The labor market in post-reform China: history, evidence, and implications; China's labor cost advantages are shifting but will remain formidable

Concern over China's growing economic power has focused attention on its prevailing wage, which--in spite of recent strong growth--remains a fraction of that of the industrialized countries. This paper analyzes the recent history and current structure of China's emerging labor market with the use of published econometric evidence of Chinese wage determination and with recent labor market, macroeconomic, and demographic data. The results indicate that wages of skilled Chinese workers will accelerate enough for the skilled wage gap with the industrialized world to narrow appreciably over the coming years. China's advantage in semi-skilled and unskilled labor costs, however, will continue for an indefinite period.

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The emergence of China as a global economic power has garnered increasing attention in news analysis and political dialogue. As shown in Figure 1, China's economic growth compared to global growth has been extraordinary, even considering the well-known flaws in Chinese gross domestic product (GDP) data. China's rise is all the more remarkable for its speed. It was not until 1978 that China began to lift the burdens of communist economic control by initiating an experiment with private ownership and markets.

Of great interest to the United States is the growing importance of China in the U.S. trade picture. U.S. imports from and exports to China have accounted for increasing shares of total U.S. imports and exports of goods and services (Figure 2). In 2003, China's rapidly growing bilateral trade surplus with the United States reached nearly $124 billion.

Two factors have combined with this remarkable growth performance to transform the Chinese economy into a magnet for foreign direct investment (FDI), which exceeded $53 billion in 2003. First, with a population of 1.3 billion and with the promise of economic reforms, China has enormous potential as a consumer market. (1) Secondly, wage costs in China are a fraction of those in the industrialized world. China's average annual wages in 2001 for both the economy as a whole and in manufacturing were under $1,400 at the current (fixed) exchange rate, even with wage growth above nominal GDP growth in the 1998-2001 period, and even with wages more than doubling between 1993 and 2001 (Figures 3 and 4). (2)

The consequence for the U.S. manufacturing sector of growing import competition from China and other low-wage giants has been a topic of considerable debate. On the one hand, Bernard, Jensen, and Schott (2003) found that plant survival, along with output and employment growth, is negatively correlated with the share of industry imports sourced from the world's lowest-wage countries. The unique finding of that paper is that it is the origin of imports rather than their overall level that is related to industry and plant reallocations over time. The authors find "statistically significant and economically meaningful links" between low-wage imports and plant outcomes. They estimate that a 10 percentage point increase in the share of low-wage country imports is associated with a 3.3 percentage point increase in the probability of plant death and a 1.3 percentage point decline in year-over-year...