Skilled Workers Shortage in China: Causes and Effects
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Published: Wed, 07 Mar 2018
In this chapter the researcher will present the theoretical foundation for this dissertation. This review aims to investigate and examine extant literature on the following research questions:
Research Question 1: How great is the shortage of skilled workers in China?
Research Question 2: How do such shortages in skills affect the working of multinational corporations?
Research Question 3: How do multinational corporations, with the use of talent management practices and tools, retain skilled workers, including managerial and executive staff, in China?
Information for this literature review has been obtained from a range of secondary sources including books, journal and magazine articles and other media publications, both in online and physical form. Talent management is a comparatively new development in HR theory and practice and much of pertinent and associated literature on the subject exists in the form of publications in various periodicals. Shortage of skilled workers in China is presently attracting a significant amount of concern and material on the subject has been sourced from different articles authored by Chinese and Western experts. The various aspects of the studied subject matter have been taken up in sequence in the interest of coherence and continuity of thought and discussion.
2.1 Shortage of Skilled Workers in China
The shortage of skilled workers, whilst of recent origin, is assuming grave dimensions. The Chinese economy has been growing at an astonishing pace for the last two decades (Barbosa 2010). Such phenomenal economic growth has propelled the country from the ranks of the poorest of the poor to the position of the second largest global economy (Barbosa 2010). Having crossed Japan in the GDP rankings in August 2010, the Chinese economy is now second in size to only that of the USA (Barbosa 2010). With it being widely accepted that access to cheap and skilled labour has played a predominant role in the countryâ€™s economic performance, the emerging shortages in availability of skilled workers is becoming a serious matter of concern (Powell 2009). Experts feel that the problem, whilst manageable until now, is increasing in various dimensions and can become a serious challenge to the countryâ€™s economic growth in the foreseeable future (Powell 2009).
â€œVarious domesticÂ media reportsÂ put the labour supply gap at around a million people in Guangzhou and neighbouring cities such as Dongguan, legendary centres of Chinaâ€™s export boom in the past three decades. Numerous assembly lines and construction sites are sitting idle while anxious employers have raised salaries by more than 30% but still canâ€™t attract enough applicantsâ€?. (Hong, S. 2010)
The current shortage of skilled workers in China is due to the emergence and interplay of a range of factors (Trading Economic 2010). It is in the first place indisputable that sharply accelerating economic growth in China has created enormous demand for skilled workers (Trading Economic 2010). The Chinese economy has grown in size from an annual GDP of 990 billion USD in 2000 to 4900 billion USD in 2010 (Trading Economic 2010). The last decade has seen the entry of numerous multinationals in the country and the establishment of thousands of local and foreign owned production units (Blanchard 2007). Such production units are now being established in different geographical areas making it easier for workers to obtain gainful employment near their houses (Blanchard 2007). The Chinese government has also in recent years embarked upon developing the economic and physical infrastructure of numerous inland and hitherto neglected provinces (AsiaNews.It. 2006). Airports, roads and housing in upcountry regions are receiving strong investments (AsiaNews.It 2006). Such investments are creating thousands of jobs across the country and reducing migration of workers to zones with strong manufacturing activities (AsiaNews.It 2006).
Experts also feel that low wages in the manufacturing sector, along with long working hours and difficult working and living conditions are forcing many workers to give up their jobs in manufacturing units and return to work on their farms (Rein 2010). The Chinese governmentâ€™s decision to reduce taxes on agriculture has also helped in reinforcing such attitudes (Rein 2010). The Chinese government has constantly placed emphasis upon development of agriculture and providing of adequate food supplies for the rural population, who constitute 727 million people (Rein 2010). A continuous supply of positive policies, like the elimination of onerous taxes and powerful market intercession, have enhanced rural incomes and made farming rewarding in comparison to skilled jobs in some manufacturing organisations (Rein 2010).
China implemented its one child policy in 1979. This has resulted in the development of an ageing population (Hong, S. 2010). The median age of the country, at 33 years, is closer to that of the USA, the UK and the countries of Western Europe, rather than to its southern neighbour India, which has a median age of 26 and whose economy is also growing rapidly and with a swiftness that is second only to that of China (Hong, S. 2010). The ageing population is leading to lesser numbers of people joining the workforce every year and consequentially to restrictions on the availability of skilled workers (Hong, S. 2010). The impact of an ageing population is being felt intensely in manufacturing centres like Shanghai, where people above 60 are expected to constitute practically 30 percent of the total population in another 10 years time (Hong, S. 2010). The numbers of people in the 15-19 age groups in the country have reduced by approximately 17 percent, from 124 million in 2005 to around 103 million today (Hong, S. 2010).
Academic policies in China have in recent years paid greater attention to academic performance and have neglected imparting of high level vocational training and skills training to people (AsiaNews.It 2006). Many universities have failed to understand market demands and mechanisms in the designing of their courses (AsiaNews.It 2006). Only 200 of the 20,000 vocational schools in the country are aiming to produce skilled workers and technicians with good skills (AsiaNews.It 2006). Such circumstances have added to the reduced availability of skilled workers in the manufacturing sector (AsiaNews.It 2006). Rein (2010) states that the younger Chinese unwilling to work any longer in factories. They are much too buoyant about their work prospects and perceive no compulsion to work for comparatively low wages at long distances from their families (AsiaNews.It 2006). The increase in the number of college and university graduates from just about a million in 2000 to 6 million in 2010 has reduced the pool for potential skilled workers (AsiaNews.It 2006). Even workers with low skills prefer to stay nearer home in interior provinces like Sichuan and Hunan, rather than relocating to manufacturing centres like Guangdong to work for remuneration that is being increasingly perceived to be insufficient (AsiaNews.It 2006).
The shortage of skilled workers is being felt intensely in the export regions of the country like the Pearl River Delta as also the Yangtze River Delta.
â€œIt was officially reported that the city of Shenzhen, on the Hong Kong border, alone faced a labour shortage of about 300,000 workers this year. In Guangdong province, the government said factories were short more than 500,000 workers; and in Fujian province, there was a shortage of 300,000â€?. (AsiaNews.It 2006)
Surveys, conducted a few years ago, revealed that technicians constituted only 4% of the total numbers of skilled workers, even as organisations needed at least 14% technicians in their labour force (People’s Daily 2004). Personnel who are most in demand include skilled workers, technicians and marketing staff. Such shortages appear to be greater in case of enterprises where skilled workers were not trained adequately (People’s Daily 2004). Business organisations are also finding it difficult to attract and retain employees in different administrative and managerial positions (People’s Daily 2004).
It is ironical that the country that is widely considered to be the largest reservoir of cheap and skilled workers is now actually hard pressed to find and retain skilled workers as well as supervisors and managers at different levels for its own needs (People’s Daily 2004).
2.2 Impact of Shortage of Skilled Workers and Managerial Employees on the Working of MNCs in China.
Shortage of skilled employees is affecting the working of all business firms, MNCs as well as locally owned establishments, across China (Roberts 2006). Such shortages are in the first case leading to progressively higher levels of attrition and employee turnover in business firms (Roberts 2006). The most important challenge in contemporary Chinese business enterprises concerns attracting, finding and retaining skilled workers (Roberts 2006). The Institute of Contemporary Observation, a research organisation based in Shenzhen, states that employee turnover in low technology industries is nearing an unprecedented 50% (Roberts 2006). There are 2.5 million jobs in the province of Guangdong that are yet to be filled, even as the provinces of Shandong, Jiangsu and Zhejiang are also facing considerable shortages of skilled labour (Roberts 2006). Such shortages are affecting the production of numerous organisations, adversely impacting expansion plans, and restricting organisational growth (Roberts 2006).
â€œIt was officially reported that the city of Shenzhen, on the Hong Kong border, alone faced a labour shortage of about 300,000 workers this year. In Guangdong province, the government said factories were short more than 500,000 workers; and in Fujian province, there was a shortage of 300,000.â€? (AsiaNews.It 2006)
Numerous MNCs have increased their investments in Chinese production centres and built up large capacities (Lane & Pollner 2008). The unavailability of the required numbers of skilled workers is leading to underutilisation of capacity, idle machinery, higher finance costs, and poor productivity and profitability (Lane & Pollner 2008).
Shortages in required numbers of skilled workers are also leading to significant increases in job hopping and in the movement of employees between organisations for the sake of achievement of small salary differentials (Roberts 2006). MNCs and local companies are â€œstealingâ€? skilled workers from each other, by offering the target worker a lucrative opportunity such as a better compensation or better benefits. The â€œtalentâ€? war has led to rapid wage inflation. . MNCs have been increasing salaries to keep existing employees (Downing, Rouleau, and Stuber 2008).
Whilst labour intensive industries are facing increasingly severe problems, substantial increases in numbers of employee departures are affecting all low tech and high tech organisations (Roberts 2006). â€œEmerson General Manager David Warth says it’s all he can do to keep his 800 employees from jumping ship to Samsung, Siemens, Nokia, and other multinationals that are now operating in the tech manufacturing hubâ€?. (Roberts, 2006)
Increases in employee turnovers and shortages in supply of skilled workers, as well as employees for higher level and managerial jobs, is leading to sharp increases in employee costs. AS Salop and Salop (1976) indicate that labour turnover is costly for all firms. In the event of a sudden employee departure, the firm suffers two types of cost: direct and indirect cost. Direct cost includes leaving costs, replacement costs such as advertising, interviewing and selection costs and transitions costs, and indirect costs refer to the loss of production, reduced performance levels, unnecessary overtime and low morale (Schlesinger and Heskett, 1991).
â€œCompanies across the board are feeling the squeeze. Last year turnover at multinationals in China averaged 14 percent, up from 11.3 percent in 2004 and 8.3 percent in 2001 (AsiaNews.It 2006). Salaries jumped by 8.4 percent, according to human resources consultant Hewitt Associates LLCâ€?. (AsiaNews.It 2006) Minimum wages in China are going up steadily and are currently many times that of Bangladesh, a neighbouring low cost producer (AsiaNews.It 2006). Many organisations are perforce improving the working and living conditions of their employees and the quality of food served in their cafeterias, with result increases in total costs expended on labour (AsiaNews.It 2006 ).
Such increases in labour cost have multiple implications (Roberts 2006). At one level companies are seriously thinking of putting up new establishments in interior regions where wages are lower, or even of shifting their operations to lower wage countries like Indonesia or Vietnam (Roberts 2006). Organisations that have already made substantial investments in regions that are now facing labour shortages are experiencing strong pressures on costs and margins (Roberts 2006). Such pressures are leading either to problems with organisational viability or are manifesting themselves in higher product prices and consequent pressure on competitiveness (Roberts 2006).The American Chamber of Commerce recently reported that increasing costs of labour have reduced the margins of practically 48 percent of US organisations that operate in China (Roberts 2006). Teresa Woodland, the author of the report states that China could well run the risk of using its cost advantage (Roberts 2006).
The shortage in availability of skilled people goes beyond the workforce and extends too many other organisational areas (Roberts 2006). Mckinsey and company estimate that just about 10 percent of job candidates in areas like engineering, accounting and finance have skills that are necessarily required by foreign organisations (Roberts 2006). Whilst 75,000 jobs for managers are expected to arise in the country during the next five years, the country currently has lesser than 5,000 managers with the required skills (Roberts 2006). Observers believe that the impact of shortage of skilled people on the economic growth and performance of companies and the nation as a whole is likely to be far more powerful than other constraints like material or power.
2.3 Talent Management and its Application in China
Multinational corporations in China can benefit in areas concerning employee turnover and improvement of employee retention through the application of contemporary talent management techniques and tools. Organisational managements have over the years constantly tried to develop and adapt in response to workplace changes, right from the days of the industrial revolution and the emergence of labour unions to the demands of automated production, globalisation and outsourcing (Schuler, et al, 2010). Contemporary years are witnessing a global HR movement for attracting and retaining talent (Schuler, et al, 2010). Whilst organisations have in many ways been trying to attract and retain skilled and productive employees for ages, formal talent management processes have emerged only recently (Schuler, et al, 2010). Whilst such practices are now being implemented rigorously by progressive business organisations in the developed economies, they have become extremely relevant in the Chinese environment where an abundance of people is ironically accompanied by shortages in availability of skilled workers and other managerial personnel (Schuler, et al, 2010).
2.3.1 The importance of talent management
Talent management represents the systematic use of appropriate HR strategies, policies and practices for management of the talent challenges faced by business organisations (Lane & Pollner 2008). Such policies and practices in the Chinese context include attraction of the most appropriate talent, careful selection, training and development, fair and sympathetic evaluation and assessment, high quality training and development and alignment of personnel and business objectives (Lane & Pollner 2008). The importance of adopting strong talent management practices for retaining talent assumes great importance in the existing and predicted scenario (Lane & Pollner 2008). Research conducted by the Kenexa Research Institute, conducted in 2007 in six countries, including China reveals that â€œpolicies such as career path programmes, goal development and monitoring, regular feedback sessions with managers, tracking progress have a demonstrable effect on employee execution and motivationâ€? (Talent Management 2008). The report confirms that employees of organisations that focus on talent management are more engaged with their functions and more content with their jobs and organisations (Talent Management 2008)
2.3.2 Vroomâ€™s VIE expectancy theory
Vroomâ€™s VIE (Valence, Instrumentality and Expectancy) theory of expectancy states that individuals tend to act in specific ways with the expectation that specific acts will lead to particular outcomes, and in line with the attractiveness of such outcomes (Citeman.com 2010). The theory, whilst appearing to be complex, is actually simple and necessitates the comprehension of three relationships, namely (a) the perceived probability by individuals that the making of specific efforts will lead to performance, (b) the extent to which individuals believe that performing at specific levels will result in achievement of specific outcomes and (c) the importance placed by individuals on possible rewards that can be obtained in job execution (Citeman.com 2010).
The intensity of individual motivation to make efforts depends on the intensity with which individuals believe that they can achieve what they are attempting, whether they will be adequately rewarded by their organisations, and whether such rewards will meet their individual objectives (Pitt 2001). The application of the expectancy theory needs the careful consideration of four relevant steps (Pitt 2001). Organisations must firstly assess the perceived outcomes offered by specific jobs to employees (Pitt 2001). These may be (a) positive like income, benefits, stability and security, comradeship, congenial relationships trust, employee benefits, and opportunities to use skills, or (b) negative like weariness, monotony, annoyance, apprehension, inconsiderate management or danger of dismissal (Pitt 2001). Employee perceptions, regardless of actual reality become relevant in such scenarios (Pitt 2001). Organisations must try to assess the attraction to employees of such outcomes and whether employees perceive outcomes with positivity or negativity (Pitt 2001). Individuals who find specific outcomes attractive and view them positively would like to achieve them (Pitt 2001). Managements also need to determine the type of behaviour required of employees to achieve positive outcomes and employees need to clearly and explicitly know what they must do to achieve them (Pitt 2001). It is finally also important to know how employees view their chances of satisfying what is asked of them (Pitt 2001). HR experts feel that appropriate applications of the expectancy theory through the linkage of efforts with performance and rewards can make employees developed a liking for their jobs and consequentially reduce employee attrition and employee turnover (Pitt 2001).
Whilst the expectancy theory certainly has its logical strengths, talent management is a far broader area and retention of talent in skilled jobs in China poses specific challenges like (a) the need for skilled workers to work far away from their farms and homesteads, (b) difficult working and living conditions, (c) inadequate monetary benefits and (d) the emergence of various alternative areas of occupation and work with more attractive attributes with regard to location, remuneration and job content (Changing Minds.org 2010).
2.3.3 Impact on skilled workers
The Kenexa (2007) report on organisations in countries including China states that organisations with progressive talent management cultures have workers with greater pride in their organisations who moreover recommend their organisations to others as good places to work for (Talent Management 2008). Employees with positive perceptions of the talent management practices of their organisations are likely to be confident of the prospects of their organisations (Talent Management 2008). The research revealed that employees who believed in the talent management policies of their firms tended to have more positive perceptions of their managements (Talent Management 2008). Such employees believed that their managers were capable of effectively managing workloads and that their senior managers felt that employees were critical to organisational success and growth (Talent Management 2008). Employees of such companies were likely to experience greater sense of job stability and security, be happy with company training, feel that their performance is fairly assessed and harbour greater feelings of individual achievement (Talent Management 2008).
MNCs in China are working towards retaining talent through the adoption of a range of initiatives (Roberts 2006). Many companies are locating their manufacturing units in interior regions in densely populated areas in order to tap larger workforce pools (Roberts 2006). â€œGeneral Motors, Honda, Motorola, and Intel, for instance, have all shifted some manufacturing or research to inland locations in recent years, both to tap lower costs and to open up new markets.â€? (Roberts 2006) Salaries and rewards are being increased significantly across the line in order to retain talent and reduce job hopping (Roberts 2006). Many organisations are taking pains to ensure better living conditions, better cafeteria food and more attractive career paths for their employees (Roberts 2006). Foxconn, the maker of Apple iPhones in China is experiencing severe criticism for its treatment of its workforce (Rein 2010). It is evident that such organisations will have to make significant investments in HR policies and practices if they are to attract and retain skilled employees (Rein 2010).
The Chinese government is also taking initiatives to improve the content of vocational and technical courses and build a stronger workforce base of skilled workers. It is however very evident that the Chinese economy and the various business organisations, both MNC and local, are facing significant challenges with regard to availability of skilled workers and competent managerial employees. Such trends are also expected to intensify in future.
2.4 Talent Retention tools
Vaiman and Vance (2008) suggest that motivational force can be achieved by extrinsically through monetary incentives or intrinsically through non-monetary incentives.
2.4.1 Monetary rewards and non monetary rewards
Monetary rewards include all types of compensation and benefits (C&B) packages such as salary, performance related payment, deferred compensation plans, social and commercial benefits and etc (Tian 2007). Monetary rewards can satisfy employeesâ€™ physiological needs and it is an effective tool to retaining talent (Vaiman and Vance 2008). Maslowâ€™s Hierarchy of Needs, suggests the physiological needs have to be satisfied before dealing with the higher order needs. This may be the reason why money is still the best reward for the majority of people.
In contrast, non-monetary reward is another essential tool for retaining employees. It can be use to satisfy employeesâ€™ higher other of needs such as the needs for achievement, affiliation and power (McMlelland 1987). Non-monetary rewards include: training and career development, employer branding, ect. (Tian 2007).
The researcher will consider these retention tools in the Chinese environment below..
2.4.2 Extrinsic motivation
According to a recent survey conducted by Waston Wyatt in China, the number one reason for Chinese talented and skilled workers to leave their current job is to find a better-paid job (Leininger 2004). Therefore, it is extremely important for MNCs to offer a competitive compensation and benefits package, in order to retain the Chinese skilled worker.
The following components are normally included in the packages that MNCs offer to local employees, and therefore they are discussed here in detail.
Salary is the fixed amount of money pay to an employee for work performed and is the largest component in a C&B package. Due to the weak social security in China, Chinese employees tend to place more value on money than Western employee (Jones 1997). Therefore, MNCs need to consider a number of factors when they design the salary level for Chinese employees. For example, the cost of living and level of economic development vary significantly from city to city, so the salary for equivalent positions may vary as well. Leininger (2004) points out that first-tier cities such as Beijing and Shanghai enjoy the highest salary level, followed by second- and third-tier cities. Moreover, the salary level has been increasing at a dramatic rate in China. Since the rapid economic growth, the annual salary growth rate has been risen up to 8 percent in recent years, and the trend is expected to continue in future (Tian 2007).
As a result, it is necessary for MNCs to have a general idea about local compensation level and salary growth rate before designing their own competitive packages.
220.127.116.11 Performance related payment
Performance related payment (i.e. bonus) is the portion of a C&B package that is related to performance. It is very popular and accepted by many MNCs in China.
Many MNCs believe that performance related payment is an effective tool to given an incentive for compensation to meet certain goals such as completion of a specified sales target. In addition, it is able to encourage local employees to be more creative such as: propose a new idea to increase efficiency in the work place ,or improve the quality of the output, etc (Melvin 2001). To an extent, performance related payment helps to attract local employees and keep them help in the company.
18.104.22.168 Deferred compensation plans-
Deferred compensation plans are also called â€˜golden handcuffsâ€™. They are popular with MNCs in China, and are offered in the form of a contract-related gratuity. For example, If the Chinese employee stays with the company for a contractually specified length of time ( i.e. 2 years), at the end of his/her contract he or she would be given an extra year’s salary as a reward.
Deferred compensation plans are useful in retaining Chinese employees because it provides a financial incentive for talented Chinese employees to remain in the company. Recently, MNCs have begun offering a new version of â€˜golden handcuffsâ€™ to young talented Chinese employees who would like to get a degree at an overseas university. They offer a full scholarship for these employees and in exchange, the employees have to work for the company for specified length of time after completing their degree (Tian 2007).
22.214.171.124 Social and commercial benefits.
Social benefits are mandatory in China they refer to contributions to government-run social insurance schemes, which cover pensions, medical care, unemployment, work injury, child birth and housing, etc. The benefits are borne by both employer and employee. 30 and 40 percent of payroll is paid to the State, of which around 50% is paid by employers. In recent years, Chinese employees are increasingly aware of the importance of social benefits, due to rising costs of housing and medicare in China. , Some MNCs are even willing to pay benefits of more than regulated ratios to retain their employees.
By contrast, commercial benefits refer to the benefits offered by an employer to an employee on a commercial basis. Many MNCs in China provide numerous commercial benefits for their employees such as offering loans at below-market interest rates, monetary assistance with single child family or even payment of wedding. Both social and commercial benefits are reported as useful to inducement to employees to remain in the company (Tian 2007).
2.4.3 Intrinsic motivation
However, monetary rewards are not everything employee wants. Once compensation reaches a certain level, employees are likely to look for higher order of needs such as career development opportunities ( Maslow 1954; McClelland1987).
According to the DDI survey in China 2007, the result shows that the top two reasons for Chinese employee turnover were lack of growth and development opportunities with the current company with 53% of the respondents agreed and better career opportunities elsewhere with 42% of the respondents agreed. The result reflects that Chinese employees have high expectations for rapid advancement (Howard, Liu, Wellins and Williams 2007). Therefore, it is necessary to consider these non-monetary factors that can motivate and retain employees.
As Jones (1997) points out that it is very important to understand Chinese employeesâ€™ expectations. For most Chinese employees, especially those top performers joining a MNC not only for a high C&B package but also for the opportunity to receive advanced training and learn western business methods. Those top performers are clearly aware of the skill gap between them and their Western counterparts, so they are eager to improve their own knowledge and skills. Additionally, providing training and career opportunities to employees can improve employeesâ€™ commitment to the company. As Leininger (2004) stated that the heart of retention is long term employee commitment. He divided employees into two different groups. They are â€œsatisfiedâ€? and â€œcommittedâ€? employees. The satisfiedâ€? employees can easily be retained by satisfying their monetary incentives while the â€œcommittedâ€? employees tend to stay longer with companies even without monetary incentive. A global research conducted by Waston Wyatt shows that committed employees are more productive and efficient than those whose employees showed low commitment (Leininger 2004).
Therefore, it is important that MNCs recognize the importance of training and development opportunities to their Chinese employees and demonstrate a commitment to training, development and career path development for them. Besides, organizational factors can also influence talent retention such as corporate culture, communication, leadership behavior are able to satisfy employeesâ€™ needs for affiliation (Chew 2004).
In the Chinese case, the leadership behavior is one of the most important motivation and retention drivers for Chinese employees. For many MNCs, the meaning of a â€œgood leaderâ€? for Chinese people can be far more complicated than what they have seen in their home countries.
Leadership in China has specific connotations. According to the research conducted by Craig Pepples, to achieve success in Chinese environment, foreign leader need a strong leadership style to build a team. Chinese employees respect those leaders who have a strong leadership style. They expect leaders always able to give them instruction to follow. Moreover, Pepples also insists that to be an effective leader, foreigners need to create a culture of teamwork, showing their personal commitment to the employees and care for each individual (Jones 1997). Therefore, Chinese employees are most likely to want to stay and work for an organization if they have a good manager or boss, who recognized individual contribution, and had great company leaderships (Howard, Liu, Wellins and Williams 2007).
These studies above are just a few examples of tools regarding talent retention in the Chinese context. When these retention tools are applied to Chinese employees, MNCs have to rank all the tools in order of importance, and then focus on several areas for motivation and retention talent (Vaiman and Vance, 2008).
2.5 Talent development in the Chinese cont
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