(Bloomberg) — The most educated generation in China’s history was supposed to blaze a trail towards a more innovative and technologically advanced economy. Instead, about 15 million young people are estimated to be jobless, and many are lowering their ambitions. 

A perfect storm of factors has propelled unemployment among 16- to 24-year-old urbanites to a record 19.3%, more than twice the comparable rate in the US. The government’s hardline coronavirus strategy has led to layoffs, while its regulatory crackdown on real estate and education companies has hit the private sector. At the same time, a record number of college and vocational school graduates—some 12 million—are entering the job market this summer. This highly educated cohort has intensified a mismatch between available roles and jobseekers’ expectations.  

The result is an increasingly disillusioned young population losing faith in private companies and willing to accept lower pay in the state sector. If the trend continues, growth in the world’s second-largest economy stands to suffer. The sheer number of jobless under-25s amounts to a 2% to 3% reduction in China’s workforce, and fewer workers means lower gross domestic product. Unemployment and underemployment also continue to impact salaries for years—a 2020 review of studies reported a 3.5% reduction in wages among those who had experienced unemployment five years earlier.

More young people taking roles in government may leave fewer jumping into new sectors and fueling innovation.

“The structural adjustment faced by China’s economy right now actually needs more people to become entrepreneurs and strive,” said Zeng Xiangquan, head of the China Institute for Employment Research in Beijing. Lowered expectations have “damaged the utilization of the young labor force,” he added. “It’s not a good thing for the economy.”

Pre-pandemic, 22-year-old Xu Chaoqun was prepared for a career in China’s creative industries. But a fruitless four-month job hunt has left him setting his sights on the state sector. “Under the Covid outbreak, many private companies are very unstable,” said Xu, who majored in visual art at a mid-ranked university. “That’s why I want to be with a state-owned enterprise”.

Xu is not alone. Some 39% of graduates listed state-owned companies as their top choice of employer last year, according to recruitment company 51job Inc. That’s up from 25% in 2017. A further 28% chose government jobs as their first choice. 

It’s a rational response in a pandemic-hit labor market. All workplaces have been hit hard by China’s snap lockdowns and strict quarantine measures, but private companies were more likely to lay off workers. Beijing’s main employment-boosting policy has been to order the state sector to increase hiring.

President Xi Jinping may be relieved that the country’s unemployed youth are trying to join the government rather than overthrow it. During a June visit to a university in the southwestern China’s Sichuan province, he advised graduates to “prevent the situation in which one is unfit for a higher position but unwilling to take a lower one.” He added that “to get rich and get fame overnight is not realistic.”

The message is getting through: Graduate expectations for starting salaries fell more than 6% from last year to 6,295 yuan ($932) per month, according to an April survey from recruitment firm Zhilian. State-owned enterprises grew in appeal over the same period, the recruiter said. 

But lower income expectations and talent shunning the private sector are likely to lower growth in the long term, challenging the president’s plan to double the size of China’s economy from 2020 levels by 2035—by which point it would likely overtake the U.S. in size.

The phrase “tang ping”—“lying flat”—spread through China’s internet last year. The slogan invokes dropping out of the rat race and doing the bare minimum to get by, and reflected the desire for a better work-life balance in the face of China’s slowing growth. As the unemployment situation has continued to worsen, many young people have adopted an even more fatalistic catchphrase: “bailan,” or “let it rot.”

Read More: From the Great Resignation to Lying Flat, Workers Are Opting Out

That concept is “a kind of mental relaxation,” said Hu Xiaoyue, a 24-year old with a psychology masters degree. “This way, even if you fail, you will feel better.”  When Hu started looking for work last August, she found it easy to land interviews. “But when it came to spring, only one in 10 companies would offer an interview,” she said. “It fell off a cliff.”

China’s state-owned enterprises (SOEs) aren’t all unproductive behemoths. But the weight of economic evidence suggests they are, on the whole, less efficient and less innovative than privately-owned companies. China’s economic boom has coincided with a falling share of SOE jobs in urban employment—from 40% in 1996 to less than 10% pre-pandemic. That trend could now go into reverse.

Last year, China launched a regulatory crackdown on formerly high-flying sectors dominated by private companies that previously attracted ambitious young people. Internet companies were hit with fines for monopolistic behavior, real estate businesses were starved of financing and the private tutoring sector was almost entirely shuttered.

Read More: Xi Jinping’s Capitalist Smackdown Sparks a $1 Trillion Reckoning

Regulatory filings show that China’s top five listed education companies reduced their staffing by 135,000 in the last year after the crackdown. The largest tech companies have kept their headcounts stable, and Zhilian says that there were more tech jobs advertised in the first half of this year than the same period in 2021. Even so, the sector’s allure has faded.

A graduate of the highly ranked Central University of Finance and Economics in Beijing, Hu was set for the tech sector—she interned at three internet companies including video-sharing giant Beijing Kuaishou Technology Co. But she has changed her mind. “People who are going to work for Internet companies are all worrying about themselves because they feel like they could be fired any time,” she said.

Instead, Hu landed a position at a research institute within state-owned China Telecom Corp. “The working hours of my future job will be 8:30 a.m. to 5:30 p.m., and the workload will be quite light. Internet companies are too consuming,” she said.

As well as the movement of talent towards state-owned companies, there’s another mechanism at work that can damage long-term growth. Studies by from the US, Europe and Japan have shown that the longer young people are unemployed at the start of their careers, the worse their long-term incomes, an effect known as “scarring.”

That’s the risk facing Beiya, who was laid off from an e-commerce company this year. The 26-year-old, who gave only one name because she feared that talking about losing her job could hit her employment prospects, missed out on a role with TikTok parent company Bytedance Inc. because of her limited experience.

“I’m a good candidate with potential but they want to see me in two years,” she said. “But how can I get the experience if no one gives me a job now?”

The state sector already employs around 80 million people and the figure could grow by as much as 2 million on a net basis this year, according to Lu Feng, a labor economist at Peking University. “But compared with total demand for jobs, it’s still relatively small,” he said. “We still need private firms to hire.”

That will only happen if the economy grows. To meet its employment goals, economists say China needs GDP to increase between 3% and 5% this year. Economists are predicting growth closer to 4%—with the outlook highly uncertain due to the prospect of more lockdowns to contain the spread of the coronavirus. “Lack of clarity on an exit strategy from the Covid-Zero policy makes companies wary of hiring,” said Chang Shu, Bloomberg Economics’ chief Asia economist.  

Beijing has launched a version of the job-support programs seen in Europe during the pandemic, offering tax rebates and direct subsidies to companies who promise to retain workers. But the amounts involved are small: The incentive for hiring a new worker is just 1,500 yuan. Provincial subsidies for graduates who start businesses are also small—just 10,000 yuan in the prosperous Guangdong region.

Even if China can return to strong growth in the second half of this year, the youth unemployment problem will persist—the rate has been rising since 2017, reaching 12% pre-pandemic. Economists attribute that to two factors: urbanization and a mismatch between the education system and employers’ needs.

The hundreds of millions of workers who moved from the countryside to cities used to return to their villages during labor market slumps, acting as an economic shock absorber. Now, younger migrants increasingly stay put when they lose their jobs, pushing up urban unemployment.

“A lot of them are not even raised in rural areas. So they regard themselves as urban people,” says Peking University’s Lu. “The constraints for the government have changed substantially, it’s tougher than in the past.”

Second, the annual number of graduates in China has increased tenfold over the last two decades—the fastest higher-education expansion anywhere in the world, at any time. The share of young Chinese people attending college is now almost 60%, similar to developed countries.

The number of vocational graduates lags far behind those receiving academic degrees. Such is the stigma around vocational education that students rioted last year when told their university was being rebranded as a vocational school. Highly educated young people are rejecting factory jobs. “That’s the basic matching problem. It is huge in this country,” said Lu.

That’s left manufacturers complaining about shortages of skilled technicians. “There are not a lot of people applying for those jobs, such as electrician or welder,” said Jiang Cheng, 28, an agent for electronics factories in central China.

Other sectors are oversubscribed. According to a 2021 study of 20,000 randomly selected jobseekers on Zhilian’s website, some 43% of the job applicants wanted to work in the IT industry, while the sector accounted for just 16% of recruitment posts.

Half of jobseekers had a bachelor degree, but only 20% of jobs required one. “There is now compelling evidence of over-education,” the study’s authors wrote, warning that the misalignment “could have profound influences on both individuals and the nation.”

In the longer term, it’s possible that government intervention may get the private sector hiring again, while education reforms and market forces can smooth the misalignment in the labor market. 

China is easing its regulatory campaigns, and a vocational education law passed this year aims to improve standards. A study by Wang Zhe, an economist at Caixin Insight, found college majors that attracted a wage premium in 2020 became more popular in 2021. As applicants’ academic choices adapt to demand in the jobs market, mismatches stand to ease. 

But the share of graduates from China’s nine top-ranked universities joining the private sector has fallen since the pandemic, according to research from Hong Kong’s Lingnan University. That suggests ideological shifts, and not just market forces, are at play. Some graduates at top universities are adopting “ cadre style,” according to online forums where they seek tips on where to buy the black zippered windbreakers favored by Xi.

Even in the current environment, Kay Lou, 25, would be a leading candidate for any number of private-sector jobs. She has a masters in law from top-ranked Tsinghua University and has interned for a legal firm, an Internet giant, a securities brokerage and a court.

In the end, she won a government position in Zhejiang province—where some roles attract as many as 200 applicants.

“I felt my work wasn’t meaningful,” she said. “I became increasingly opposed to the capitalists’ pursuit of wealth after I read Marx, so in the end I chose to become a civil servant.”

©2022 Bloomberg L.P.

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