China’s population is falling.
In 2022, for the first time since 1961, more people died than were born in China. For years, observers have been clamoring about a coming demographic crisis, as a steady decline in the birth rate, combined with continued population aging, transforms the size and structure of the Chinese population. In accordance, China’s new economic normal was destined to include a smaller labor force, more elderly citizens dependent on the younger generations for their well-being, and strained welfare and pension systems. With the new data, the heralded crisis appears to have arrived.
The Roots of the Crisis
To some extent, China’s troubling demographic landscape is not unique. There is a well-documented negative correlation between per capita income and fertility rates across countries and periods of time, showing that, as a country becomes richer, it should expect fewer births per woman. At the same time, higher per capita incomes are associated with greater longevity. The Chinese experience bears this out, as state health authorities project that the proportion of the population over 65 years of age will increase from below 20 percent today to over 30 percent by 2035.
The demographic trends associated with China’s past four decades of rapid economic growth is roughly in line with the experiences of other countries such as Japan, as lower fertility and greater longevity combine to create a proportionally older population. But the Chinese experience includes one distinctive force that has magnified the size of the demographic crisis: the one-child policy.
In 1979, Chinese leaders, fearing the country’s then-rapid population growth would outrun the ability of the economy and state welfare systems to provide for Chinese citizens, instituted a policy limiting the vast majority of families to a single child. Legally effective from 1980 until its termination in 2016, the policy was enforced by restricting contraceptive access, imposing economic sanctions, and, in some cases, mandating sterilizations and abortions.
The one-child policy—and the culture of fear it produced—succeeded in achieving the Chinese government’s stated goal of reducing the fertility rate. Over the course of the one-child policy’s lifetime, fertility declined from 2.74 births per woman in 1980 to just 1.77 in 2016. And despite active governmental efforts to increase fertility, including a 2021 “three-child policy” and new financial incentives for having more children, China’s fertility rate has fallen further to 1.18 births per woman in 2022. This places China below the population replacement rate of 2.1 births per woman. China’s persistently low fertility rate in spite of these measures reveals the difficulty Beijing will have in changing the culture of reluctance to have children forged by years of legal and social sanction. Below-replacement fertility rates, combined with the unwillingness of individual families to have more children, all but ensure that aging and population decline will be irreversible.
The Demographic Disaster
A forty-year shortfall of new births accompanied by more elderly retirees has created a perfect storm for China. The country’s age pyramid is becoming increasingly skewed toward older adults, who will make up a larger and larger proportion of the Chinese population. China will likely face an absolute decline in the working-age population by about 260 million by 2050. Furthermore, China’s dependency ratio—the ratio of the population not of working age (aged zero to 14 and 65 and older) to the working-age population—will increase to over 76 percent in 2055, up from 45 percent in 2021. Such an age structure would place China well above the projected global average of 61 percent dependency in 2055, creating new risks for China’s labor market. Population aging is associated across countries with lower labor supply and slower economic growth, as cohorts of older adults exhibit lower labor force participation and tend to be less productive.
In practice, this will mean a greater burden on the backs of those of working age; this burden can take many forms. Younger workers may have to spend more time and money caring for aging family members. An older population means a higher proportion of GDP spent on healthcare. And, to address what is perhaps the concern most directly associated with a rising dependency ratio, pension funds—which rely on the contributions of younger workers to pay for current retirees—will come under greater strain as the number of retirees per worker grows. Indeed, Chinese state pension funds may run dry by 2035, owing to the declining workforce.
Facing pension and healthcare crises, the Chinese government might be forced into the unenviable position of choosing between lower living standards for the elderly, higher corporate or personal taxes, and reduced government spending in other areas—each one a threat to economic growth. Labor shortfalls, too, may play a role in slowing growth. The World Economic Forum projects an annual labor shortage of 11.8 million people over the next decade, and, while some of this gap is due to shortfalls in education and skills, most is attributable to falling birth rates.
It is extremely difficult for any country to sustain robust economic growth with a shrinking workforce. This is particularly true for China, whose rapid growth over the past several decades was driven by low-cost production and abundant labor. The International Monetary Fund projects China’s growth to continue to slow to an average of three percent after 2027, far below its past trajectory. This slow-growth trajectory would mean stagnating living standards in one of the world’s most populous countries, as well as dire consequences for global economic growth, which has been buoyed by a developing China.
Automation: A Balm for China?
China, of course, is not taking this crisis lying down. But, going through some of the potential ways to rejuvenate the labor force, one might be forgiven for remaining pessimistic. Immigration, a surefire way to address declines in domestic fertility, appears an infeasible solution; China’s net migration is currently negative, meaning more people leave the country than enter on an annual basis, and the Chinese government appears committed to its restrictive immigration policies. Increasing the birth rate has been met with resistance by families, and comes with a twenty-year time lag. And the Chinese government itself has admitted that the prospective raising of the retirement age will have a negligible effect on the labor force, serving, at best, as a temporary solution.
But one potential solution stands out: robots. Often viewed in the West as an antagonist—the fears of “robots taking our jobs” have become pervasive in the news media and US presidential campaigns alike—labor-saving automation could be the key to renovating China’s economic prospects. These technologies, ranging from industrial robots automating assembly-line production to emerging chatbots which may reduce the demand for white-collar workers, can substitute for human labor in the tasks they perform, enabling companies to produce the same output with less available labor.
Countries facing aging populations often avert the worst potential economic consequences by shifting productive tasks to robots. Within manufacturing, firms tend to respond to the scarcity of middle-aged production workers and the consequent increase in labor costs by automating certain tasks. And, in these aging countries, automation tends to have positive effects on labor productivity within the manufacturing sector. Where labor is plentiful, the fears that robots will outcompete human workers is plausible. Where labor is scarce, as will be the case for China in the near future, robots seem more likely to augment human labor, helping firms reap the economic benefits.
At least for now, the Chinese government seems to recognize the potential for automation to contribute to economic growth in a world where labor is more scarce. In 2022, the government released a five-year plan calling for China to become a global leader in industrial automation. The specific problems China faces as a result of its increasing dependency ratio could be meaningfully addressed by automation. Enhanced productivity could ensure young workers higher pay and greater ability to contribute to pension funds. And maintaining a higher growth rate than currently projected could help China to manage its fiscal affairs more easily, balancing the imperative of healthcare spending and social services for the elderly with sufficient spending in other areas.
But the path to a new robotic industrial economy will not necessarily be a smooth one. Already, concerns are being raised within China’s manufacturing sector about the devaluation of skilled labor associated with the installment of industrial robotics and the adoption of advanced manufacturing techniques. Because of the advanced nature of many new industrial technologies, these technologies can perform the tasks previously performed by skilled workers, demoting them to more routine, lower-paying positions.
If automation works too well, a scarcity of labor may not be sufficient to save Chinese production workers from the threats automation may pose to countries with higher labor costs, such as the United States or United Kingdom, including pay cuts, a reduction in worker bargaining power, and increased unemployment. Research on robot adoption in China backs this up, suggesting that increased firm-level adoption of robots decreases the probability of employment for manufacturing workers. Already some Chinese firms have expressed their desire to use automation not only to make up for a scarcity of labor, but to replace existing labor. Though, at the firm level and the national level, automation may do more good than it does harm, it may not be individually beneficial for much of China’s working class.
As China transitions to a service- and consumption-driven economy and begins to de-emphasize its traditional economic core of manufacturing, the government is betting big on automation to offset the population decline and aging crisis it is experiencing today. The rise of the industrial robot and the chatbot shows us that no job is safe, but this new reality may be a saving grace for China even as it presents a threat in the United States and Western Europe.
The data tells us that, where countries weather the storm of aging and low fertility, they typically have automation to thank. China appears to recognize this potential, and may be headed in the right direction in safeguarding the economy against stagnation. But this does not excuse the government from taking into account the distributional consequences of automation and the potential for displacement to overwhelm the augmentation of labor. As long as robots serve to enhance human well-being, though, current investments are more than worth it.
Despite the traditional fears associated with technological advancements in the workplace, Chinese workers perhaps ought to welcome their new robot overlords—or, to be more accurate, their new robot coworkers. The future of their country may demand it.