2010-06-30 10:18

Peng Wensheng, research head of China economy at Barclays Capital

The recent developments in labor issues involve workers in the manufacturing sector in some coastal areas, most of them migrant workers from rural, inland areas.

An immediate explanation is to relate it to the so-called Lewis Turning Point, a highly stylized model of economic development in a labor surplus economy. After reaching the turning point, surplus labor disappears, the job market tightens and real wages rise rapidly, forcing structural changes in the economy.

There are possible reasons for seeing the Lewis Turning Point effect earlier than would be suggested by the urbanization rate in China.

China is a huge country, and differences in regional development and incomes are wide. This implies a differentiated labor market with imperfect mobility. The disappearance of the labor surplus is likely to start in coastal areas where the modern urban sector is most developed. In other words, the turning point may take place at different times in different regions.

Another important factor is changing demographics. China's working age population is approaching its peak. One difference between China and Japan is that Japan's urbanization largely ended in the 1970s, but its working-age population peaked only in the early 1990s. In China, the working-age population will peak much earlier than the completion of urbanization. Therefore, surplus labor is likely to disappear earlier in China's urbanization process.

Moreover, many of the new generation of workers have grown up in one-child families (the one-child policy started in the early 1980s, initially in urban areas, but the policy was also much strengthened in rural areas in the 1990s). They are much better educated and have greater aspirations than their parents.

As a result of the disappearing labor surplus, China's economic growth may decelerate, as the rate of labor force growth falls and the rate of investment slows.