Wages in China

Wages in China Have Been Doubling Every Ten Years. One clue is from the Conference Board: Region: China GDP growth: 4.1. Labor Productivity Growth: 4.0. Labor Productivity relative to US: 21.3. GDP per Capita growth: 3.5. GDP per Capita level relative to US: 25.2

From the German Chamber of Commerce in China: “1. National Wage Developments China closed out 2015 with an average wage increase of 10.1%, recovering from a lower than two digit growth in 2014, and therefore growing faster than the previous year for the first time since 2011. The average annual urban wage was RMB 62,029, up RMB 5,669 from 2014. Note that NBS wage statistics only consider urban wages.1 Disposable per capita income of households2 in 2015 was RMB 21,966, representing a 7.4% in increase in real terms from 20143 and outpacing GDP growth (6.9%). The disposable per capita income for urban households was RMB 31,195 (6.6% increase in real terms versus 2014), whereas per capita disposable income for rural households averaged RMB 11,422 (7.5% increase in real terms). Efforts by the government to reduce the income gap – mostly via the implementation of minimum wages since 2004 have been successful. China’s Gini Coefficient4 was reduced from 0.481 in 2012 to 0.462 in 2015. (To provide some context, according the latest data available from the OECD, the Gini index for the US was 0.394 (2014) and 0.292 for Germany (2013).)

Another is rising productivity:

China’s Rebalance Reflected in Rising Wage Share of GDP

[From The Petersen InstituteThe rebalancing of China’s economy has been underway for five years. As has been widely noted, services and consumption, rather than industry and investment, are increasingly driving growth.  Almost unnoticed, trends in the distribution of national income among workers, enterprises, and the government, also reflect the rebalancing of China’s economy.

As shown in figure 1, the wage share of GDP has risen sharply since 2011, reversing the trend in the previous decade of imbalanced growth when this share declined from 53 percent to 47 percent.  The rising share of wages makes possible an increase in consumption as a share of GDP—one of the key goals of China’s rebalancing agenda. The rising share of compensation in GDP in China contrasts sharply with trends in the US and other OECD countries where, after falling for a decade, the share has plateaued in recent years.

Figure 1 Employee Compensation as a Share of Value-Added, 2000—2014

Source: National Bureau of Statistics of China, OECD Data (2016).
Notes: The average share of OECD is weighted by GDP of OECD countries. Turkey is excluded in OECD countries since no data of employee compensation for Turkey is available. Compensation of employee refers to total payments of various forms to the employees, both in cash and in kind. It includes wages and salaries, and the value of social contribution payable by employers such as social insurance and housing fund paid by employers.

The rise in the wage share is the foundation for the increases in disposable income and private consumption expenditure as a share of GDP in recent years, reflected in figure 2. To date these increases in the shares of disposable income and private consumption expenditure have offset only a small portion of the declines that occurred in the prior decade when growth was highly imbalanced.

Since 2011, the rise in the wage share has been balanced by a decline in the share of profits in national income. The decline in the profit share, in turn, has contributed to a decline in investment as a share of GDP, which is essentially the flip side of the government’s goal of increasing the consumption share.  The investment share peaked in 2011 but has fallen since.  The income share of government has increased slightly in recent years.

Figure 2 Household Consumption and Disposable Income as A Share of GDP, 2000—2015

Source: National Bureau of Statistics of China

Two factors contribute to the rising wage share of GDP in China.  The first is demographics.  The growth of the working age population (ages 15-64) has slowed in recent years and then turned negative in 2014.  Second, the transition from industry to services-driven growth has increased the demand for labor because services are more labor-intensive than industry, particularly heavy industry which was the dominant driver of growth in the decade to 2010.  The combination of reduced supply and rising demand has led to wage growth much more rapid than the growth of GDP, hence the rising wage share.

Two structural factors will likely lead to a further increase in the wage share of GDP, providing the fuel for future increases in both consumption as a share of expenditure in GDP and a services share in the production of GDP.  First, China’s working age population will continue to shrink for the foreseeable future, further reducing the supply of labor.  Second, a growing share of private consumption expenditure will continue to be directed to services rather than goods, further increasing the demand for labor.  Over the long-run the shrinking labor force may impede China’s GDP growth, but in the short and medium-term it is a favorable factor supporting rebalancing.


Is low-wage China disappearing?
By Fan Gang (chinadaily.com.cn)
Updated: 2010-08-31 13:29

BEIJING — Reports about labor shortages, wage disputes, and wage increases for migrant workers in China have abounded of late. They naturally raised concerns, or expectations, that China’s labor-cost advantages may be disappearing.

It is my hope that China’s comparative advantage as a low-wage producer does disappear — the sooner the better. But why should I, a Chinese economist, wish to see China’s competitiveness reduced through rising labor costs? After all, when a country still lacks real advantages, such as higher education, efficient markets and enterprises, and a capacity for innovation, it needs something like low wages to maintain growth.

While cheap labor has been a key factor in generating high growth over the past three decades, it has also contributed to profound income disparities, especially in recent years. And persistent, widening inequality might cause social crises that could interrupt growth and damage competitiveness. China must avoid such a scenario, and if wages could increase in some meaningful way, it would indicate that the economy might finally reach the next stage of development, during which income disparities would be narrowed.

Unfortunately, China has not yet reached that point — and will not any time soon. Agriculture remains the main source of income for more than 30% of China’s labor force, compared to less than 2% in the United States or 6% in South Korea. Another 30% of the labor force comprises migrant workers, who have doubled their incomes by moving from agriculture to the industrial and service sectors.

Although migrant workers earn only about $1,500 per year on average, the income gap between them and agricultural laborers provides a powerful incentive for the latter to try to find better-paid non-farm jobs. Naturally, this competition in the labor market suppresses non-farm wages: whereas labor productivity in non-farm sectors increased by 10-12% annually in the past 15 years, migrant workers’ real wages have increased by only 4-6% per year. As a result, income disparity between low-end labor, on the one hand, and professionals and investors, on the other, has also increased.

All this means that the process of industrialization in China still has a long way to go. To reduce farm labor to 10% of the labor force (the point at which, judging by historical experience elsewhere, China may achieve worker-farmer wage equilibrium), the economy needs to create about 150 million new non-farm jobs.

Even if the economy continues to grow at 8% per year, China might need 20-30 years to reallocate agricultural laborers and reach “full employment.” But this requires generating eight million new jobs every year, including five million for farmers leaving the countryside.

During this long process of industrialization, wages will increase gradually, but it is very unlikely that they will grow at the same rate as labor productivity. This is bad news for reducing income inequality, as capital gains and high-end wages may grow much faster. But it should be the good news for competitiveness, because Chinese wages will remain relatively low in terms of “wage efficiency.”

Indeed, the wage increases of recent years have not changed the basic cost structure of Chinese companies. An analysis by Goldman Sachs shows that, despite real wage gains, the share of labor costs in total manufacturing costs is lower than it was in 2001 — a trend that continued in the first half of 2010.

To prevent serious social tension, China’s government (at various levels) has begun to intervene by enforcing higher minimum wages, in addition to investing in a social safety net for the poor. In some provinces, minimum wages have increased by more than 30%. But the minimum wage is normally much lower than the effective wage, and thus has not changed the fundamental relationship between wages and labor productivity.

Nevertheless, artificial wage increases enforced by government policies could slow down the process of labor reallocation and make some “surplus labor” permanent. Income disparities will not be fundamentally altered until the market equilibrium wage inches upwards sufficiently to create labor demand at decent wage levels.

So will companies, both multinationals and Chinese, leave for Vietnam, Bangladesh, or Mozambique? Perhaps. But that will happen only if the other countries’ wages are relatively more efficient (i.e., productivity there is ultimately higher than in China), and not just because Chinese nominal wages go up. For now, however, this does not seem to be the case in general.

Evidence that China’s wage efficiency remains high relative to other developing countries comes in the form of continued growth in inflows of foreign direct investment over the past 12 months, despite wage increases. In July, for example, FDI increased by 29.2% year on year, much higher than the global average. There may be many factors behind China’s strong FDI performance, but it does mean that the nominal wage increase itself may not lower the capital gains that concern investors most.

In any case, the Chinese wage story is much more complicated than it might seem. Nominal wages may increase, while real wages stagnate, owing to higher inflation. Even if real wages increase in some coastal cities, “surplus labor” could keep the national average flat. And even a real wage increase on the national level will not undermine competitiveness if labor productivity grows still faster.

So the conclusion seems to be that wage growth will not threaten China’s competitiveness in the next 10 or even 20 years. As China will not complete the process of reallocating workers from agriculture to more modern economic sectors any time soon, it should remain a cost-competitive economy for the foreseeable future.

About Godfree

Visiting China and studying it since 1967. Interested in its culture, politics, education and economy.
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