China may have created the most impressive advance of educational attainment in history but it also suffers from a growing skills gap. In fact, China has one of the least educated workforces in the world as measured by the proportion of its labor force with a high school and college degree.
The evidence piles up in Invisible China: How the Urban-Rural Divide Threatens China’s Rise, an illuminating read by Stanford researchers Scott Rozelle and Natalie Hell.
Here’s the key data point:
“Data from the 2015 national micro-census reveal that only 12.5 percent of China’s labor force has a college education. This is lower than any country at China’s level of development, and even lower than many poorer countries. China is dead last in college attainment. China is just as far behind when it comes to high school. According to the 2015 micro-census, about 30 percent of China’s current labor force has a high school education or more. These figures put China behind all other middle-income countries, including Mexico, Thailand, Turkey, and even South Africa.”
Figure 1 illustrates high school and college attainment measures.
Figure1. Proportion of Labor Force with College and Higher School Education in 2015
In a sense, this should not be controversial; it’s a numbers game. The large proportion of rural students who do not graduate from college or high school and then become low-skilled, poorly paid workers will skew China’s aggregate measures to the downside. But their impact matters. How long are the “invisible” 900 million people who don’t live as well as the 400 million urban elite going to keep quiet? How can China be the world’s leading example of educational attainment, sending over 1.3 million college students around the world, while also being among its most challenged? When and how can this massive skills gap be significantly narrowed?
There is more to absorb, and many potential investment opportunities in this picture. Let’s start with macro.
China’s Invisible Labor Market
First, China’s 800 million plus work force has been growing since 1970 but that is tapering off (see Figure 2). According to a recent report from China’s central bank, the country’s projected workforce reduction based on an aging population (7 million per year will leave the workforce each year between 2021 and 2025) may impact productivity. Barring another baby boom (and who wants that with a 1.4 billion population?), China’s only alternative choice is to squeeze as much out of the future workforce as possible through more skills, education and labor mobility, particularly from rural areas. In short, close the skills gap.
Figure 2. Workforce Participation is Peaking
A second area is worker compensation and spending power. Labor’s percentage of GDP peaked in the 2000s before dropping to a historic low of 55% in 2010. It currently sits below long-term trends at 58% (Figure 3). Should we care? After all, labor’s share of GDP has fallen to less than 60% of GDP. Yet this comparison is flawed. Unlike the US, China must have a substantially higher per capita income (currently ranked $11,652 in nominal terms, ranked #73 in the world) to fuel its next phase of economic growth which is contingent on higher value goods and services.
China needs higher wages across its mass population, but, without the skills to produce and consume higher value-added products and services, this is not going to happen. And if it does not happen, there are a whole range of outcomes, none positive. Figure 4 shows the already difficult trend in income inequality.
Figure 3. Labor’s share of GDP has been volatile
Figure 4: Rising Inequality in the Top 10% and Bottom 50%
Third, China’s most dynamic employment sectors—urban, private, incorporated—account for 177 million people as of 2020 (Figure 5). These segments are what many people may think about when they contemplate China’s miraculous leap in wealth, innovation and productivity while looking out of a luxury hotel window in Shanghai. Yet they represent a minority segment of the labor market. What about the undefined 442 million “urban employed persons” which range from state sector to government and unskilled employment, or, even less visible, China’s rural sector employment which exceeds 400 million people?
Figure 5. China’s Workforce: Employment by Sector, 2019 (in Millions)
Education and career technology platforms to the rescue?
This macro picture, of course, coincides with China’s explosive advances in education technology which makes me reasonably confident that innovators will move quickly to close the skills gap. China’s private sector has raised $16.1B in edtech-related venture capital in 2020, or 32x what was raised in 2010. Its academic and policy circles know that the use of edtech is one solution to tackle the rural problem. Its government is going to feel the heat. That said, the next phase of education-to-work pathways that extend throughout China—and into and out of China, including into rural areas—will require a heavy lift for investors and educators.
Based on my own observation, and ongoing client work in the sector, China’s investable universe for the education-to-labor market is already taking shape and being led by a collection of enterprises that comprise a skills-based ecosystem, from MOOCs (which drive a large proportion of learning and development inside and outside the corporate sector) to specialized skills platforms along industry verticals, to various types of HR, gig and employment platforms that optimize the search, assessment and job matching process using algorithms and assessment tools.
Figure 6 illustrates. I did not include China’s Big Tech names–Alibaba, Meituan, ByteDance, TenCent—but they are already throwing their weight into education and skills development and may increasingly compete at lower cost points and massive scale, given their already dominant network effects.
Figure 6. China’s Future of Work Ecosystem
Where does that leave foreign investors and companies?
Given China’s highly competitive education and workforce industry, and plentiful venture fund and capital market access, this is largely a domestic affair. But foreign companies have and will continue to enter China—organically and through partnerships/acquisitions—if they offer differentiated value.
- Strategic investment into Chinese job boards (e.g. SEEK of Australia, Recruit Holdings of Japan); mobile applications for work sourcing; and multinational initiatives that can build hiring pipelines across technology, hospitality, finance and other high-value service based industries.
- Nationally dispersed skills training in partnership with lower-cost MOOCS (industry, regional, private, public), selected direct-to-consumer (DTC) skills platforms, and corporate universities within specific job roles, such as Meituan (which trains for delivery services). The Microsoft/Aptech model, which provides globally recognized IT certifications and has been operating in China for two decades, is also relevant if the certificates are valued within China.
- Foreign content of interest to workers such as English language testing and other assessments that can be matched with potential employees for hiring and progression.
- Provision of specialized degrees and certifications with global distinction and which are recognized as uniquely valuable in China’s workspace—in other words, anything that Chinese universities and entities can’t offer themselves.
- Creative HR platforms that facilitate mobility options for Chinese employees, including start-up tools that link to global recruiting and immigration, and generally serve Chinese companies as they extend their operations globally.
Finally, there is a significant amount of progress that must take place within China’s education and employment markets to avoid future economic stagnation, and to get the country beyond the Middle Income Trap. But automation and other forces are also going to increase pressure on China’s jobs market and potentially compound existing skills gaps. Those companies who can crack this problem in this race against time stand to gain significantly, as will society at large.
- Next in Emerging Markets: Confronting a Jobless Future
- China Talent, Training and AI: Asia as the World’s Laboratory
- Future of Highly-Skilled Underemployment
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