China’s economic shift may hinge on what migrant workers do next

Published on August 14th 2026

*Originally published in the South China Morning Post.
By Zongshuai Fan, Cambridge Industrial Innovation Policy

This blog is also available in Chinese: 中文版

Where migrant workers go, which sectors they serve, and how many remain employed will shape whether productivity gains extend beyond the most advanced sectors.

At its just-concluded late-July meeting, China’s Politburo set economic priorities for the second half of the year. The meeting took place against the backdrop of GDP growth slowing to 4.3 per cent in the second quarter, its weakest pace since late 2022, and an increasingly K-shaped economy: strong exports and fast-growing high-tech industries on one side, and weak domestic consumption, soft investment and slower growth elsewhere on the other.

The official readout did not describe the economy as K-shaped or echo the central bank’s language of structural divergence. Instead, it emphasised new growth momentum and an improving economic structure, while calling for faster infrastructure development, a deeper “AI +” push, the expansion of emerging and future industries, and continued upgrading of traditional sectors. This reinforces an official narrative in which the divergence is interpreted as part of China’s transition from old growth drivers to new ones, with AI and other advanced technologies expected to raise productivity across the economy.

But this framing makes China’s productivity challenge look mainly technological. A more fundamental test lies in what happens to China’s 301 million rural migrant workers. Under the urban-rural household registration system, the migrant workers remain registered as rural residents while taking up non-agricultural jobs. Where they go next will shape whether productivity gains reach beyond China’s most advanced sectors.

The productivity challenge is also a labour reallocation challenge

China remains the world’s largest agricultural economy by output. In 2025, agricultural value added reached about US$1.3 trillion. The sector still employed 22 per cent of the workforce, while its labour productivity was only about one third of the economy-wide average. Reducing the concentration of low-productivity labour in agriculture is therefore central to Beijing’s 2035 ambitions: doubling GDP per capita from its 2020 level will depend heavily on raising output per worker.

That requires two changes: raising productivity on the farm and moving more workers into higher-productivity non-agricultural sectors. The second may matter more for overall gains.

The challenge is that this reallocation is slowing. Rural migrant workers made up more than two-fifths of China’s employment, yet the migrant workforce grew by only 0.5 per cent in 2025, down from 1.3 per cent a decade earlier. Agriculture’s share of employment has also fallen more slowly than in the early 2010s.

Reallocation to urban jobs is neither guaranteed nor one-way. If cities cannot absorb these workers, unemployment and returns to rural areas become real risks, a concern flagged by the central government. Nor is leaving agriculture enough on its own. Where rural migrant workers go next will shape China’s broader productivity growth.

Where migrant workers go matters as much as whether they move

Construction, labour-intensive services and manufacturing together employed 83 per cent of them in 2025, but they point in different directions: construction is productive but shedding labour; services absorb workers but may not lift productivity enough; manufacturing best aligns employment and productivity, yet attracts fewer migrants.

Construction shows why higher productivity does not guarantee job absorption. Its labour productivity is more than three times the economy-wide average, yet it has lost 17 million rural migrant workers over the past decade.

A new infrastructure drive could offer some support. The Politburo called for faster development of the “six networks”, covering water, power, computing, next-generation communications, urban underground pipelines and logistics. Official estimates put related investment at more than RMB7 trillion, or roughly US$1 trillion, in 2026 alone. Yet recent employment policy still treats construction as a sector in which job opportunities need to be explored, rather than as a major source of job growth.

Labour-intensive services present the opposite problem. Retail, logistics, hospitality and household services have absorbed more rural migrant workers, but many are non-tradable and depend on domestic consumption. With demand weak and price competition intense, they may create jobs without delivering the productivity gains Beijing needs.

Manufacturing is therefore the crucial case. One recent estimate suggests that, measured by physical output, Chinese manufacturing workers produce two to three times as much as their American counterparts. Attracting and retaining migrant workers there, rather than seeing them move into lower-productivity services, would support economy-wide growth. Yet manufacturing employed 85 million rural migrant workers in 2025, 1.4 million fewer than a decade earlier.

Beijing treats manufacturing as a labour-market stabiliser in its employment policy for the 15th Five-Year Plan period. Demography adds another constraint. Between 2015 and 2025, the average age of rural migrant workers rose from 38.6 to 43.3. Growth came largely from those aged over 50, offsetting a decline among those under 30.

China therefore faces a two-sided challenge: sustaining the movement of workers out of low-productivity agriculture while enabling an ageing migrant workforce to support its industrial agenda.

AI and robotics may help, but technology diffusion alone cannot ensure that workers find productive manufacturing jobs rather than move into lower-productivity services or return home without secure employment.

The implications extend beyond China. To stabilise manufacturing employment, Beijing encourages manufacturers to expand exports to emerging markets while seeking to retain domestic capacity.

As China’s trading partners pursue more balanced trade relations, they should take this domestic logic into account. Beijing has strong reasons to retain manufacturing capacity because it supports technological upgrading and international competitiveness, but also jobs and productivity. The Politburo’s call for more balanced trade development suggests that sustainable trade relations remain on the agenda. But the pressure to sustain productive employment will shape how Beijing balances trade adjustment and industrial support.