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back to index backGLOBALtalk May,  2007


China: How to deal with the future labor shortage

The current labor shortage spreading from the coastal areas across the country signifies the coming of the Lewisian Turning Point in China's economic development. China's oversupply of labor is on its way to becoming a thing of the past.

Most developing countries experience a process of dualistic economic development. The surplus rural labor force provides cheap labor for industrialization and the wage level increases slowly. This process continues till there emerges a shortage in the supply of labor and the economic growth mode reaches a modern stage.

Economist Arthur Lewis was the first to define dualistic economic development; hence, the concept of the change from an unlimited supply of labor to a shortage is called the Lewisian Turning Point.

China's fast economic growth took place under these dualistic economic conditions with the country's policies of reform and opening-up to the outside world. During this period, the scale of the working-age population was large and its percentage kept rising.

Research shows that every percentage point drop in the dependency rate (the ratio of those under 16 and above 65 compared with the working population) will bring a 0.115-percentage increase in the per capita gross domestic product (GDP). About 27 percent of the per capita GDP growth in China can be attributed to the decease of the dependency rate in the reform period. But according to projections on population age structure, the dependency rate will begin to increase in 2013 as the aging of the population speeds up. Similarly, every increase in the dependency rate will cut the per capita GDP growth by 0.115 percent.

The overall population and its age structure are the base of the labor supply. The current labor shortage is not a temporary phenomenon but signifies the coming of a turning point.

This is the transition from an underdeveloped to a developed economy. Before this, capital and labor are the drive for development; after this, economic growth depends on the increase in productivity. A few changes are currently under way in China.

First, both rural and urban areas are facing a shortage of labor. The new jobs added every year do not seem to have absorbed surplus laborers in the past few years.

Second, the wage level will increase for the average laborer. This has affected foreign investment and business operations to a certain degree.

Third, the high rate of personal savings will gradually decrease. The average worker's consumption habits change as wages increase. Together with the changes in the dependency rate and a more developed social security system, the high savings rate will decline.

Of course China's labor supply changes only incrementally. China's labor costs will still be low for a rather long period, compared with developed and many developing countries. The change in the personal savings rate will not happen overnight, either. It is still too early to worry about the Chinese economy's losing its comparative advantage and competitiveness.

This changing situation has put forward demands to change China's economic growth mode.

China should adjust to the change by cultivating greater productivity. When labor becomes scarcer, economic growth should be based on increased productivity. It is important to create a productive market environment for investors and enterprises so that rising labor costs do not increase prices.

Obstacles in the labor market should be cleared to keep the current comparative advantages for longer.

In urban areas, more employment channels should be opened. In rural areas, the further reform of the household registration system and the training provided to laborers can also expand the labor supply.

The advantageous period of the population bonus can be prolonged through adjusting policies. For example, increasing the retirement age increases the size of the workforce, which creates an added source for economic growth.

The author is director of the Institute of Population and Labor Economics of the Chinese Academy of Social Sciences.

Source: China Daily - GAI


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