Why do labour shortage and high unemployment co-exist in China? I analysed this in my book. More specifically, I explored the matching efficiency in the labour market by estimating the matching function between job offers and job seekers in urban labour markets in China based on search and matching theory.
Figure 3 shows the values of matching efficiency on the vertical axis. From the figure, we see that matching efficiency in China declined sharply from the late 1990s to the 2000s.
Figure 3. Matching efficiency in the Chinese labour market
Source: Liu (2013 a, b)
A conceivable cause of the sharp decline is the increase of the inflow and outflow of workers into and out of companies, reflecting the establishment of new companies and the disappearance and downsizing of old state-owned enterprises following economic and corporate reforms, which led to friction in the labour market. This decline was also attributable to imperfect information between job offers and job seekers.
I also found that a rise in productivity has a significant negative impact on matching efficiency and showed that a mismatch has arisen between unemployed persons and companies seeking highly-skilled workers.
Lastly, although it was not dealt with by quantitative analysis in the book, a skill mismatch and a geographic mismatch have some bearing on this phenomenon.
For example, the job-offers-to-seekers ratio for security maintenance staff is surprisingly high in Nanjing at 4.0, while it is only 0.2 in Shanghai.