To meet the challenges of fewer workers and more elderly, China must invest in improving the quality of labor force

China recently started to experience a shortage of labor. The problem started to appear in the eastern coastal cities, but soon spread to major inland cities. This trend has marked the end of the golden age of labor surplus in China.

China's rapid economic growth over the past decades is often attributed to its demographic dividend. According to data from the World Bank, the structural advantage of China's demographic dividend contributed around 30 percent to its total economic growth.

However, this demographic dividend is coming to an end, and the low-end labor market is starting to shrink. If China maintains its current economic structure and counts its economic growth on exporting low-end goods, it will become trapped in low-end production. In order to avoid this trap and promote its future economic growth, China has to transform its current unsustainable demographic dividend structure into a more sustainable and quality-oriented structure.

Since the economic reforms introduced in the 1980s, China's gross dependency ratio, the ratio of the non-working-age population to the working-age population, dropped from 62.6 percent in 1982 to 37.9 percent in 2007. The population dependency ratio has remained below 40 percent since 2005. Studies have shown that for every 1 percent reduction in the country's population dependency ratio, there will be a corresponding 0.115 percent increase in its economic growth rate. Between 1982 and 2007, the decline in the population dependency ratio has contributed around 25-30 percent to China's GDP growth during these years.

So China's aging population has become a big concern. The Sixth Chinese National Census in 2010 shows that 8.9 percent of the population is 65 and over. By the year 2050, the figure could reach 30 percent, indicating a rapidly aging population. Moreover, the Lewis Turning Point is also emerging, indicating a decline in the labor surplus in rural areas.

According to the census, the number of migrant workers, those who work outside of their hometown for six months or longer, increased by 6 percent between 2002 and 2006, yet this figure dropped to 1.7 percent between 2006 and 2010. The expected rate of migrant worker growth rate over the next 10 years is 0.8-1 percent. According to the Chinese Academy of Social Sciences, although China's population dependency ratio is still declining at a relatively low rate, 2013 is expected to be the turning point. After 2013, the population dependency ratio will start to grow again, and the demographic dividend will decline correspondingly.

More importantly, China's per capita GDP is relatively low compared to other countries that have the same or similar demographic dividend conditions, for example Japan, South Korea and Singapore. The per capita GDP in these countries is around $20,000 to $49,000 per year, whereas the GDP per capita in China is only $5,414. Low per capita GDP indicates a possible decline in living standards as the overall population ages.

Over the past 30 years, China's miraculous economic growth has relied heavily on the surplus of two major factors of production, namely labor and capital. It is widely acknowledged that China's demographic dividend has remained in its initial stage, a stage relying on the quantity instead of the quality of its labor force. A quality-oriented demographic dividend values the accumulation of human capital, human resources development, and improving the total factor productivity of the labor force. With a quality-oriented demographic dividend, the profits of economic development can achieve sustainability by promoting and strengthening the formation of human capital.

From this perspective, experiencing a disappearing quantity-oriented demographic dividend is a necessary and unavoidable process in China's socioeconomic and structural transformation. Hence, we have to recognize the importance of human resources, and establish the primary status of human resources in socioeconomic development.

Strategically, we should engage in improving the quality of human capital. We should engage in developing the service sector, strengthen the sectors providing sustainable jobs, and improve the overall quality of the labor force.

More specifically, we should reform the education system, the employment system, the household registration system, and the pension system to reduce institutional barriers for human resources, in order to meet the challenges arising from an aging society and a declining labor force.

The author is an economics researcher with the State Information Center.