(Beijing) — China's labor force is expected to drop to 906 million workers in 2016, pushing up labor costs and prompting firms to relocate outside the mainland, a leading demographer said.

The country's working-age population between the ages of 16 and 59 has declined for three straight years since 2012, said Zeng Xiangquan, head of the China Institute for Employment Research at Renmin University, at a seminar on Saturday.

This downward trend will continue, with the country's workforce shrinking to about 700 million people by 2050, Li Zhong, spokesperson for the Ministry of Human Resources and Social Security, said in July.

Rising labor shortages have pushed up salaries, forcing manufacturers to relocate to Southeast Asia as factories in China are struggling to recruit new workers, Zeng said.

The one-child policy, which led to a drop in birthrates, has led to a decline in the number of young people entering the workforce. But the pool of semi-skilled blue-collar workers, which was once plentiful, is drying up as more young people opt for a college education and prefer to work in the service sectors.

Nearly half the new entrants in the Chinese job market have a college degree, but there is a mismatch between their skills and what the market needs, said Zhang Juwei, director of the Institute of Population and Labor Economics of the Chinese Academy of Social Sciences, at the same seminar on Saturday.

Zhang said China's education system needs to offer better vocational training and teach practical skills to youth.

Although the country is expected to shed 1.8 million workers to trim overcapacity in coal and steel this year, these workers cannot be easily absorbed into the manufacturing sector because they had only nine years of schooling on average, Zeng said.

He said labor shortages could hamper China's transition from a manufacturing economy to a service- and consumption-driven one.

Contact reporter Coco Feng (renkefeng@caixin.com); editor Poornima Weerasekara (poornima@caixin.com)