Is China finally running out of workers?

August 3, 2010

     By Duncan Green     

You don’t normally expect the Economist magazine to advocate a major shift in wealth from capital to labour, Economist china coverbut it seems to make an exception in the case of China, the subject of this week’s fascinating cover story.

The topic is China’s labour market: a few years ago, I and many others thought that the entry of China into the world economy would change the rules. With an effectively infinite reserve army of surplus labour, China would be able to grow and grow without ever running out of workers and so having to upgrade and pay higher wages. China would be the last ‘flying goose’, the world’s factory (the shift in production to China has added an estimated $1,000 a year to the pockets of every American household in the form of cheaper goods), leaving few crumbs of manufacturing trade for any other poor countries seeking to follow in its footsteps (they would have to stick to commodities instead).

According to The Economist that view was wrong. China’s labour market is running out of skilled labour, strikes are on the increase, and some strikers are winning – workers at a Honda plant in Foshan recently got a big pay rise. Overall wages, while still low (just 3% of US hourly rates) rose by more than 9% a year from 2002-6. Why the change? The Economist gives a number of possible explanations:

Chinese migrant workers wages– the supply of potential migrants (usually aged 15-30 and reasonably well educated) is finally running out (though others dispute this)
– the labour market is too ‘segmented’ with the discrimination against internal migrants under the ‘hukou’ system artificially curbing the flow of new workers to the factories and pushing up migrant workers’ wages (see bar chart)
– rising expectations: a generational shift means that today’s young workers no longer compare their lives with those back on the farm, but aspire to an urban lifestyle
– the government changed the labour law in January 2008 to give workers more contractual rights and is particularly relaxed about strikes against foreign-owned companies like Honda, which are less likely to trigger wider political disaffection

Up until around 2004, productivity increased even faster than wages, so overall labour costs fell, but since then they china labour costshave started to rise (see graph), meaning that China may finally have to abandon the really rock bottom rungs of manufacturing and move up the value chain, making space for new ‘flying geese’ to enter. One candidate is Vietnam, where income per person is a third of China’s, but the Economist reckons the most likely source of competition could actually be from within China itself – the inland provinces that have so far largely been left out of the coastal boom.

Why is all this a good thing? Because rising wages will lead to greater domestic consumption and rebalance the world economy (China underconsumes and overinvests; the US does the opposite); it opens the way for other even poorer countries to get in on the act. And of course, because it means more dignified lives for China’s workers (though the Economist doesn’t dwell on that aspect…..).

August 3, 2010
Duncan Green