China will move from a having vast supply of low-cost workers to being a labor-shortage economy between 2020 and 2025, according to an IMF paper published four years ago. The concept, usually known as the Lewis Turning Point, describes a transition to rapid wage increases as an economy runs down its surplus labor supply in the agrarian sector. New evidence shows that that the threshold may be approaching even faster than the IMF had predicted.
A study by Euromonitor shows that manufacturing wages in China have risen substantially over the past decade, and are now close to the hourly rates of high-income countries like Greece and Portugal, according to the Financial Times. In contrast, GDP per capita in China was still less than half of Greek and Portuguese levels as of 2015. Average hourly manufacturing wages trebled to $3.60 between 2005 and 2016, making Chinese labor more expensive than that of other middle-income economies such as Brazil, Argentina, and Mexico, according to the study. Manufacturing wage increases accompanied rises in the overall average wage in China, which more than doubled to $3.3 per hour during the same period.
High productivity growth — which some argue has yet to run its course — has contributed to wage increases. Growth contribution from total factor productivity — factors besides labor and capital — has historically been a significant source. Wage growth, on the other hand, has been relatively modest until recent years given the abundance of rural labor ready to take factory jobs. Dani Rodrik has long argued that China had been exporting goods associated with productivity levels much higher than countries of comparable incomes. It is reasonable to predict that, since the exports have only become more sophisticated since then, more wage advances are yet to come.
Also, the One Child policy has helped depress population growth. In fact, although China abandoned that policy in early 2015 after more than 3 decades of enforcement, new evidence shows little improvement in the birth rate, prompting the government to consider additional measures to boost fertility rates.
Whatever the explanation for its causes, rapid wage increases in China could have far-reaching ramifications for the Chinese and global economy.
First, the world’s second largest economy will be producing a very different set of goods from what it has produced until now, given the emergence of lower wage countries elsewhere, which offer the lower-income countries an opportunity to pursue a China-style growth miracle.
Second, higher wages would help China to achieve a rebalancing at home from an export-driven to a consumption-driven economy. In fact, consumption has already been contributing to the bulk of GDP growth as external demand wanes.
Third, a more affluent China would have stimulating effect on the overall global economy. The size of its economy could mean considerable demand for other countries, including the US, to expand their export markets.