Multinationals are likely to encounter long-term headwinds as overall demand decreases because of rising youth unemployment
While high youth unemployment may present a few short-term advantages for multinationals operating in China, companies will ultimately face long-term challenges that could prove difficult to overcome.
With numerous young people seeking jobs, multinationals have an abundance of applicants, many of whom have graduated from top-notch universities and have the potential to become high-performing professionals. Given the fierce competition, multinationals are unlikely to face significant wage pressures, as is currently happening in Western markets. Pay and compensation costs for junior workers are expected to remain subdued for at least this year and the next.
However, this may not be the case for factories seeking workers for their assembly lines. Many university graduates lack the skills required for production line work. Culturally, they may also feel uncomfortable taking on blue-collar jobs. Consequently, the large number of university graduates searching for employment may not alleviate the challenges faced by manufacturers struggling to find sufficient workers for their factory floors.
Longer term, high and persistent youth unemployment could lead to problems with overall demand, which may hurt multinationals’ revenues in the long run. In China, young people are traditionally the primary consumer group, more willing to spend (even taking on debt in some cases) on services such as dining out, pubs, cinemas, travel and holidays, as well as on durable goods like high-end electronics, home appliances, furniture, cars, and ultimately, properties. This willingness to spend is contingent on their confidence in job security and their earnings prospects for the future. If they lose this confidence due to unemployment or underemployment, their propensity to spend will be much lower, resulting in decreased overall demand in the economy. For multinationals, this translates into a shrinking pool of customers.
Firms can certainly attempt to identify new groups of customers with more significant purchasing power, but this becomes increasingly challenging, as most of these customers accumulated their wealth during better times, and their demands have been largely met. The law of diminishing marginal returns suggests that firms are unlikely to see a return as high as what they once obtained from the younger generation.
Ultimately, multinationals will be confronted with the question of whether to double down and make additional investments in China as returns continue to diminish.
- The unemployment rate for China’s younger adults ages 16–24 rose to 20.8% in May 2023, the highest since recording began.
- In comparison, the unemployment rate for those ages 25–59 stood only at 4.1%, and the nation’s overall unemployment rate in cities and towns was only 5.2%, both vastly lower than the younger generation.
- The worst is yet to come, as there will be more than 11 million graduates leaving universities and entering the job market as summer comes.
- The wave of layoffs at tech giants has exacerbated the situation, as the tech sector traditionally employs a large number of young people. A similar impact can be observed in the tutoring sector, which suffered from a crackdown by regulators.
China is facing its highest youth unemployment rate in decades, posing significant challenges to its economic recovery and long-term growth.
Despite reopening, the economy is presently not generating enough job opportunities for young people, primarily due to weak business confidence. Three years of zero-COVID have caused significant damage to businesses, particularly private small and medium enterprises (SMEs), which provided nearly 80% of jobs nationwide before the pandemic. Consequently, entrepreneurs and business owners are now more conservative in terms of investment and employment.
To boost confidence, China needs to implement growth-oriented policies and strike a balance between growth and security by easing its grip on economic activities. However, this change is unlikely to occur in the short term.
Meanwhile, the number of university graduates has been steadily increasing over the past decade due to rising enrollment. This trend is unlikely to reverse anytime soon, so the number of graduates will remain elevated for at least a few more years. Furthermore, the majority of Chinese graduates prefer white-collar jobs, which are precisely the type of roles that the economy is not creating in sufficient numbers. This skill mismatch further contributes to the unemployment of many graduates.
With high supply and low demand, alongside a discrepancy between the two, China’s challenge of high youth unemployment is likely to persist for a few more years.
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