more financial support than that from the government.
China’s current government gross debt of approximately $6.8 trillion, as a percentage of its GDP, has increased significantly this decade from 34% to its current 51%, with the IMF projecting 65% by 2023. Such a trajectory of government debt needs to be monitored carefully, particularly while concerns about financial risks related to China’s large shadow banking industry persist despite recent declines in shadow lending. Still, for perspective, China’s government gross debt as a percentage of GDP remains much lower than other leading economies––Japan’s current government gross debt is at 234% of its GDP, the United States is at 109%, and India is at 67%––while being on par with Germany’s 55%. Thus, funding the $120-$130 billion with government debt, which would add less than 2% to China’s current government debt, is a possibility. However, if China’s government would be uncomfortable adding more debt for this purpose, there are current China government programs from which some or all of the funding can be drawn. Within China’s $3.3 trillion of government spending in 2018, $334 billion was spent on broadly termed urban and rural community affairs, $319 billion went to agriculture, forestry and water conservancy, $173 billion was spent on military, and $170 billion was spent on transportation; in addition, $486 billion went to education, $408 billion to social security and employment, and $208 billion to public security. Reallocating some of the $236 billion already being spent annually on health and family planning could provide assistance to funding the $120-$130 billion proposed.
Given the significance of child care and parental benefits in the child birth decision and to avoid any hiring and promotion discrimination in the workplace, a particularly effective area of investment by the government could be maternity leave. At $5,000 per birth, the woman is being provided funding well beyond the current average of $1,200-$4,200 per maternity leave, and the program also takes the burden of maternity leave off the employer, which would lessen some of the increased hiring and professional advancement discrimination against women.
The Chinese government may detect the social discord rising due to women’s increased struggles with the change in behavior by employers if unchecked. Thus, investing in keeping women in the workplace––while allowing them to feel more comfortable having multiple children by reducing the economic burden of maternity leave on employers––addresses two problems simultaneously: a pressing economic concern and a social issue that the government should address sooner rather than later. ]
Additional funding beyond the over $5,000 for a maternity leave, likely best targeting structural improvement in available child care after the maternity leave period, can be debated. However, when you consider the increased dependency rate problem looming, and what that could mean in constraining the government’s fiscal policy, the argument for doing more than solely the generous maternity leave gains weight. The potential upward pressure on tax rates, potential backtracking on policies to increase eligibility for entitlement programs given the financial constraints to fund them, and even previously effective broad short-term economic stimulus packages being harder to justify if entitlement programs are underfunded, all suggest that stimulating the required birth rates even further could be rationalized as fending off not just adverse economic consequences but potentially even further social strife.
At a minimum, I would propose the government start immediately with my proposed change to the maternity leave program and closely monitor fertility rate increases that hopefully are similar to the success seen in Russia and Germany. That success may further enhance the argument for additional funding beyond the over $5,000 per birth to attainment of China’s fully required fertility rate increase. The administration of my proposed change could be fairly straightforward as there would be only two main changes to the current program. Employers would cease contributing to the Social Security Bureau, as it would be replaced by government funding. The amount paid to the woman on maternity leave would now be $5,000. It would be at the discretion of the employer to provide any further maternity leave benefits. Depending on the success of this initiative, altering the $5,000 can be considered, be it incremental compensation or simply reallocation of the same resources with an increased focus on improved childcare post the maternity leave period, which is an element of the fertility rate success stories in other countries.
Investment Alternatives Exist, But Undoubtedly Investing in Raising the Birth Rate Is an Important Part of the Solution
There are, of course, alternate reasons for the slow structural GDP growth other than fertility rates. One option is to change policies surrounding immigration. The government can also continue to invest in increasing the productivity level of its current labor force, either by investing in labor-improving systems like education and healthcare, which could lengthen individuals’ working years, or investing in productivity-enhancing technology. While alternative investments have merit, I feel strongly that the $5,000+ ($120-$130 billion in total) to incentivize, at a minimum, a meaningful part of the needed increase in the number of births to stop the labor force decline has such justification that this is money well spent. The Chinese government and China’s private economy have the means to continue to invest in alternatives out of other funding as they have in the past.
Sofia Raso can be contacted at email@example.com.