Chinese wages and the turning point in the Chinese economy

Author: Cai Fang and Wang Meiyan, CASS

Migrant worker wages have steadily increased since 2003, the year that significantly witnessed the first labour shortage in Chinese economic development. Not only have the wages in manufacturing and construction increased constantly, reflecting a more general rise in wages, migrant workers’ wages have been catching up to urban wages as well.

Investors fear that inflated migrant wage rates may weaken the comparative advantage of China’s labour-intensive industries and thus harm their commodities’ competitiveness.

Why are migrant worker wages increasing?

A younger overall demographic, stronger trade union involvement and the gradual approach towards the Lewis turning point in economic development (when abundant low cost supplies of labour begin to run out) have all contributed to wage rises in China. These factors also indicate that wage rises are likely to continue and most likely to speed up in the near future.

In addition, migrant demographic characteristics are changing. New migrant workers are not only younger, but also tend to work fewer hours than their predecessors did. The results from the China Urban Labour Survey (CULS) shows that, if measured by hourly wage rate, the growth of migrants’ wages and their convergence to urban locals implies a larger surge in the actual wage rate.

The increase in the wage rate has been the highest in the eastern regions. With investments flowing in from coastal regions, employment opportunities have grown in the central regions and thus had faster growth of wages than in eastern regions. Due to their faster and more capital-intensive growth, the migrants’ wage rates in the western regions have increased faster, compared with both the eastern and central regions.

There are three reasons why investors should worry less about rising wages.

First, the more rapid growth of labour productivity guarantees that the wage inflation will do no harm to the comparative advantage of manufacturing. Nationwide data from manufacturing firms shows that while workers’ compensation in real terms increased by 91.8 per cent between 2000–2007, marginal product of labour increased by 178.7 per cent. It is clear that not wages alone but the ratio of wages-to-labour productivity determine the competitiveness of a firm, sector or country.

Secondly, China’s spatial and regional diversity will allow central and western provinces to carry on labour-intensive industries, which have become outdated in the coastal regions. China can avoid the common flying geese pattern of labour-intensive industries’ moving costs to less-advanced countries, following a wage increase, by allowing labour-intensive industries to continue growing in the less-developed inland regions. China’s capacity for industrial development in the central and western regions has substantially improved as the result of the central government’s implementation of the ‘going-to-the-west’ strategy.

Thirdly, the wage increase and its continuation will create a new group of consumers in China, which in turn can help rebalance the Chinese economy (as well as the world economy) and sustain its growth. There were 145 million recorded Chinese migrant workers in 2009, accounting for more than one-third of urban employment. Although the level of migrant workers’ wage rates are below the average in the urban labour market, the huge size of migrant workers makes their total earnings and potential consumption expenditure significant. Being at the bottom of income distribution, an increase in migrants’ income implies a reduction of inequality. Hence, as can be generally expected, this low income group has a higher consumption elasticity of income — namely, a stronger marginal propensity to consume.

Migrants are more likely to become the next big consumers in China. That will support China’s transformation from export-led to domestic demand-driven growth and hopefully ease some investors’ fears about labour wage increases.

Cai Fang is Director of The Institute of Population and Labor Economics (IPLE), Chinese Academy of Social Sciences (CASS).

Wang Meiyan is an associate professor at the Institute of Population and Labor Economics at CASS.

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  • There are a few points needing some clarification.
    The second reason given for worrying less about wage increases is moving westward of labour intensive industries inside China, because labour costs are lower there presumably. But earlier on in the post it was said that wages rises in the western regions are faster. It requires a bit reconciliation between the two arguments.
    The third reason is that wage rises will create more domestic demand that would sustain production. That obviously has some truth, but also may confuse the change in the comparative advantages between China and other countries. The newly created demand may choose to buy cheaper imports as opposed domestic products.
    Further, the figures in the post suggest that the wages for the bottom income class of migrant workers increased very rapidly over a period that may indicate a reduction in income inequality. This seems to be inconsistent with what many people are saying that income inequality has been rising in China. Which is correct?

  • Charles Wolf

    A very interesting essay. What this and other items miss about wage
    increases is. however, whether the increases have been preceded and/or accompanied by at least equivalent increases in productivity. To the extent the latter holds, the real costs of Chinese labour may retain or even enhance their competitive advantage. Hence, the may be no ‘turning point’, or at least the turning point is open to question.

  • Andrew Elek

    This is a very good summary of the issues.
    Congratulations to the authors.
    Best wishes
    Andrew Elek