Economist: China still maintains low-cost labor advantage

By Fan Gang, former advisor to the People's Bank of China

There have been many recent reports in newspapers regarding a labor shortage, wage disputes between employers and employees and rising wages for migrant workers. This has caused public concern or expectations that China’s low-cost labor advantage is disappearing.

Unfortunately, this has not happened in China and will not happen in the near future. The income of more than 30 percent of Chinese laborers still mainly comes from agriculture versus only 2 percent in the United States and 6 percent in South Korea. Another 30 percent of Chinese laborers are migrant rural workers in industrial and service sectors instead of in the agricultural sector, and their incomes have been doubled.

To lower the proportion of Chinese agricultural laborers to the total labor force to less than 10 percent, China must create an additional 150 million non-agricultural jobs. The historical experience in other countries and regions shows that the percentage of 10 percent is the balancing point where the average wage of agricultural workers will be equal to that of industrial workers.

Even if China maintains an annual growth rate of 8 percent, it will take 20 to 30 years to further reallocate agricultural laborers and achieve "full employment." This means that 8 million new jobs should be created per year, including 5 million for migrant rural workers.

Workers' wages will gradually increase along with China's lengthy industrialization, but the growth rate of wages can hardly exceed that of labor productivity. This is bad news for removing income inequality because the capital gains and high-level workers’ salaries will grow much faster than the salaries of common workers. However, it is good news for maintaining China’s industrial competitiveness because the wages of most Chinese people will remain at a "relatively low level."

In order to reduce social tensions, Chinese government entities at all levels have compulsorily raised the minimum wage and invested more in the social security system built especially for low-income people. The minimum wage has increased more than 30 percent in certain provinces, but since the minimum wage is normally far lower than the efficiency wage (a company paying higher salaries than the minimum it needs to pay in order to encourage higher output), workers' wages are still not in proportion to their productivity.

Nominal wages may rise, but real wages will stagnate due to inflation. Even if the real wages do increase in certain coastal cities, the problem of labor surplus will pull the national average of real wages down to a lower level. Even a real wage increase in the national average will not undermine China's competitiveness if labor productivity still grows faster than wages to say the least.

Therefore, the conclusion seems to be that wage growth will not threaten China's competitiveness in the next 10 or even 20 years.