China beyond the Turning Point

Study traces labor shortage, rising wages to rural roots
August 24, 2010

China’s rapid economic growth has been sustained by a seemingly infinite supply of labor streaming from rural to urban areas. Economists and policymakers now debate whether China has passed the Lewis turning point, a shift from labor surplus to shortage that heralds increased wages and a decline in labor-intensive production. A new IFPRI discussion paper, co-authored by senior research fellow Xiaobo Zhang, analyzes rural wages and determines that the watershed moment arrived in rural China in 2004, only to now surface in the coastal cities.

As a country develops, surplus rural labor is absorbed into its growing industrial sector while wages remain at subsistence levels. When a country reaches full employment and each additional farm worker becomes more valuable, earnings climb in the rural areas until eventually factories must compete for workers, prompting urban wages to also rise.

Whereas many studies of China’s Lewis turning point rely on short-term labor statistics, often with divergent conclusions due to unreliable data on migrant workers, this study regards long-term rural wage trends as a barometer of the country’s labor availability. Zhang and his co-authors examined real wages from 1993 to 2007 in over 100 nationally representative villages across five provinces, along with 88 villages in Gansu province, one of the country’s poorest regions.

In each of the first five provinces, real wages rose more quickly from 2004 to 2007 than from 1998 to 2003, indicating that the job market has expanded faster than the workforce.

One would expect to find the last holdouts of surplus labor in areas that are far from job-generating centers, particularly during the non-harvest season when demand for labor is weakest. From 1993 to 2003, the daily income in Gansu province during the harvest season remained almost constant at about 17 yuan, but by 2006, it had jumped to 26.8 yuan. This timeline was mirrored in the non-harvest season, with wages rising from 12.8 to 19.6 yuan. The sluggish earnings before 2004 suggest an excess of rural labor, while the subsequent dramatic wage hike signals a new era of labor scarcity.

A nationwide labor shortage could give China’s workers bargaining power to negotiate higher wages, reducing the wealth gap between rural and urban areas. The arrival of the Lewis turning point has huge implications for China’s labor-intensive development models as well as the global flow of foreign direct investment and trade.