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Is Low-Wage China Disappearing?

BEIJING – Reports about labor shortages, wage disputes, and wage increases for migrant workers in China have abounded of late. They naturally raised concerns, or expectations, that China’s labor-cost advantages may be disappearing.

It is my hope that China’s comparative advantage as a low-wage producer does disappear – the sooner the better. But why should I, a Chinese economist, wish to see China’s competitiveness reduced through rising labor costs? After all, when a country still lacks real advantages, such as higher education, efficient markets and enterprises, and a capacity for innovation, it needs something like low wages to maintain growth.

While cheap labor has been a key factor in generating high growth over the past three decades, it has also contributed to profound income disparities, especially in recent years. And persistent, widening inequality might cause social crises that could interrupt growth and damage competitiveness. China must avoid such a scenario, and if wages could increase in some meaningful way, it would indicate that the economy might finally reach the next stage of development, during which income disparities would be narrowed.

Unfortunately, China has not yet reached that point – and will not any time soon. Agriculture remains the main source of income for more than 30% of China’s labor force, compared to less than 2% in the United States or 6% in South Korea. Another 30% of the labor force comprises migrant workers, who have doubled their incomes by moving from agriculture to the industrial and service sectors.