The ongoing migration of rural labourers into China's cities and factories is a huge driver of the global economy and challenging Chinese pension reform efforts in ways that are not fully recognized outside of the country, argues Fan Gang, a respected academic.

This represents a demographic shift of proportions comparable, if not bigger, to the mass migration to the United States in the 19th and early 20th centuries.

So far, at least 200 million rural workers have moved to the industrial or service sector, mainly but not exclusively located in the coastal cities. The result is today over 60% of China's labour force is in sectors unrelated to farming, while just over 40% of the population lives in a city. Moreover, this trend is at best only half over, with another 2-300 million expected to migrate in the coming generation, says Fan, who is director of the National Economics Research Institute and professor at the Chinese Academy of Social Sciences. He recently addressed a conference of government pension funds hosted by the Pacific Pension Institute and the Asia Foundation in Beijing.

Among the implications for China's economy, Fan highlights two: that wages will remain low for another 20-30 years, which will help China retain its comparative advantage in low-cost labour; and that China's income disparity is here to stay, giving it the greatest extremes between the haves and have-nots among global emerging markets - and setting it up for potential social unrest and bad policy choices. "Every economy has experienced this but not for such a long period of time," Fan notes. "Korea and Taiwan took 20 years to achieve full employment but here it may take 50 years."

Inner migration serves a useful role in Chinese society, by reducing regional disparities and ultimately raising incomes in the interior, so the government has been encouraging it, and 11 provinces so far have abolished internal passport controls. It does mean, however, that wages will remain suppressed in the coastal areas; it also suggests that China will have a great difficulty moving up the value chain, and create industries based on comparative advantages other than low-cost labour.

This should continue the positive role China has played in Asia's economy. China will continue to import capital, technology inputs and raw materials from Southeast Asia, Japan and Korea, and services from Hong Kong and Singapore; assemble; and export to America.

This also suggests outsourcing from global companies will also continue - and therefore so will pressure on lost jobs in Western countries, trade friction and currency-related arguments. From the point of view of developed countries, China's migrants are threatening jobs; but from China's point of view, the economy is still not growing fast enough to create the jobs required to meet full employment. This means, Fan says, that social disparities could become permanent, with the majority of the workforce unable to ever increase its standard of living. Throw in the rise of India and other low-cost manufacturing countries, and this permanent majority of low-wage workers looks even more likely.

The phenomenon of migration will play a big role in China's ongoing pension reform, Fan says. On the plus side, most of these migrants are young people in their 20s and 30s who move to cities and industry, where they can find jobs in sectors that offer pensions. There is no pension system for rural areas, where people rely on the land and on families. So despite China's overall aging population, by including its young in the urban pension system, the social security demographics will actually improve.

But this only happens if migrants join social security systems - which, unfortunately, they are not. They are still a floating population (think construction workers), and China's social security regime is not portable. Nor is there a national system, but rather a patchwork across provinces and municipalities. So migrants have little incentive to join these schemes. As a result, not only are the demographics within social security not benefiting, but China faces a future crisis of hundreds of millions of aging workers without coverage.

"A key problem for social security in China is how to get migrant workers involved, and how to make the system portable," Fan says. He notes some cities recognize the problem and are trying to attract migrants by letting them move on but still receive benefits, or letting them return in, say, 30 years to collect their benefits. But such moves are piecemeal and modest.