China's youth unemployment hits a record high, deepening its economic scars

As youth unemployment in China rises to a record high, college graduates are caught in a perfect storm — with some forced to take on low-paying jobs or settle for jobs below their skill levels.

Official data shows urban unemployment among the 16- to 24-year-olds in China hit a record 20.4% in April – about four times the broader unemployment rate even as millions more college students are expected to graduate this year.

"This college bubble is finally bursting," said Yao Lu, a professor of sociology at Columbia University in New York. "The expansion of college education in the late 1990s created this huge influx of college graduates, but there is a misalignment between demand and supply of high skilled workers. The economy hasn't caught up."

The scourge of underemployment is another issue that Chinese youths and policymakers have to grapple with.

In a paper Lu co-authored with Xiaogang Li, a professor at Xi'an Jiaotong University, the professors estimated at least another quarter of college graduates in China are underemployed, on top of the rising youth unemployment rate.

"Increasingly, college graduates are taking up positions that are not commensurate with their training and credentials to avoid unemployment," Lu told CNBC.

Underemployment takes place when people settle for low-skilled or low-paying jobs, or sometimes part-time work, because they're not able to find full-time jobs that match their skills.

"These are the jobs that used to be mainly occupied by the non-college educated," Lu added.

The scarring effects of graduating at a difficult economic time has been well documented in other societies. Research from Stanford University shows college graduates who start their working lives during a recession or period of economic downturn earn less for at least 10 to 15 years than those who graduate during periods of prosperity.

Data from China's Bureau of Statistics shows that 6 million of the 96 million 16- to 24-year-olds in the urban labor force are currently unemployed. From this figure, Goldman Sachs estimates there are now 3 million more unemployed urban youths relative to the period before the Covid-19 pandemic.

This is likely to make it more urgent for the Chinese government to act.

"Diminished job prospects could inevitably fan dissatisfaction among the youths, and a perceived failure to ensure their material well-being could upset the social contract the Communist Party has with the people in China," said Shehzad Qazi, managing director at China Beige Book.

Given China's aging and declining population will reduce its economically-active population, the impact of youth unemployment and underemployment could "potentially have very negative ramifications for the economy," Columbia's Lu told CNBC.

While China is not the only society in the world plagued by double-digit youth unemployment, few others are seeing the scale of China's problem, according to statistics from International Labor Organisation.

The Chinese central government is very cognizant of this problem.

In April, China's State Council announced a 15-point plan aimed at matching jobs with young seekers more optimally. This includes support for skills training and traineeships, a pledge for a one-time expansion of hiring at state-owned enterprises and support for the entrepreneurial ambitions of college graduates and migrant workers.

Addressing more fundamental mismatches is much tougher, analysts say.

"In many societies, including China, there's usually a disjuncture between the labor market and higher education institutions. They don't necessarily talk to each other," said Lu. "Universities have some sense of what the labor market situation is and what employers are looking for, but often times their understanding is outdated, and may be distorted from time to time."

There's also a mismatch between changing expectations of young people who are more educated and an economy that is not keeping up with their aspirations.

"Because of the rapid increase in education, both for men and women, these young people are not willing to go back to factory jobs anymore," said Jean Yeung, a professor of sociology at the National University of Singapore.

Even as youth unemployment rates climb, China projects nearly 30 million manufacturing jobs could go unfilled by 2025, according to the country's Ministry of Human Resources and Social Security. That's nearly half of all the jobs in the sector, the ministry said.

"But the plan was for China's economy to transform from labor-intensive industry to more technological, with a strong service-oriented, knowledge economy," Yeung added.

Yet this transition seems to be half-hearted in China's state-driven economy, according to Qazi.

Economists say a thriving services-driven economy is predicated on support for the private sector. But the problem is that small- and medium-sized companies are not getting access to credit.

"Until that happens, you're not going to have services in the private sector really being able to absorb these young graduates who want to work in the new industries, the industries of the future, and then be able to have that massive economic transition," said Qazi. "It's all interconnected."

China's "zero Covid" policy during the pandemic led to factory closures and a two-month lockdown in the financial capital of Shanghai last year, as the broader economy ground to a halt.

Goldman Sachs says the slackening in the services sector at the start of the year, before China reopened, could have contributed to the current high youth unemployment rate.

However, analysts from the U.S. investment bank estimate that China's youth unemployment rate will likely peak in the summer months in July and August with the influx of fresh college graduates.

Goldman Sachs economists say that getting young people back to work would help China's economic recovery since it would restore the consumption power of the young, a demographic that typically accounts for almost 20% of consumption in China.

Except the jobs may not match what they desire or are trained to do.

"I think it's ironic that nowadays, having a college degree is no longer sufficient to land a high skilled job for most college graduates," said Lu.

"But at the same time, it's becoming unnecessary because everyone else is getting it."

Correction: This article has been updated to accurately reflect that youth unemployment in China hit a record high in April. An earlier version of the story misstated the fact.