Approaching a neoclassical scenario: the labor market in China after the Lewis turning point

Fang Cai

doi:10.1186/2196-5633-1-1

Abstract

As China passes through its Lewis turning point characterized first by the appearance of a labor shortage and a constant increase in wages, its labor market shows both features of the dual economy and neoclassical growth. This paper first depicts the trend of population as a root cause of the labor market transition from dual economy to neoclassical scenario. It then reveals the changed labor market profile - the labor shortage and wage increase. By examining three major groups of employment, namely, migrant workers, university graduates, and urban vulnerable workers, it tries to explore those unique characteristics of the labor market in such a transitional period and draws policy implications.

Highlights

(1954), are (1) wage is determined by marginal productivity of labor, (2) the labor market can correct its own disequilibrium in labor supply and demand over the long run, and (3) there are only three basic types of unemployment - cyclical, frictional, and structural - all of which need to be addressed with macroeconomic and labor market policies
The Chinese economy has exemplified a dual economy characterized by unlimited labor supply, subsistence wages, and the existence of institutional barriers to labor mobility, as well as the resultant difficulty in labor market clearing
The labor market has responded to these developments, which can be clearly seen in the nationwide labor shortage and steep rises in worker wage

Summary

Introduction

The three chief characteristics of a neoclassical scenario of the labor market, which I contrast with a dualistic scenario of the labor market such as described by Lewis (1954), are (1) wage is determined by marginal productivity of labor, (2) the labor market can correct its own disequilibrium in labor supply and demand over the long run, and (3) there are only three basic types of unemployment - cyclical, frictional, and structural - all of which need to be addressed with macroeconomic and labor market policies.For some time, the Chinese economy has exemplified a dual economy characterized by unlimited labor supply, subsistence wages, and the existence of institutional barriers to labor mobility, as well as the resultant difficulty in labor market clearing. It was not until very recently that the Lewis turning point arrived, signaled by widespread labor shortage and constant wage increases, for unskilled workers, and facilitated by both demand and supply factors, such as demographic trends and strong growth of employment in urban areas.

Results

Conclusion