China Faces Turning Point on Labor

China is facing a major shift in labor availability as the government considers plans to transform the economy, experts say.

After decades of relying on a limitless workforce to give it a price advantage on exports, China is running out of "surplus" rural labor, the official English-language China Daily warned.

The paper quoted Zeng Xiangquan, dean of Renmin University's School of Labor and Human Resources, as saying the surplus rural labor supply would drop to "zero" this year.

The report also cited a National Bureau of Statistics (NBS) estimate that China's workforce of 937 million fell by nearly 3.5 million last year, marking the first drop in the country' labor count.

Economists say the consequences for China are likely to be significant.

"This will mean quite strong upward pressure on wages," said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington.

"This may turn out to be the great rebalancing of the Chinese economy, which everyone has talked about," Hufbauer said.

Demographic shift

China's government has talked for years about changing the basis of economic growth from investment and export-led expansion to consumption.

Now, the demographic shift may give China's new leaders little choice but to push ahead with the change.

The labor limit has long been seen as a watershed for China because of the concept known as the "Lewisian turning point," named for economist Arthur Lewis in the 1950s.

Under the theory, wages rise when the supply of surplus labor moving from the country to cities is used up.

Wages have already been increasing at annual rates of 15 to 20 percent, according to state media. The government has promised yearly minimum wage hikes of at least 13 percent through 2015.

By last September, 18 of China's 31 provincial-level areas had raised minimum wages by an average of 19.4 percent from a year earlier, the official Xinhua news agency said.

In the Guangzhou export hub of coastal Guangdong province, the monthly minimum wage stood at 1,300 yuan (U.S. $212) in February with employers promising more increases on the way.

Average per capita monthly income for migrant workers rose 11.8 percent last year to 2,290 yuan (U.S. $370.48), according to NBS figures cited by Xinhua.

Export growth slows

Higher pay may boost consumer spending among China's 262 million migrant workers, but it could also raise manufacturing costs while cutting into export competitiveness and productivity growth.

Although official trade figures have been unreliable, economists estimate that exports grew by as little as 2 or 3 percent in March, far less than the 10 percent reported by the General Administration of Customs (GAC).

The yuan's rising value is also making exports less competitive, leaving producers less room to meet wage demands.

The turning point comes at a sensitive time as the government prepares a sweeping new urbanization plan that would draw nwe migrants to China's cities by giving them access to many of the same benefits as urban residents.

The government sees urbanization as an imperative to ease social pressures by bridging the gulf between rich and poor.

Average per capita net income in rural areas is still less than a third of urban disposable income, making cities unaffordable for newcomers without new policies and additional help.

Although the government has been trying to curb housing costs with new taxes, home prices in major cities are still rising by about 2 percent per month.

Property rights

The push for urbanization has increased pressure for rural reforms that would give farmers the right to freely sell land and create wealth, bringing urban dreams within reach.

"The government should let farmers have more property and economic rights over their land," said Han Jun, deputy chief of the State Council's Development Research Center, according to China Daily.

"A lot of pressure is coming to bear here," said Hufbauer.

"They might very sharply liberalize the ability to go to the cities. On the other hand, if the people lose their land when they leave the rural areas and there's no surplus labor, it could be a hard thing."

On May 24, the director of the National Reform and Development Commission (NDRC), Xu Shaoshi, denied a Reuters report that the State Council had rejected the urbanization plan due to fears of a "spending binge."

"How can it be possible that the State Council rejected a proposal that we have not yet submitted?" said Xu, according to Xinhua.

New guidelines

Premier Li Keqiang was said to be concerned that the 40- trillion-yuan (U.S. $6.5-trillion) program would only lead to more inflationary investment at the local level.

The next day, the State Council published general guidelines for the urbanization program and a series of 22 planned economic reforms, in an apparent sign it will push ahead despite the concerns.

The guidelines deal with reforms on a range of issues, including medical insurance, social security, and environmental protection, state media said. A detailed urbanization plan is to be completed by the end of the year.

But the surplus labor issue may put a premium on rapid and simultaneous transformation in a host of areas affecting economics and social mobility.

Lowell Dittmer, a China specialist and political science professor at University of California, Berkeley, said the turning point is likely to drive the economy out of low-cost, labor-intensive industries and toward higher-value sectors.

Dittmer said Premier Li has been firmly behind plans to reform the hukou, or household, registration system, which restricts rural access to urban entitlements.

"He's pledged a lot of money in support of that," said Dittmer. "That's their big hope, that it will solve a lot of these problems."