Low-cost workers will continue to propel country's economic growth but industry needs more high-caliber workers

Since the adoption of the reform and opening-up policy three decades ago, China's sustained and rapid economic growth has benefited from the labor advantage provided by the continuous transfer of surplus rural labor.

Before 2003, a young migrant worker's monthly wage was long maintained at about 600 yuan ($91.5). After 2005, their average wages per month surpassed 1,000 yuan, an increase of more than 60 percent in about two years. Amid the global financial crisis, Chinese migrant workers' monthly wages saw a year-on-year increase of 10 to 20 percent.

Accordingly, many analysts have claimed that China is losing its low-cost labor advantage and the nation's competitiveness is beginning to decline.

Is this true?

I don't think so. I believe that China's low-cost labor advantage will continue for the next two decades.

China is still a developing country and it will continue to have a dual economy in the next two decades, during which surplus rural labor will continue to be an advantage as labor is still an essential factor propelling the nation's growth.

However, the supply and demand of labor is seeing some changes in terms of the age structure and regional demand. The standards required of labor in East China are becoming higher while the central and western regions need more and more labor.

Though the nominal wages are rising, the labor costs in fact have not increased, as the growth rate of labor productivity is higher than that of nominal wages.

Since reform and opening-up, China's labor productivity has been rising fast, especially in the industrial sector. Taking all State-owned enterprises and above-scale private companies for example, labor productivity saw an average annual increase of 16.27 percent from 1998 to 2006. During the same period, the average annual increase of employees' wages was 12.85 percent, nearly 4 percent lower than the growth rate of labor productivity. Therefore, the increase in wages did not cause rising labor costs, but instead led to falling costs and rising economic competitiveness.

In 1991, the wages of Chinese manufacturing workers accounted for only 1.7 percent of that of their peers in the United States. The ratio rose to 3.7 percent in 2000. However, the productivity of Chinese manufacturing workers in 1991 was only one-fortieth that of their US counterparts, while the figure rose to one-tenth in 2000. The efficiency of Chinese workers rose faster than the cost of labor, which means that the competitive advantage of Chinese workers has in fact increased.

The overall real labor costs have not increased, but nominal wages among different regions in China are changing. Nominal wages in the nation's eastern coastal areas are rising faster and faster, in the future the nation's low-cost labor advantage will mainly lie in the central and western regions where the economy is underdeveloped.

China's strategy to transform the economic growth mode has been formulated by considering the overall situation, rather than labor force shortages or rising labor costs, so we should not withdraw from labor-intensive industry simply because of an assumption of a labor shortage.

In eastern coastal areas, some enterprises and industries, which mainly rely on increasing labor input for profits, are facing the problem of industrial upgrading and transformation. Labor-intensive industries will be gradually transferred to the central and western areas and will continue to develop in these regions for the next two decades. As a result, the migrant workers who used to flow to the east may choose jobs near their hometowns in the hinterland.

The relocation of some labor-intensive enterprises from the eastern coast to inland areas in itself does not justify a conclusion of a labor shortage.

The absolute quantity of China's labor resources is huge. In 2014, the nation's total working-age population could reach 997 million, a number no other country can match.

In China, the problem is not the lack of labor, but the lack of quality labor.

So, in the future more efforts should be made to improve the quality of labor-intensive employees so as to extend the advantage of China's labor resources and improve labor productivity.

Removing institutional and system barriers and enhancing protection of labor rights are the fundamental ways to address the employment contradiction and promote economic development.

The author is a researcher with the Institute for Labor Science Studies under the Ministry of Human Resources and Social Security. The article first appeared in the China Development Observation magazine.

(China Daily 03/29/2011 page8)