What these stories show is how China’s changing dynamics—economic, social, and demographic—are creating a distinctive set of problems. Specifically, companies are failing to find the high-skilled workers they need, while individuals find themselves ill-prepared for the jobs that are available.

In a larger sense, however, these stories speak to a different, bigger question: what kind of country will China be? There is one certainty. As China evolves from an investment-led economy to a consumption-oriented one, from being the workshop of the world to, perhaps, being a services powerhouse, it will need more high-skilled workers, in particular post-secondary vocational graduates.

Companies know this because they are already feeling the pain, in a multitude of ways. One is higher costs. Manufacturing-labor costs in the Pearl River Delta, for example, rose 11 percent during 2011 and almost 8 percent last year. These gains were supported by productivity improvements, but low-end manufacturers are already looking elsewhere, such as India and Vietnam, as they begin to get priced out of China. In some ways, this is a good thing and a sign of China’s advancing prosperity. In fact, the national economic strategy is to emphasize higher-value, higher skilled work. That is what pays higher wages, and raises living standards, which is the point of growth. But there are consequences, both intended (richer workers) and unintended (skills shortages).

At the high end of the labor market, the striking fact is that while it looks like China is producing the professionals it needs, the numbers are deceptive. For example, in 2005, China graduated 600,000 engineers, but a report from the McKinsey Global Institute estimated that only one in ten were ready to work at a foreign multinational1. We call this the “supply paradox”: there are shortages of good hires even though there appear to be plenty of qualified people.