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Monday 19 Feb 2018 | 05:24 | SYDNEY
Monday 19 Feb 2018 | 05:24 | SYDNEY

What's behind China's labour unrest?



15 June 2010 15:48

The international press is full of stories about labour unrest in China. 

There have been several (usually complementary) interpretations on offer: this is push-back against China's high level of inequality; its a product of demographic change and the changing nature of the workforce (fewer and younger workers more aware of their rights); it signals the drying up of what had until now seemed like an endless supply of migrant workers from rural China. 

Put these explanations together, and you get the proposition that these events could mark a significant new phase in China's development story. A slightly different way of phrasing that proposition is to ask whether current events signal the arrival of the much-anticipated Lewisian turning point.

The idea of a 'Lewisian turning point' derives from a classic 1954 paper by Arthur Lewis called 'Economic Development with Unlimited Supplies of Labour'. That paper is 'widely regarded as the single most influential contribution to the establishment of development economics as an academic discipline'. It also won Lewis the Nobel Prize in economics. 

In it, Lewis developed a dual economy model to explain economic take-off in developing economies. In his model, developing economies comprise a capitalist sector and a subsistence sector, and economic development involves the transfer of labour from the latter to the former. Key to the model is the argument that 'an unlimited supply of labour may be said to exist in those countries where population is so large relatively to capital and natural resources, that there are large sectors of the economy where the marginal productivity of labour is negligible, zero, or even negative.'

Under these circumstances, the capitalist sector can tap this supply of under-employed (or surplus) labour from the subsistence sector, and moreover can do so at a constant wage. This allows a rising share of profits in national income. These profits are then re-invested in the capitalist sector, and the large supply of surplus labour means that this increased rate of profit and investment can be sustained, powering the transformation of the economy. 

Eventually, a turning point arrives when the supply of surplus labour is exhausted, at which point wages start to rise, the rate of profit falls, and the rate of investment slows. (For a short review of the subsequent development of the Lewis model see this paper by Gary Fields.)

Given the significant role in Chinese economic development played by a large supply of cheap labour due to both rural-urban migration and favourable demographics, it's no surprise that the idea of applying the Lewis model to China receives lots of attention. Similarly, debate as to whether China is about to run out of cheap labour have been around since at least 2004.  

One forecast that received a lot of attention a few years back was some 2006 work by CASS which predicted that China was heading for a Lewisian turning point. This study argued that the supply of surplus rural labour was being depleted, that China would face significant labour shortages and sharply rising wages by 2009 or 2010, and that this would constrain China's development options. 

This prognosis received a fair amount of attention in 2007, some of it cautiously sceptical. The onset of the GFC and subsequent reports of extremely heavy job losses among China's migrant community then pushed the discussion off the agenda. Recent weeks, with their reports of rising wages and evidence of a shift in bargaining power towards workers mean that the debate is back, although once again there is also plenty of scepticism over whether the turning point has actually arrived.

What would it mean if it has? Some of the commentary to date has tended to focus on the potential implications for international supply chains and on the relocation of footloose manufacturing to economies where labour costs are lower. Other pieces have asked whether it could signal an end to cheap Chinese imports and a rise in the China Price (although some China analysts argue that the share of labour costs for many of China's exports is so low that any impact of even quite large pay rises will be very modest).

A more general point is that higher wage growth – and any consequent shift towards a higher wage share in China's national income – would be an important step forward both for China's own development and for the much-discussed objective of global re-balancing. With regard to the latter, after a couple of months while the world has been distracted by the problems in Greece and the Euro-area, a recent surge in Chinese exports means that the future of the RMB is another debate making a return.

Photo by Flickr user benoitflorencon, used under a Creative Commons license. 

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