Context: Many recent university graduates in China are struggling to find employment, even though industries such as electric vehicle production and scientific research need skilled workers. Youth unemployment has been worsened by prolonged lockdowns during the COVID-19 pandemic.
Introduction
Youth unemployment has become a growing macroeconomic challenge in China, especially after prolonged COVID-19 lockdowns. While industries such as electric vehicle (EV) manufacturing and scientific innovation report shortages of skilled labour, many university graduates remain unemployed. This paradox points to a structural mismatch between the qualifications of graduates and the skills demanded in high-growth sectors. To tackle this issue effectively, China must consider both demand-side policies to stimulate job creation and supply-side measures to realign labour market skills with industry needs.
Expansionary demand management policies
One approach is to increase aggregate demand (AD) through expansionary fiscal or monetary policy, since higher activity encourages firms to produce more and raises their demand for labour, including youth. The government could adopt expansionary fiscal policy by increasing spending on infrastructure, green energy or digital connectivity. Projects like high-speed rail expansion or clean energy development stimulate short-term demand and lay foundations for long-term productivity. Such spending raises government expenditure, a component of AD, shifting the AD curve rightward and raising output, national income and job opportunities for graduates. Reducing personal income tax can boost consumption, while cutting corporate taxes may incentivise firms to invest and expand hiring, raising both consumption and investment, further stimulating AD and reducing cyclical unemployment.
The stress test
The effectiveness of this approach in China may be limited by high levels of local government debt, as many municipal governments have already borrowed heavily to finance past infrastructure projects, so additional borrowing could crowd out future investment and constrain fiscal flexibility. Moreover, not all sectors benefit equally from demand stimulus, so if newly created jobs are not in areas that employ young, skilled workers, the impact on youth unemployment may be muted. Alternatively, expansionary monetary policy, such as reducing the reserve requirement ratio or cutting interest rates, can encourage borrowing and investment, but risks fuelling asset bubbles, especially in property markets, rather than employment in high-tech sectors, which tend to have longer gestation periods before hiring scales up.
Supply-side policies to retrain workers
Since much of the youth unemployment in China appears to be structural, where the skills of workers do not match the jobs available, supply-side policies may be more appropriate and sustainable in the long term. One key solution is education reform. The government could channel more funding towards university programmes aligned with national development goals, such as EV technology, artificial intelligence and scientific research and development, helping future cohorts enter the job market with relevant qualifications and reducing mismatches at the source. For existing graduates, retraining and upskilling schemes can be implemented. The government could partner with firms in high-demand industries to offer short-term vocational programmes, apprenticeships or coding boot camps, incentivising graduates in oversaturated disciplines to attend condensed engineering or data science training designed with employers, supported by subsidies or wage support.
The stress test
Challenges remain. Graduates who have already invested years in a particular field may view retraining as a sunk cost or be reluctant to pivot careers. There is also a time lag, since even well-designed programmes may take years to yield significant employment results. To address this, the government could offer job placement guarantees, stipends or tax incentives for employers who hire retrained graduates. To enhance job matching in the short term, the government could also improve labour market information systems so graduates are better informed about sectors with shortages, using online platforms, AI-driven career guidance and nationwide job fairs to smooth the transition from education to employment.
Evaluative conclusion
China's youth unemployment problem is complex and rooted in both cyclical and structural issues. While expansionary fiscal and monetary policies can boost aggregate demand and generate employment in the short term, their effectiveness may be constrained by debt concerns and sectoral misalignment. Supply-side measures such as educational reform, retraining schemes and public-private partnerships offer a more targeted and sustainable approach to tackling structural mismatches, though they are not without cost or implementation challenges. The most appropriate strategy is therefore a balanced combination: short-term stimulus to ease current unemployment, and long-term structural reform to align the supply of labour with the evolving needs of China's innovation-driven economy.