Labour Shortages in China’s Dual-Sector Economy: Has the world’s workshop exhausted its comparative advantage – people?

University essay from Lunds universitet/Ekonomisk-historiska institutionen

Abstract: In 2004, acute labour shortages were first observed in labour-intensive export-processing sectors in China’s coastal provinces. Paired with rising wages in rural and urban areas, many economists have claimed China has reached its Lewis Turning Point of economic development. This dissertation reviews these claims by context-testing Lewisian theory, and finds little evidence to suggest China has met its Lewis Turning Point. Rather, it attributes China’s unique institutional and political economy to persisting labour shortages. These findings are founded in an amalgamation of numerous factors. While structural transformation has been vast and far-reaching, a significant portion of China’s population still lives in rural areas and urbanisation processes show no indication of levelling-off. While wages have been rising since the mid-1990s and early 2000s for urban and rural households, respectively; it is found the implementation of minimum wage laws and their provisions may attribute these trends. Employment rates reveal that as late as 2009 – some five years after labour shortages first appeared – underemployment in the traditional sector was widespread, and high participation rates of migrants in urban labour markets suggest there exists a barrier to labour mobility that leaves many rural residents without access to gainful employment. This sentiment is developed with migration trends that illustrate labour mobility in China is largely cyclical. Institutional and political barriers, presenting themselves in the hukou system and a skewed incentive structure, provide disincentives to permanent migration. As a result, China has a floating population of upwards of 180 million people even to this day. This dissertation thus finds institutional and political undercurrents – a legacy of Maoist China – obstruct the perfect elasticity of labour mobility. Accordingly, labour shortages co-exist with a surplus pool of labour and cannot be explained by China having met its Lewis Turning Point.

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