It's one of the strangest paradoxes of modern China: a booming economy and an emerging scarcity of labour in key industries, even as millions of ordinary Chinese suffer from a sharp rise in unemployment.

Those two contradictory trends could jeopardize China's economic miracle if they are neglected by the Communist government, a new report by the International Labour Organization warned Monday.

With the outside world still in awe of its economic growth, China's poor record in job creation has gone relatively unnoticed. But the ILO report is calling on China to focus on creating more jobs and better jobs for the flood of new entrants to its labour force, who number more than four million annually.

From 2000 to 2004, China's economy grew by a stunning 51 per cent. Yet in the same period, there was only a modest 5-per-cent rise in the number of jobs, the ILO report noted. And the official unemployment rate increased to 4.2 per cent, compared with 3.1 per cent in 2000 and just 2.5 per cent in 1990.

"China has seen a tremendous slowdown in the number of jobs being created, compared to GDP growth," the report said.

"Given the steady increase in unemployment, job creation needs to be placed at the forefront of the policy debate.¡±

Some Chinese experts have gone far beyond the ILO in their warnings of future unemployment problems. Government researchers have estimated that the true unemployment rate in Chinese cities is around 7 to 8 per cent because many of the jobless are not officially registered.

With an estimated 150 million surplus workers still on the farms and villages of the Chinese countryside, analysts have suggested that China needs to create 25 million new jobs a year to absorb rural migrants and school graduates over the next several years.

According to the ILO report, China's mediocre rate of job creation is a result of two main factors: the shedding of jobs at poorly performing state-owned enterprises, which have eliminated 30 million jobs in recent years; and the long-term structural shift from employment-intensive growth to capital-intensive growth as the country modernizes.

Labour productivity has surged by 40 per cent in the past five years, the ILO report said. "Yet the growing number and share of unemployed in the country underscores the need for greater efforts toward achieving the goal of decent and productive job creation," it said.

"Expanding access to decent work will go a long way toward spreading the benefits of the country's tremendous growth across the country's massive population."

At the same time, the rising unemployment rate is co-existing uneasily with a rising shortage of labour and soaring labour costs in many sectors of the economy.

There is an estimated shortfall of two million workers, for example, in the southern province of Guangdong, one of the primary centres of manufacturing in China.

Nationally, there is a shortage of about 750,000 trained managers, according to recent studies. And in industries such as construction and machine building in the booming coastal provinces, employers are willing to offer wages of 1,000 yuan (about $139) a month to their workers, a sharp rise from 600 yuan a month just three years ago.

The ILO is urging China to bolster its education and training systems to reduce the scarcity of skilled workers and technicians. "While shortages of cheap labour threaten the dominance of China's powerhouse manufacturing industries, the lack of qualified graduates could derail longer-term plans for a transition to producing higher-value goods and services," the report said. "This talent crunch is now hurting both multinational companies and local firms."