Think Tank

Growing pains of labor market

By Cai Fang (China Daily)
Updated: 2010-11-30 08:04

End of labor surplus means higher productivity should result in better and institutional services for migrant workers

Labor shortages and rising labor costs in China have caused growing hostility between capital and labor. Building a collective negotiation mechanism is nothing but a makeshift measure to ease the tensions. The permanent cure lies in a mature institutional design of the labor market.

The rising cost of labor in China is an inevitable result of supply and demand and not the growing awareness of workers in sweatshops. China, which once had an abundance of low-cost workers, is reaching the Lewis turning point which pushes up wages, consumption and inflation when there is no more surplus labor.

Inheriting a dual employment system, urban and rural, from the planned economy, China had long seen an over-supply of labor in both urban and rural areas. However, the dramatic social and economic transitions of China brought about unprecedented population mobility. Rural surplus labor started migrating to cities on a large scale in the late 1990s.

The radical urbanization of China absorbed nearly 145 million rural workers and boosted the development of the labor market, as well as employment system reform in cities.

However, human resources are increasingly allocated in light of China's turning point and the decline in the number of people entering the labor market.

This turning point in the supply of labor is the primary cause for labor clashes.

Compared with the early flow of migrant workers, many migrant workers can now secure fixed jobs. And, after working and living in cities for almost a decade, migrant workers are demanding the same rights as permanent citizens.

That's why merely squeezing out more and more jobs is no longer effective in mitigating labor conflicts. Granting migrant workers medical care, education and endowment pensions is more advisable than encouraging collective negotiation, because negotiation cannot change the basic fact that there is now a labor shortage.

As long as the rising cost of labor is caused by a labor shortage accompanying the Lewis turning point this tendency will continue without eroding the strength of the Chinese economy. The Japanese experience of the Lewis turning point around 1960 is a case in point.

The transformation of industry entails improving labor efficiency, so that the rising cost of labor does not result in the loss of China's comparative advantage in the global economy.

Correspondingly, employers should attach more importance to providing decent pay for a quality labor force.

Cases of wage arrears dropped significantly in China after peaking in 2004. Afterwards, migrant workers chose more proactive ways - strikes and negotiation - to demand higher wages.

Before 2004 when labor supply exceeded the nation's requirements, migrant workers had no status and had to endure intolerable treatment or risk being replaced. After the Lewis turning point was reached, the supply of labor became more elastic, that is to say, migrant workers had the freedom to say no to employers.

The poor adaptability of some enterprises to the new labor market means they are unable to cope with labor problems. Employers should update their understanding of the market and their workforce and cooperate with governments to promote the institutional maturity of the Chinese labor market.

The labor costs of manufacturing in China grew an average 9.8 percent annually from 2000 to 2007. The marginal labor productivity increased by an annual average of 20.4 percent and the average annual labor productivity rose by 22.8 percent during the same period.

Perfecting the labor market mechanism simply suggests increased productivity means increased pay. It is an unavoidable "growing pain" for employers of all emerging economies. Japan went through this process in the 1960s and South Korea in the 1970s.

Japan streamlined its primary national wealth distribution after it reached its Lewis turning point around 1960 through collective wage negotiations and gradually increasing its consumption rate. South Korea on the other hand maintained strict controls over domestic unions after its turning point around 1970. As a result, it took the country more than 17 years, with awful political and social costs, to build up their learning curve, granting the payments the labor forces deserved.

Only when every party involved agrees that labor payments should account for a bigger part of the primary distribution of national wealth can we move on to build a collective negotiation system and strengthen the role of the unions. This is the right order to eliminate income disparity, improve company performance and cultivate a healthy mentality among the labor force. It is a win-win situation for all instead of a zero-sum game.

History indicates that it is a golden opportunity for the Chinese government to lay the foundations for a rational labor market. Doing so will not only help upgrade the nation's industries, it will also contribute to releasing social pressures effectively.

The author is director of the Institute of Population and Labor Economics with Chinese Academy of Social Sciences. The Chinese version of this article can be found in the latest China Economic Observer magazine.