The End of Cheap Labor in China?

Published on Author gjeong


Many companies like to expand their business to China due to cheap labor. According to CNN, the highest minimum wage in China, in Shenzhen province, workers get $240.49 a month. The minimum wage in Beijing is $2.24 dollars per hour, which is much lower than that of the US’. Although China’s government announced that it will raise the minimum wage up to 40% of the average salary by 2014, it is still relatively far lower than other countries. People doubt that it can really happen due to the huge population. However, things are getting more complicated.


Cheap labor was one of the factors that have been bringing lots of foreign investments to China. However, some experts, mainly IMF, argue that cheap labor in China is going to end. IMF claims that the working age population will reach a historical peak and then decline precipitously in a few years. This means the labor supply will decrease (labor shortage) and China might not be a place for cheap labor anymore. IMF researchers argue that China will get to the Lewis Turing Point, so that wages will go up. Will this happen? If the moment does arrive, how will China react? How will the world react?

Further reading: CNN Money, WashPo Wonkblog

7 Responses to The End of Cheap Labor in China?

  1. (side note: Kind of cool that you can edit other people’s posts)

    On another note one of the concern we continually here about is China’s aging population. While it is becoming a growing concern especially with the population pyramid flipping on its head one might wonder what China’s retirement population will look like in the near future and what retirement plans (private/government) are being developed or implemented to deal with such a sizable group. Raising the minimum wage will better help people save for retirement but it is doubtful that people’s incomes will be able to keep up with inflation. At the same time China has mentioned raising the retirement age but depending on the age and the life expectancy age it may not be significant.

  2. The fact still remains that 1.35 billion people live in China. With this many people, the country holds a lot of options. With the one child policy holding the population back, China’s population could explode if this were to be relaxed or taken away. I am sure that the Chinese government will make sure there is no shortage of labor supply, especially if that means driving away foreign investment in China.

  3. China actually is changing its one child policy for most couples. When they actually implement the policy is another question, but most of the changes under the Third Plenum are surrounded by uncertainty. The other thing to watch is how Party Leadership sets economic policy as they try and transition to a consumption based economy rather than one heavily dependent upon investment. Making such a change will require a more of a middle class and higher wages to support consumption.

    • Re Brister and Miller: we’ll look at demographic issues later, but you might look at the following paper by Cai (access using the library periodical finder or via WebLink in EconLit).
      Cai, Yong (2010). “China’s Below-Replacement Fertility: Government Policy or Socioeconomic Development?” Population and Development Review, 36(3), pp. 419-440.

      The final paragraphy concludes:

      In recent years the debate on China’s demographic future has focused on whether and how to alter the now three-decade-long one-child policy (Morgan et al. 2009; Zeng 2007; Wang 2005). Launched as an emergency measure to achieve a purely economic goal (Greenhalgh 2008), the policy paid little attention to its social costs and the long-term demographic effects, such as accelerated population aging, distorted sex ratios, and changes to the Chinese family and kinship system (Cai and Lavely 2003; Wang 2009; Zhao and Guo 2007). One of the main obstacles to reforming China’s birth-planning policy is a concern that fertility in China would rebound to a much higher level should the policy be relaxed (Jiang 2006; Zhang 2007). This concern in turn is based on the belief that the low fertility achieved in China is a result of the high-pressure policy. The analysis above suggests that such a belief is based on a misconception. Below-replacement fertility in China, as in other societies, is driven to a great extent by the increasingly global forces of social and economic development.

  4. The next time you buy shoes, check the label. Ditto clothing. More and more is Made in Vietnam (shoes) or Indonesia and especially Bangladesh (clothing) because wages are lower than in China.

    • This is what I am worried about (rather I guess the Chinese government is worried about.) Although China still has a lots of people, due to the decline in the labor force population, the cheap Chinese labor might not be more competitive than other countries such as India and Vietnam. Allowing more than one child policy will take a long time to take effect. During this time period, other countries can offer better prices, which may lead to slower economic growth in China.