A groundbreaking survey examines the challenges facing the Chinese manufacturing sector and its workers

China’s manufacturing sector exploded in size following the economic reforms enacted in the late 1970s.

Four decades ago, China produced only 2 percent of the world’s manufactured goods and individuals in the Chinese workforce earned approximately 3 percent of American wages. Today, China is the world’s second-largest economy and produces over 20 percent of the world’s goods. The wages of Chinese workers are now about 20 percent of those earned by American workers.

Despite China’s outstanding performance in manufacturing, changing technology and increased labor costs are key challenges facing its manufacturing sector today. Many firms are investing in automation technology that reduces the demand for unskilled labor. Meanwhile, other firms are increasingly outsourcing production to lower-wage countries like India and Vietnam.

To date, the lack of high quality, in-depth data on firms and workers has prevented the systematic study of issues impacting both employers and employees in China. This changed when Hongbin Li, the James Liang Director of the China Program at the Stanford Center on Global Poverty and Development, partnered with a team of researchers to conduct a large-scale survey of firms and employees, the China Employer-Employee Survey (CEES). They gathered this data in order to answer questions like, “To what extent are Chinese firms upgrading technology to produce higher value-added, more capital-intensive goods? Are they replacing labor with machines, increasing R&D investment, shifting production to cheaper regions in China or other countries, or simply shutting down?”

The CEES began in 2015 with a survey of firms and workers in Guangdong province, China’s most important industrial province, and expanded to Hubei province in 2016. In 2018, the survey will be further expanded to an additional 3 provinces (Liaoning, Sichuan and Jiangsu provinces) to better capture regional diversity across China. So far, over 1,000 firms and more than 11,000 workers have participated in the survey. The high-quality dataset provides a platform for evidence-based studies of the Chinese economy which Li says can “inform and impact policy making both directly and indirectly” in China and worldwide.

Working alongside Li and the other researchers were two Stanford graduate students, Franklin Qian and David Yang, who traveled to China to visit firms and interview managers and employees.

Back in California, Stanford undergraduate Emily Ruan, a sophomore majoring in economics, is also helping with the survey instrument as a research assistant.

Tracking manufacturing with the China Employer-Employee Survey

China’s manufacturing industry has now reached a critical stage as many of the factors that drove economic growth in recent decades, such as low labor costs, are eroding.  This will lead to major changes over the coming decades, primarily in terms of automation technology, innovation, trade, human capital development, and labor organization. In order to document and monitor these changes in Chinese manufacturing, the CEES will follow sampled firms over a number of years.

The survey was created in such a way as to capture the diverse nature of the Chinese manufacturing industry. To do this, the survey initially sampled firms that ranged from small, home-based enterprises to Fortune 500 companies in the Guangdong and Hubei provinces.

Survey findings

The researchers found that Chinese wages are increasing, which has, in turn, increased labor costs. To offset this, many firms are replacing unskilled employees with more capital-intensive production that increases the demand for skilled workers, such as technicians. Data collected through the CEES survey also revealed that the wages of skilled workers are increasing slightly faster than those for unskilled workers.

One method Chinese manufacturing firms use to combat rising labor costs is adopting robots and automation technology. Using the CEES data, Li and two other researchers (Cheng and Jia) have found that firms are more likely to adopt robot technology when they receive government subsidies, wage costs and labor turnover are high, and their manufacturing relies on manual tasks. Even as China figures out what to do with its displaced unskilled laborers, robot adoption is expected to increase in coming years. In fact, the Chinese government intends to triple the density of robots used in the manufacturing sector by 2020.

Since management quality is a major contributing factor to the performance and innovation of a firm, the researchers also collected data from CEOs, senior managers, and workers in order to assign “firm management scores.” This data shows that the management scores of Chinese firms are lower those of US firms, and a third were being “poorly managed.” Unsurprisingly, these firms were shown to have lower of productivity and growth.

The survey results also determined that whether a firm is state- or privately-owned plays a role in its performance. State owned enterprises were found to have generally higher productivity than private firms, which was partially attributed to higher levels of human capital, greater market power, and better management. However, in terms of financial results, private firms tended to score higher than state owned firms.

Future survey waves will continue to monitor changes in China’s manufacturing industry. Seeing the evolution of Chinese technology, labor and management will have significant implications for international competitiveness.

Policy impact

Li stresses that this survey, the first of its kind, is “providing an important data set which can be used by policy makers and researchers to move toward evidence-based policy design and evaluations.” The goal is for the data to be leveraged for more effective policies and to better evaluate the impact of economic policies on automation, innovation, firm performance, trade, and economic growth.

The team of researchers in Wuhan with whom Li worked have written industrial reports based on earlier survey rounds that were endorsed by the provincial governors of both Guangdong and Hubei provinces. These reports led to special meetings by the relevant policy-making departments.

The data that the CEES research team has provided to local governments has helped earn continued support for the project. Wang Xiaodong, the Governor of Hubei Province, has said that he attaches “high value to this report, which seizes the crucial problems.”

Zhu Xiaodan, Governor of Guangdong Province, has said that the survey “is timely and in-depth,” and that his departments are studying suggestions that come from the data for his province.

The survey has implications far beyond China or even other high performing nations. “We are documenting the industrialization process of China, which has been happening over the past forty years and is evolving very fast,” Li said. “Learning about the dynamic process may also help to inform industrialization in other less developed countries.”

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The China Employer-Employee Survey was established by Hongbin Li along with Hong Cheng, from the Institute of Quality Development of Wuhan University; Yang Du, from the Chinese Academy of Social Science; and Albert Park from the Hong Kong University of Science and Technology. Nicholas Bloom, the William D. Eberle Professor of Economics and a faculty affiliate for the Stanford Center on Global Poverty and Development, joined the CEES team as an advisor in 2016. The success of CEES has also been aided by the contributions of Jean Oi, the William Haas Professor in Chinese Politics in Stanford’s Political Science department; Prashant Loyalka, Assistant Professor in the School of Education; Takeo Hoshi, the Henri H. and Tomoye Takahashi Senior Fellow in Japanese Studies at the Freeman Spogli Institute for International Studies; Scott Rozelle, the Helen F. Farnsworth Senior Fellow at the Freeman Spogli Institute for International Studies; and Mark Duggan, the Trione Director of the Stanford Institute for Economic Policy Research.

Please note that prior to May 2019, the Stanford King Center on Global Development was known as the Stanford Center on Global Poverty and Development.