Migrant workers key driver of Chinese consumption

Authors: Meiyan Wang and Fang Cai, CASS

China’s economy has entered a ‘new normal’, slower growth pattern. And consumption is touted to play a more significant role in boosting economic development. The potential is large. But if it’s to be achieved, the Chinese government needs to focus on unlocking the consumption potential of migrant workers who are a major driver of structural change and urbanisation in the Chinese economy.

The number of rural–urban migrants and migrant incomes per capita has increased rapidly over the past decade, resulting in a huge total migrant income pool. This new generation of migrants has a higher propensity to consume out of increments to their incomes than the previous generation of migrants, making them an emerging consumer group whose impact on the shape of the new normal could be significant.

But a number of factors are suppressing migrant consumption. Compared with urban residents, migrants are disadvantaged in employment conditions, income levels and access to social welfare and public services. They usually do not have stable jobs, they earn lower incomes and they have fewer social security and public service entitlements. These factors are positive influencers of consumption, and the lack of them is inhibiting migrants’ consumption.

The gulf between urban residents and migrants is driven by China’s hukou (urban registration) system, which has been hindering migration from rural to urban areas. Despite the implementation of many reforms to the hukou system in the past three decades, migrants still do not have equitable access to education, health care, social welfares and public services with urban residents.

The average yearly consumption per capita of migrants is RMB8627, which is 22 per cent lower than the RMB11,104 average for urban residents. Migrants consume 14.7 per cent less in food than urban residents, and work-related consumption is 19.6 per cent lower. The bulk of the difference comes from facilities and services consumption (37.6 per cent) and human capital consumption (47.9 per cent). The relative proportions of food, work-related, facilities and services, and human capital consumption are largely similar between the two groups.

Migrants consume less in total and food-related consumption per capita compared with urban residents. Total consumption per capita for migrants is 24.4 per cent lower than for urban residents, and food consumption per capita is 14.5 per cent lower. But migrants consume more food from additions to their incomes than do urban residents. This suggests that if migrant incomes were to increase, the effect on national food consumption would be larger than if just urban resident incomes increased.

According tour own research, if migrants’ income per capita were to increase by 1 per cent, 0.25 per cent of this will be used for consumption. If migrants’ incomes increased by RMB1, then their total consumption would increase by RMB0.16. Urban residents, on the other hand, would only increase their consumption by RMB0.10 after a RMB1 increase in income.

Expanding pension coverage is an important way to promote migrants’ consumption. The pension coverage rate has a positive effect on both total consumption and food consumption for migrants, but almost no effect on total consumption and food consumption for urban residents. This implies that pension coverage expansion would promote migrants’ consumption.

Improving educational levels can also make a difference. After controlling for other factors, total consumption per capita and food consumption per capita of households whose heads have had more years of schooling are higher for both migrants and urban residents.

Migrant incomes have been increasing rapidly in recent years. So if migrants are able to enjoy resident rights in terms of access to services and facilities, social security and so on in their adopted urban home, we can expect their consumption potential to be huge.

If migrants could consume like urban residents, their total consumption per capita would increase by RMB2333, or by about 27 per cent — even if their characteristics (such as lower education levels or younger household heads) remained the same. Food consumption would increase by 16.7 per cent, which is the lowest increase among all categories of consumption. Work-related consumption and human capital consumption would increase by 35.7 per cent and 37.3 per cent, respectively. Facilities and services consumption would increase by a massive 56.7 per cent.

In recent years as China has been going through a process of urbanisation, migrant incomes have been increasing, pension coverage has been expanding and the educational level has been improving. By improving the demographic characteristics of migrants and allowing consumption to change naturally, migrants have the potential to become a huge emerging consumer group and to play an important role in boosting domestic demand and promoting China’s economic development.

Granting migrants full residency rights, such as access to education, health care and social security, is not only an important social task and challenge of urbanisation, but also appears to be an intrinsic requirement for China’s economic development under the new normal.

China has made great efforts to provide more and better public services and social welfare for migrants. The government should continue promoting the welfare and livelihood of migrant workers in order to further tap the economic benefits of their consumption potential.

Meiyan Wang is a professor at the Institute of Population and Labor Economics, the Chinese Academy of Social Sciences. Fang Cai is a professor and Vice President of the Chinese Academy of Social Sciences. This article is based on their paper in the China Update book series, China’s domestic transformation in a global context (ANU Press).

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7 December 2015 5:25 am

Thanks for an informative analysis. There would be another benefit besides econmics if the government afforded migrants equal rights and access to social services, education, etc. By helping migrants to become more integrated into urban society the government would lessen the likelihood of their being alienated and thus ‘rebellious.’. Ie, social cohesion would improve in the country as a whole.

9 December 2015 3:49 pm

The situation in familiar in the USA where Afro-Americans and Hispanics are being denied access to jobs, training, education, etc, thus depriving the country of their economic benefits of their consumption potential. It is kind of like the situation where the majority of white Americans before the Great Depression and World War II. After World War II, the GI Bill gave the poor white Americans a chance to go to college or a good vocational education thus creating the largest, prosperous middle class until Reagan came into office as Governor of California and then later as President of the USA and destroy the middle class.

Lintong Feng
10 December 2015 3:48 pm

It makes perfect sense to provide the same public services and social security to rural-urban migrants. A main question is whether the national and local governments have the means, mainly the revenue to do so. If they have then it will be all fine. If they don’t, then the question is how they can have the revenue to do so. There should be a national policy mandating a deadline for achieving the equality between rural-urban migrants and the permanent residents, recognising the differential capacity between different regions. The central government may also need to use its financial power to assist some regional governments in the process.

11 December 2015 12:03 pm
Reply to  Lintong Feng

I don’t understand why businesses bring the jobs out to the rural areas so the rural-urban migrants would not have to leave the rural areas?

I do agree with Lintong Feng about government providing the same public and social security services to people no matter who you are. In the USA, cities and counties have to call on the state police or even federal law enforcement agencies, since they don’t have the manpower, resources, and technical skills to police their areas and to solve crimes.

Lintong Feng
10 December 2015 4:19 pm

Personally, though, I am a bit sceptical about the consumption-led (more generally a demand driven model) rapid economic growth model for a developing economy. If consumption can lead the development of a developing country, then every country could do it easily. The basic logic is that you have the income in hand first before you can consume. I think it is conceptually easier to have production-driven through a combination of investment and productivity enhancing, supply-driven model (using international trade to balance the difference between production and consumption). While the current surplus capacities in some industries in China represent a serious problem and may take years to be overcome, businesses and the government need to consider how to raise productivity in many other sectors. Surplus in the capacity of some industry can occur in any countries: the current international mining and oil industries are examples.