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

The weak labor market environment for staff and workers has not affected wages. Average wages of staff and workers have been increasing at a strong rate. Figure 9 shows that even in the embattled state sector, nominal wages grew faster than nominal GDP in the 1999-2001 period (over 11 percent per year versus five-to-nine percent for nominal GDP). Nominal wage growth in manufacturing in the state-owned sector grew at an annual nine-to-twelve percent clip between 1999 and 2001.

In the urban collective sector, wage growth also has been strong, growing at an eight-to-nine percent annual rate in the 1999-2001 period and 6.5-to-7.5 percent annually in manufacturing. Interestingly, wage growth in the "other types of ownership" sector was somewhat weaker than in the state-owned sector an annual nine-to-eleven percent in the 1999-2001 period. Manufacturing wage growth in the "other" sector was roughly nine percent during this period.

Weak employment and strong wage growth suggest strong labor productivity growth. While not measured directly in China, it can be inferred. In the discussion below, I include a proxy for labor productivity as part of an analysis of the path of variables that will impact the course of wage growth.

Statistically Identified Wage Drivers

To date, empirical work on the Chinese wage dynamic has been limited. Nonetheless, a review of the academic economics literature reveals four articles that contain useful statistical evidence. These studies offer insight regarding the relevant variables for a prediction of the wage path.

Paus and Robinson (1997) estimate a cross-sectional wage equation for a set of developing countries for the 1973-1990 period. Their specific aim is to test the impact of economic openness (using export share as a proxy) on the wages of a developing country. (5) In addition to export share (i.e., exports/GDP), the other predictor variables in their wage model include GDP, labor productivity, labor supply, the exchange rate, and the debt-service ratio. The results of the econometric tests were quite illuminating. When export share growth is tested as the only independent variable, it is positively and significantly associated with real wage growth in the 1973-1990 period. However, export share growth ceases to be a significant explanatory variable once GDP growth, investment share growth, and/or productivity growth are included. The results for the debt service and exchange rate variables were either insignificant or sensitive to the subset of the sample being tested.

The authors conclude that increased economic openness is neither good nor bad for a country's labor pool. Their statistical results reveal fairly conclusively that economic growth, investment share growth, and productivity growth are among the key wage growth determinants.

Li and Parker (2001) also examine empirically the impact of the foreign sector on the Chinese labor market. The authors develop a simple simultaneous-equation model to test the effect of foreign direct investment (FDI) on productivity (which is specified as the ratio of value added to employment in each industry) in state-owned and local-owned firms. The other predictor variables include average capital intensity and labor quality (measured as the ratio of employees with a college degree or better to total employment in each industry).