China Labor Shortage – HR Strategies to Remain a Competitive Employer

The China labor shortage is driving companies to reassess their HR policies to improve worker retention. In this article, we discuss how the labor crunch is impacting China hiring practices and the strategies companies can adopt to remain competitive. 

China is in the midst of a growing labor shortage that is placing increased pressure on the manufacturing industry. While similar shortages are being felt by many countries around the world as workers fail to return to the workplace due to persistent fears of the COVID-19 pandemic and changing attitudes toward the nature of work, China’s current predicament is part of a longer-term trend. 

In some ways, China is the victim of its own success: an aging population and an increasingly well-educated workforce have a proclivity for white–collar positions in the rapidly-growing service sector. Many people seek jobs that offer a higher level of flexibility, such as food delivery and courier services, and migrant workers that used to move to large cities to find work are now staying closer to home. 

All of these factors, and more, play into the drop in factory workers and has been a dilemma for both the government and China’s business community for many years. This in turn has led to calls for implementing solutions, such as a higher level of automation and raising the retirement age. 

With rising labor costs and changing workforce composition, some companies are already ramping up incentives to lure workers back and keep the ones they already have. Some may also be reassessing their positions in China altogether or exploring alternative solutions to mitigate against the labor crunch. 

For this article, we spoke to Kyle Freeman, partner and head of the International Business Advisory team in North China, who offers insights into how labor shortages are shaping hiring practices in China and argues that companies need to change focus to worker retention through progressive HR practices. 

Effects of labor shortage on hiring practices 

As China’s census results from this year highlighted, an aging population coupled with low birth rates resulting partly from China’s family planning policy has led to a shrinking labor pool.  

This, along with other factors, such as slowing rural to urban migration flows and the growing availability of service sector jobs, has put increased pressure on the manufacturing labor supply.  

Factory managers have been aware of this trend for some time now. Currently, one of the most challenging aspects of running a factory in China is the availability of labor and the resulting increase in wages required to attract or retain workers.  

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Companies are increasingly looking to automation and alternative locations to China for their manufacturing needs. However, there are limits to automation, and China is still a competitive manufacturing destination for a variety of reasons, including infrastructure, access to suppliers, the scale of production, and time to market. These benefits remain true even if employment costs in China are higher than in alternative locations and increases in employment costs rise faster than productivity.  

Because of the benefits that China offers in manufacturing, companies are also exploring moving operations to lower-tier cities in China, where there may be higher retention rates and lower-cost labor. Many companies are now in China for China, so exploring lower-tier cities may be more attractive than moving operations to a different country. 

Possibility of raising the retirement age 

China has a comparatively low retirement age – 55 for female workers and 60 for male workers in most cases. That pushes some productive workers out of the workforce too early.  

Unsurprisingly, raising the retirement age has proven unpopular with the general public. Therefore, the government has been careful to make clear that any policies to raise the retirement age would be implemented gradually.  

Therefore, raising the retirement age in this manner may help to alleviate some of the pressure on China’s pension system, but likely won’t have a sizable impact on labor availability, particularly for manufacturing, in the near term.  

Mitigating labor shortages through competitive hiring and retention practices 

Companies are adopting a number of different strategies to avoid hiring issues. The main strategy is to increase staff retention. To do this, companies are looking to address both the financial and non-financial needs of employees. 

Hiring recruitment agencies 

Companies are increasingly turning to recruitment agencies to hire more specialized workers and address short-term hiring needs, especially when there are severe staffing shortages that need to be urgently addressed.  

Some companies are also using staffing agencies in more of an advisory capacity, mainly to build robust recruiting channels and procedures that they can then manage in-house. 

Building a competitive HR policy 

Companies can also benefit from creating solid HR policies that aim to ensure fair compensation practices and attract new employees. Such policies should include mechanisms for: 

• Conducting internal HR audits to ensure compliance and identify weaknesses in the current policy, as well as to get input from employees.  
• Conducting salary and benefits benchmarking to identify the company’s competitive edge.  
• Optimizing individual roles by clearly setting expectations, rewards, and benefits of the role.
• Actively recognizing employee performance and loyalty.  

Providing benefits and compensation 

Companies that want to reduce compensation growth are offering additional benefits to workers, such as healthcare insurance, and other benefits that ease the burden of personal financial decisions, such as home or car purchase and retirement. 

Companies are also trying to utilize better HR strategies to address the non-financial concerns of their employees. 

Training and upskilling 

Employees are increasingly looking for access to training and education and have higher demands for clear career progression opportunities and open channels of communication to voice concerns.  

An effective HR strategy that addresses these concerns will not only have an impact on the length of time an employee stays at the company but will significantly increase the value they bring during the course of their employment. It also helps management to identify and address some of their concerns. Smart companies actively look to tie these types of benefits, especially for training and education, to staff retention policies. 

Cultivating a positive work culture 

The issues of working conditions and long work hours have drawn a great deal of attention and public discussion in recent years. This in turn has led to a growing understanding among companies of employees’ desire to improve work culture and work-life balance. 

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These issues can be addressed through measures, such as providing work or scheduling flexibility, or recognizing and assisting with domestic concerns, such as childcare, or offering more family-oriented accommodation if the company provides accommodation for their employees. 

Tapping into China’s changing workforce 

The growing shortage of factory workers is not all bad news. China is already on the path of becoming a leader in high-end technology and automation, for which there will be a need for more highly skilled and experienced workers. President Xi Jinping recently laid out goals to cultivate and train top-level talent, highlighting China’s advance toward high-end and high-tech industries. 

At the same time, changing attitudes toward work are placing more demand on employers to provide a healthy workplace and office culture, and to offer more beneficial incentives and opportunities for growth. 

Companies that recognize these economic and cultural shifts and take appropriate steps to reward and upskill their Chinese employees will be better positioned to succeed in China’s future business landscape. 

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