The labor market in post-reform China: history, evidence, and implications; China's labor cost advantages are shifting but will remain formidable

Business Economics, Oct, 2004 by Cliff Waldman

Figure 12 shows that while U.S. FDI in China remains low and flat, total FDI, after falling in 1999 and remaining flat in 2000 has resumed an upward path. (7) No data are available to indicate the split between export-oriented FDI and FDI aimed at the domestic market. But as total FDI increases and as China continues to build its technological infrastructure, the productivity benefits from the demonstration effects are likely to increase and the negative productivity impacts from the competitive effects, particularly in the non-state sectors, are likely to diminish.

Will a turn in the growth rate of innovation investment and the upward path of education (and therefore labor force quality), as well as productive FDI, improve labor productivity? Figure 13 shows GDP per employee as an imperfect proxy for labor productivity. (8) While the growth rate of GDP per employee remained healthy, it nonetheless decelerated from a remarkable 34 percent annual growth rate in 1994 to 3.6 percent in 1999, before reversing course in 2000 and 2001 to grow at eight percent and six percent, respectively. While there may be a number of explanations, it is difficult to believe that the declining rate of innovation investment and subsequent reversal did not play some part. The emergence of new sectors that are less capital-intensive than the state sector may also have contributed to the deceleration in labor productivity. Subsequently, the increasingly educated Chinese workforce, along with beneficial demonstration impacts from the presence of foreign firms, has most likely accounted for at least some of the sharp labor productivity acceleration seen in the 2000-2001 period.

The fact that the deceleration in labor productivity bottomed at a still healthy 3.6 percent in 1999 shows that labor productivity is a strong feature of the Chinese economy. Figure 14 shows per capita GDP growth as a proxy for living standards. While per capita GDP continues to advance, its rate of increase decelerated from 1994 through 1999 and then accelerated in 2000 and 2001, in tandem with the labor productivity path of the 1990s.

There is evidence that labor supply might be a major factor in the Chinese wage dynamic. United Nations' data and projections, shown in Figure 15, indicate that the growth of China's working-age population (ages 15-59) will soon begin to level off, and by 2015 the working age population as a percent of the total population will begin to shrink. (9) The population growth slowdown is due in part to China's strict family planning laws, which--though less effective than the government hoped for--clearly have had an impact.

The Forecast

Persuasive, albeit limited, evidence pointing to the increasing importance of education in the Chinese labor market suggests that wages of educated and skilled workers will increase at an accelerating rate throughout the next decade or so. Even where regional bottlenecks might be an impediment, anecdotal evidence suggests that talented workers are beginning to find a place in the emerging urban workforce. Also at issue with the path of skilled wages is the balance between population growth as it impacts labor supply and long-run economic growth as it impacts labor demand. In the short-run, weakening population growth and strengthening GDP growth would exert upward pressure on wages. Over the long run, economic growth might slow due to constrained labor supply.