The Economist has a nice article about the debate surrounding the existence of surplus labor in China. Some say there is still surplus labor, others disagree. There is no definite answer. The one thing that can be said with certainty is that China has successfully absorbed surplus labor from the agriculture sector to the manufacturing sector. It needs to be seen when this flow of surplus labor would dry up and how much more can the increasing use of technology in agriculture (to increase productivity) can free up labor from the agriculture sector to the manufacturing sector. Shortage of labor would push up wages, which is not in the interest of manufacturing firms. MNCs would shift to other countries where wages are low in order to maintain low retail prices of final product and to maintain competitiveness in the global market. What would China do if its surplus labor vaporizes?
...A seemingly unlimited supply of cheap workers has been one of the main forces behind China’s rapid economic growth. But over the past couple of years, factory owners have complained of labour shortages and wages have risen more rapidly, leading some to conclude that China’s “surplus” labour has been used up. The country’s one-child policy, introduced in 1979, has caused the growth in its labour supply to slow sharply (see chart). After rising by 1.3% a year during the decade to 2005, the population of working age is expected to increase at an annual rate of 0.7% until 2015, and then shrink by 0.1% a year until 2025. At the same time, the shift of workers from agriculture to industry, which has been an important source of productivity gains, will also slow. Jonathan Anderson, an economist at UBS, reckons that these two trends will reduce China’s sustainable growth rate from 9-9.5% today to 7-7.5% by 2025.
...This acceleration of wages has prompted some to conclude that China’s surplus labour in the countryside has been used up. Last year Cai Fang, the director of the Institute of Population and Labour Economics at the Chinese Academy of Social Sciences, argued that China has reached the “Lewis turning point”. By 2009, he predicted, there would be a widespread shortage of workers, pushing up industrial wages. Does this mean the death of China’s growth model?
...Moreover, Mr Cai’s estimate of China’s labour surplus assumes that 180m workers, or 24% of total employment, are needed for farming. But that is based on today’s agriculture. Mechanisation and the consolidation of land plots will boost productivity, meaning that fewer farmers will be needed. That will in turn release more workers for industry. In developed countries only 3% of workers till the land.