1. Yaohui’s story Rapidly ageing Institutions that promote (extremely) early retirement Poor pensions (underfunded) Very rural society / still low income (China is 80 th per capita GDP in the world)

2. Question Who is going to support these elderly? Can China change retirement age? –Lots of push back –Inevitable –But, this only affects small part of population (formal urban sector)

3. In my comments I want to show why the answer to: Who will support China’s future elderly? is a difficult question to answer. Mainly because extrapolating out most of the trends … for income … for wealth … for fiscal capacity (to finance social security, pensions, health insurance etc.) depends on continuing productivity gain of China’s economy … and this may be difficult to do

4. 3. EXPLAINING THE RURAL TREND So what motivates these questions?

5. There are important and interesting trends in rural employment. Employment rose in the 1990s and declined quite sharply in the 2000s.

6. No one retired in the past “working until dropping” Common in poor rural economies …

7. Young men led the growth of off-farm employment, followed by older men, young women, and eventually older women.

8. Hd. Mechanization of Agriculture With accelerated mechanization of agriculture since 2000, demand for farm labor declines. This may be responsible for the decline in employment of older farmers.

9. The change in labor force participation of older rural people correspond very well with the change in agricultural employment. In other words, older and female workers increase their labor force participation as younger and male workers exit agriculture.

10. Young men led the growth of off-farm employment (especially employment in low- wage, unskilled manufacturing), followed by older men, young women, and eventually older women.

11. Migration is an important part of the off-farm employment. Migration has been shown to be more concentrated among younger and male workers.

12. CHARLS life history probably underestimates out-migration because we have a six-month rule in the definition. Nevertheless, the rising trend is clear.

13. Summary So you have an ageing society … mostly rural … Everyone is moving out of agriculture But, no one is being integrated into the city ************** So how will China grow in the future? Can the current population/labor force contribute to productivity growth in the future?

14. So: What is the nature of China’s human capital today? … in poor rural areas ? Poor rural areas are: –all rural areas in western provinces –those rural counties that are in the lower half of income distribution in provinces in Central China (> 80 million children, ages 6 to 15) cities other rural

15. Summary So you have an ageing society … mostly rural … Everyone is moving out of agriculture But, no one is being integrated into the city ************** So how will China grow in the future? Can the POOR RURAL population contribute to productivity growth in the future?

16. Probability of a child from a poor rural area going to college (relative to child from the city) Times (x) Poor Rural Urban 8x 13x 21x Poor Rural Poor Rural

17. Today’s Labor Force College/University Attainment ________________________________________________________________________________ Total Labor Force < 10%

18. While all kids do not need to go to college, all children should be going to high school … to get skills for workforce 10 to 20 years from now!! This is critical at this stage of development to get all children the skills they will need in the future Why?

19. How Expensive are Chinese Workers? Manufacturing Wages 1994-2008 (USD/year) Source: International Labor Organization LABORSTA Database China Thailand Philippines India Indonesia China Of course, as we will see later in the presentation, this also has implications for farming

20. Unskilled wage 2010 ≈ $2.00 / hour in 2011 Annual Real Hourly Wage (1978 dollars) ≈ 30 ¢ / hour in 1978 ≈ $3.00 / hour in 2014

21. Implications China continues to grow: RISING DEMAND Size of labor force falls: FALLING SUPPLY  Rising wages in the future  Changing industrial structure By 2025  around $10/hour or more!

24. Moving main base of manufacturing to Vietnam over next 5 years

25. Big question at Apple: Where will the iPhone 8 be made?

26. Summary So you have an ageing society … mostly rural … Everyone is moving out of agriculture But, no one is being integrated into the city Low wage manufacturing is leaving ************** So how will China grow in the future? Can the current population/labor force contribute to productivity growth in the future?

27. But, with higher wages, can China move itself up the productivity ladder?

28. “Textile worker” in high wage countries “made to order” Gucci shoe factory To do his job, he needs to be HEALTHY and competent in math, language, English and computers …

29. Will these young women … who are working in China’s textile plants now … be able to do the job in a modern high fashion textile plant? Unfortunately, most barely know how to read and write … why?

30. While all kids do not need to go to college, all children should be going to high school … to get skills for workforce 20 years from now!! … as we have seen from the discussion above, this is critical at this stage of development to get all children the skills they will need in the future BECAUSE: Less 40% of junior high grads in poor rural areas go on to any type of high school..

31. High School Gap in China today Percent of students that go to any High School China in the 2013 Mexico in the 1980s! 37% ≈90%

32. Even more bleak what examining the stock of human capital

33. 2010 Census data

35. Total labor force

36. Today’s Labor Force Upper Secondary Attainment ________________________________________________________________________________ Total Labor Force = 24% How does that compare to the rest of the world?

37. Share of Labor Force that Attained Upper Secondary Education, Middle Income Countries Country ShareShare of in 201025-34 year olds in 2010 Turkey 31 42 Brazil 41 53 Argentina 42 49 Mexico 36 44 South Africa2834 Indonesia2431 China2436 Average Middle Income3241 OECD7472

38. Results (2010) China’s stock of human capital (share of entire labor force with high school education) is: –With the exception of India, is the lowest of all BRIC countries … and also lower than most other Middle Income countries Lower than Brazil, Russia, South Africa –Equal to Indonesia –1/3 level of OECD countries 74% vs. 24% Lower than Mexico; lower than Turkey If China joined OECD it would be the EXTREME OUTLIER Same is TRUE for youngest cohort (25-34 yr olds)

39. Share of Labor Force that Attained Upper Secondary Education, Middle Income Countries Country ShareShare of in 201025-34 year olds in 2010 Turkey 31 42 Brazil 41 53 Argentina 42 49 Mexico 36 44 South Africa28 34 Indonesia24 31 China24 36 Average Middle Income32 41 OECD74 72

40. Drop out rates from Junior High School, Urban and Rural 31% ≈2%

41. What are kids who are dropping out of Junior High today (they are 13 years old) going to do in 2030 (when they are 28 years old)? They barely know how to read They barely know how to write They are angry at the school system for ignoring them … and this translates into anger at the government & society!

42. OutcomesALL Children in Rural China Anemia (%) 27 Worms (%) 33 Myopia (%) 20 Wasted (Z-score) -0.55 Stunted (Z-score) -1.01 Math Scores (SD) -1.01 Chinese Scores (SD) -0.98 English Scores (SD) -1.45 Drop out rates (%) 19 Mental Health (at any risk -- %) 74 n = 133,000

43. MAIN POINT HERE MESSAGE: –A large share of Rural China’s Children have Poor Health Nutrition Education China’s rural children are NOT ready for migration … or for employment in China’s future economy

44. In fact, the problem probably almost certainly begins BEFORE children have entered school

45. What are the Cognitive Outcomes of China’s future labor outcomes when they are infants/toddlers

46. 3 prefectures (collection of counties) Shangluo Prefecture Ankang Prefecture Hanzhong Prefecture

47. What are the Cognitive Outcomes of China’s future labor outcomes when they are infants/toddlers All babies are being given an Infant IQ test (Bayles test)

48. Share of China’s rural infants/toddlers with poor cognition Share of toddlers with Bayles scores on Cognition Scale that are less than 85 (= IQ less than 90) 53%22% 6 to 12 24 to 30 Months

49. Ultimate Consequences: If the micronutrient deficiencies of infants / toddlers are not corrected before baby is 30 months old  Life time effects on: –IQ –Mental health –Height –Weight –Health

50. What does this mean? In harshest terms: Nearly > 33 percent of China’s future population (100s of millions of people) are in danger of becoming PERMANENTLY cognitively challenged If a person has an IQ under 90, what does it mean? That he/she can not go to high school … they do not learn math, science, language … dead weight in a high wage, high income society … large share of these kids being born now are likely to be alive in 2100 …

51. Summary So you have an ageing society … mostly rural … Everyone is moving out of agriculture But, no one is being integrated into the city Low wage manufacturing is leaving ************** So how will China grow in the future? Can the current population/labor force contribute to productivity growth in the future?

52. http://reap.stanford.edu 52