Abstract
One of the defining features of China’s economy over the two decades between 1995 and 2015 was the persistent rise of wages for workers and professionals in nearly every segment of the economy—with wage rates for labor-intensive jobs in manufacturing, construction, and the informal service sector rising the fastest. Recently, however, the economic environment in China has begun to change, including changes in both employment and wages. We identify recent employment/wage trends throughout China’s economy and postulate the sources of these trends as well as possible future consequences if they continue. We use official, nationally aggregated data to examine employment and wages in multiple sectors and industries. Our findings indicate that China may have entered a new phase of economic development in the mid-2010s. According to the data, in recent years, wage growth has begun to polarize: Rising for professionals employed in formal skill-intensive industries; and falling for workers in the informal labor-intensive service sector. We attribute this increase in skill-intensive wages to an increase in demand for skill-intensive employment, due to the emergence of a large middle class in China, for whom the demand for high technology, finance, banking, health, and higher education industries is increasing while, at least in the recent short term, the supply of experienced, high-skilled professionals has not kept up. The employment/wage trend in the informal (low-wage) service sector, however, is following a different pattern. While there is a rising demand for services in China’s economy, the growth, due to a number of factors (e.g., large shares of GDP targeted by policymakers to investment; high rates of savings by consumers), is relatively slow. In contrast, due to a number of economic forces, including globalization and automation, the supply of labor into the service sector of the informal economy is being fueled by the flow of labor out of manufacturing and construction (two industries that that have experienced employment declines since 2013). These supply and demand trends, in turn, are leading to the fall in the growth rate of wages in the informal service sector. We conclude by discussing the possible longer-term consequences of these emerging polarization trends based on an examination of recent experience with wage polarization occurring in both middle- and high-income countries, as well as its consequences. We also present policy recommendations for greater investment in education and human capital, as well as for the development of a more comprehensive set of social safety nets for different segments of China’s population.
Highlights
Low wages were an important factor in China’s rapid economic growth and development, especially during the first decades after reform in the 1980s and 1990s
Because the rural economy employed large numbers of workers who had been engaged in low-productivity farming and sideline activities, China did not experience a significant rise in the labor-intensive wage rate during those first two decades (Lin et al 1996)
That we have established that there has been a steady rise in demand for skillintensive workers, we focus on issues that may be affecting the supply of skill-intensive workers to illustrate the relationship between supply and demand in the current trend of rising wages
Summary
Low wages were an important factor in China’s rapid economic growth and development, especially during the first decades after reform in the 1980s and 1990s. Along with a series of other policy initiatives, China launched an economic development drive that included the establishment of the world’s low-cost export base and its own domestically focused manufacturing industry (Young and Lan 1997). For 20 years, due largely to its vast, under-utilized rural labor supply that had languished for decades in remote rural communities, China was able to attract tens of millions ( hundreds of millions) of rural workers into low-cost manufacturing (Lu and Xia 2016). Because the rural economy employed large numbers of workers who had been engaged in low-productivity farming and sideline activities, China did not experience a significant rise in the labor-intensive wage rate during those first two decades (Lin et al 1996). In part based on this, China was able to launch its economy into one of the fastest periods of growth in history (Wei et al 2017)
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