Beyond Demographic Dividends

Fang Cai

• Publisher: WSPC
• Year: 2013
• ISBN:
  9789814520898
• Topic: Scienze biologiche
• Subtopic: Scienza generale

This book presents empirical observations and theoretical thinking of the fundamental changes in the Chinese economy. It starts with a warning of the arrival of the Lewis Turning Point, which is empirically proven by disappearance of surplus labor force and a rapid increase in wages of unskilled workers. It further reveals that China's rapid population-aging trend is diminishing the demographic dividend that has kept China's economic growth rate high. Subsequently, it touches upon employment challenges that arise after reaching the Lewis Turning Point, further propelling urbanization, a balanced regional development, and so on. Finally, it introduces middle-income trap which is one of the biggest challenges China is facing, followed by recommendation of policies for the Chinese government to tackle the challenges ahead.

This book should be of great interest to graduates, undergraduates, researchers and specialists who follow closely the economic development and demographic transition of China, the world's most populous country.

Contents:

• The Arrival of the Lewis Turning Point:
  • How Many Turning Points will China's Economy Experience?
  • Finding the Arrival of the Lewis Turning Point and Its Policy Implication
  • Extended Reading: Demographic Transition, Demographic Dividend, and Lewis Turning Point in China
• The Disappearance of Demographic Dividends:
  • How China is Dealing with the Problem of “Growing Old Before Becoming Rich”
  • How China Responds to the Disappearance of Demographic Dividends
  • Extended Reading: Demographic Dividend: New Source of Economic Growth
• End of the Unlimited Labor Supply Era in China:
  • The Era of Unlimited Labor Supply Ends in China
  • The “Peasant Worker Shortage” Reflects the New Relationship of Labor Supply and Labor Demand
  • Maintaining Composure and Positively Responding to the Changes in Labor Relations
  • Extended Reading: Wage Increases, Wage Convergence, and the Lewis Turning Point in China
• Employment Challenges After Reaching the Lewis Turning Point:
  • Increased Urgency of Employment Challenges in the Long Term
  • The Implication of Wage Convergence in the Urban Labor Market
  • Promoting Healthy Development of China's Labor Market
  • Extended Reading: Growing Pains: What Employment Dilemma Does China Face at Its Lewisian Turning Point?
• Further Propelling Urbanization and Balanced Regional Development:
  • Awareness of the “Mezzogiorno Trap” in the Central and Western Regions
  • Facts and Models about the Urbanization of Peasant Workers
  • A Tale of Two Cities: Diversity in the Household Registration System Reform
  • Extended Reading: The Hukou Reform and Unification of Rural-Urban Social Welfare
• Avoiding the Middle-Income Trap:
  • Maintaining Sustainable Economic Growth Requires Giving Priority to the Development of Education
  • How to Deal with the Challenge of “Growing Old Before Becoming Rich”
  • The Crux of the Continually Increasing Income Inequality
  • Extended Reading: Is There a “Middle-Income Trap?” China's Theories, Experiences, and Importance

Readership: Graduates, undergraduates, researchers and specialists who follow closely the economic development and demographic transition of China.

Chapter 1

The Arrival of the Lewis Turning Point

1.1. How Many Turning Points will China’s Economy Experience?

In daily economic life, “turning point” or “inflection point” is a frequently discussed topic: people talk about the “turning point” when the housing market or stock market experiences directional changes and about the “turning point,” when there is shortage of peasant workers. In the economic road to modernization and affluent livelihood of its people, how many turning points will China experience? What is the meaning of each turning point? In fact, there are only three turning points with significant meanings in economic growth, and the passing of all of them will realize China’s economic modernization and the wealthy lives of the Chinese people. Before introducing these three turning points, there is a description of a typical dual economy development model.

William Arthur Lewis, the 1979 recipient of the Nobel Prize in Economics, observed that a developing country’s economy could be divided into two sectors: a traditional agricultural sector and a modern industrial sector. In the traditional agricultural sector, there is abundant surplus labor compared to land and other production input factors, resulting in much lower labor productivity compared to the modern industrial sector. At the same time, the modern industrial sector can extract the surplus labor from the traditional agricultural sector with fixed low wages during its growth and expansion. Labor supply is unlimited in the modern industrial sector, therefore, the rapidity of its growth and expansion fully depends on its ability to accumulate capital. This is the well-known process of dual economy development.

Note that wages can hardly increase until the characteristic of unlimited labor supply disappears. In addition, capital accumulation becomes the only bottleneck of economic growth, and governments aiming at accelerating economic growth usually use all possible methods to help accumulate capital. As a result, there will be a bias in their economic and social policies to protect investors instead of workers. In other words, reduction in income differentials can hardly be seen in the whole process of the two-sector economic growth. Simon Smith Kuznets, the 1971 recipient of the Nobel Prize in Economics, described this phenomenon: “with economic growth and increase of per capita income, income inequality is not reduced, but increases over a period of time.”

Fortunately, one important characteristic in the process of the two-sector economic growth is that the traditional agricultural sector shrinks and the modern industrial sector expands gradually, with an important factor that labor continually transfers from the primary sector to the secondary sector to promote this process. It is exactly this labor transfer that leads to the three consecutive turning points.

The first turning point. The higher the growth rate of the modern industrial sector, the faster it attracts labor transfer. Meanwhile, the rural population grows at a decreasing rate, which is reflected in a lower growth rate of the working-age population. As a result, the growth rate of labor demand will eventually exceed the growth rate of labor supply. Then, facing abundant, but less surplus labor, the modern industrial sector must increase wages if the growth rate of rural labor demand remains the same. According to Lewis’s definition, this is the “first Lewis turning point.” It turns out that labor supply is no longer unlimited after reaching this turning point, though it is not an absolute labor shortage. It is more important that firms begin competing for labor and the wages of average workers increase.

The second turning point. Kuznets did not imply a continual increase in income differentials, but described the relationship of economic growth and income inequality with an inverted U-shaped curve. With economic growth, income differentials first increase to its maximum, and then turn to decrease. Therefore, Kuznet’s turning point is a turning point of income distribution improvement. After reaching this turning point, income gaps decrease. Though the time at which this turning point is reached varies in different countries, it is related to the first Lewis turning point; the disappearance of unlimited labor supply leads to increases of average workers’ wages and incomes, which help to reduce income differentials. Theoretically, the two turning points coincide, but in reality, whether the two turning points coincide depends on government policies. If government policies follow the changes in the economic growth, i.e., on one hand, enhance protection of workers’ primary rights with necessary regulation, and on the other hand, maintain market selection and apply a more efficient incentive mechanism for labor transfer, then the two turning points should consistently coincide in theory and in reality.

The third turning point. This is an inevitable long-term result of the first two turning points. After reaching the first Lewis turning point, we know that there will be a labor shortage if wage is not raised. An increase in average workers’ wages and directional changes of government policies will result in reaching the Kuznets turning point, which implies reduced income gaps. With better incentive mechanism and methods, labor will still transfer from the low-productivity, traditional agricultural sector to the high-productivity, modern industrial sector until labor productivities in both sectors are the same. Then, we will face the second Lewis turning point — sometimes, it is also called the commercial point, which indicates the disappearance of the dual-sector economic structure and the completion of the dual economy development process.

It was once said that we only need three thumb rules to understand the economic phenomenon. The three turning points mentioned above are such analyzing tools. In this framework, we will learn that the recently observed shortage of peasant workers is not an irrelevant phenomenon in economic growth; we will learn the significance of enacting the Labor Contract Law of the People’s Republic of China; and we will also learn that accelerating a series of reforms, including the household registration system reform, is important to extending the labor migration from rural areas to cities and to ultimately lead China’s transformation into an integrated, modernized economy.

1.2. Finding the Arrival of the Lewis Turning Point and its Policy Implication

The finding on the arrival of the Lewis turning point was hyped by news in 2007, but I actually raised the finding at an earlier time. Though most of my colleagues opposed it, I continued researches on this topic without participating in any arguments, because those who opposed this theory generally did not do any empirical analysis, but only raised opinions. Without serious empirical analysis, there is no ground to build any valid debate or argument. Both Australian National University and the Asian Development Bank held symposiums on the theme of the Lewis turning point, respectively, organizing people to criticize this finding. However, it also proves that the finding is critical for the analysis of both Chinese and Asian economies.

According to the definition by Arthur Lewis, the arrival of the Lewis turning point does not imply an absolute labor shortage, but a labor shortage with constant wages. Based on this definition and our current observations, I suggest not doubting this finding in policy analysis. However, it is free to argue for academic purposes since the nature of academic research is to seek common ground and reserve difference.

There is a policy implication for the arrival of the Lewis turning point. When finding that the Lewis turning point is imminent, I did not intend to underestimate the importance of employment, but instead, focused on raising three questions that we should pay attention to: (1) wage will rise at an increasing rate; (2) labor relations will experience acute change; and (3) it is extremely urgent to change the development pattern. No matter which finding is right, the problem becomes more obvious now, calling for attention to relevant phenomenon from policy makers and making use of economic and social development laws to solve the problem. I understand that policy makers who disagree that the Lewis turning point arrived are concerned that people will, in reality, overlook employment pressure. However, more evidences have shown that admitting the imminent Lewis turning point helps sharpen our thinking, preventing anyone from arriving at a trivial conclusion on employment.

The arrival of the Lewis turning point and its policy implication

The arrival of the Lewis turning point is the inevitable result of demographic structure changes. From the long-term labor supply and demand relationship, the increment of China’s working-age population is decreasing over the years, at an annual rate of 13.6% from 2004 to 2011. This new trend, where the growth rate of labor demand exceeds the growth rate of labor supply, can be described with the concept of the Lewis turning point.

The arrival of the Lewis turning point is not a bad thing, but indicates the disappearance of the dual-sector economic structure (though it will take a long time for the disappearance of the dual-sector economy structure after reaching the turning point). It is shown as: (1) continual peasant worker shortages determined by the long-term demographic structure, which cannot be simply explained by cyclical and partial factors; (2) the increase of average workers’ wages, which is a continuation of the wage increase trend since 2004 and is directly related to the new labor supply and demand relationship, the new generation peasant workers’ expectations, and the improvement of rural family lives; and (3) new change in labor relations, which is reflected as the aggravation of conflicts between workers and firms.

The British magazine The Economist reported this argument recently, which was based on my previous paper and foreign scholars’ retelling. The report suspected that it is too early for China to reach the turning point. Lewis did predict several possibilities for an early arrival of the turning point, but I do not think this is the case in China. So far, the wage increase has not exceeded the increment of the marginal product of labor.

First, average workers’ wage increase and the improvement of labor productivity are synchronous in the past 10 years. Premier Wen Jiabao emphasized on this principle, and it should also be strictly followed in the future. In fact, Japan’s national income doubling plan, made decades ago, also emphasized the support from the increase of labor productivity.

Second, since the wage increase was lower than the increment in the marginal product of labor in an earlier period, there will be space for a more rapid wage increase in this period with peasant worker shortages. It is a good time to adjust income distribution, improve the primary income distribution, and increase the “two proportions” (the proportion of residents’ income in the national income distribution and the proportion of workers’ remuneration in the primary income distribution). China should not miss this opportunity because of unnecessary fears of the arrival of the turning point.

The groups facing employment difficulties in the labor market

The arrival of the Lewis turning point does not imply that employment difficulties will spontaneously disappear. China should pay great attention to employment not for the reason that labor supply exceeds labor demand. In contrast, more specific policies can be made if China turns its attention from the relationship of aggregate labor supply and aggregate labor demand to the main groups with employment difficulties in the labor market. During the financial crisis, the State Council and local governments paid great attention to the employment difficulties of peasant workers, college graduates, and unemployed urban residents. Since the three groups are related to three types of employment difficulties or unemployment (cyclical, structural, and frictional unemployment), the main problem in the new pattern of labor market can be targeted if the three groups’ employment problems are solved.

There are two major changes in the employment of peasant workers. One is that agriculture is no longer the reservoir of surplus labor. Mechanized production and socialized management greatly reduced labor demand in the agriculture sector. From 2002 to 2008, labor per mu for rice, wheat, and corn production was reduced by about one third. The other is the generation replacement of peasant workers, that over 60% of peasant workers were born after 1980. The new generation of peasant workers cannot and does not intend to farm, which leads to irreversible labor transfer.

The employment difficulties that peasant workers face are cyclical unemployment shocks, which are reflected in the earlier home return during spring festival in 2009 and the shortage of peasant workers after spring festival in 2010. It is very important and urgent to provide them with more stable employment and the same labor protection (such as social security and employment assistance) as urban residents. Urbanization of peasant workers and their families brought by the household registration system reform can comprehensively improve employment in the labor market.

The employment difficulty that college graduates face is structural unemployment, which is caused by mismatches between their skills and the labor market demand and gaps between their job expectations and the real job vacancies. Appropriate adjustment of education structure, reform in higher education, job training, and other employment assistance services are the key to solving the problem.

Unemployed urban residents are characterized as older residents lacking in renewed skills. They are usually reemployed in unskilled job positions after their layoff. Since this group faces natural unemployment, which is the structural and frictional difficulties, the most important assistance to this group is to provide job training, profession introduction, and other services as well as increase social security coverage.

Trend in changes of labor relations

The experiences of western countries and developed Asian economies show that an obvious sign of the imminent Lewis turning point is the rapid changes in labor relations. With the new labor relations, workers are more conscious of guarding their rights for increasing wages and benefits and improving working conditions, while firms lack willingness to improve, which will result in an inevitable partial conflict between workers and firms.

Therefore, the current conflicts between workers and firms in China, such as strikes, are regular and inevitable. They should be considered the “growing pains,” which cannot be, and are impossible to, avoid. More generally speaking, in the transition from a middle-income country to a high-income country, China faces as many challenges as it faced during the upgrade from a low-income country to a middle-income country. When the labor relations change in a society, conflict between workers and firms will usually be triggered or revealed. Meanwhile, people raise expectations of income increases, while a group of them will face difficulties in the adjustment. For example, during the U.S. manufacturing industries’ transferring process abroad, many domestic workers were laid off and were unable to find new jobs. With every cyclical economic fluctuation that causes large manufacturing industry migration, employment is usually not recovered — so-called “jobless recovery.” China is suggested not to set up labor market institutions to solve the problem and to prevent the conflicts. I think it is wrong to ignore or suppress the conflicts between workers and firms, since it is an “ostrich strategy.”

Western countries, Japan, and South Korea have become high-income countries, while many Latin American countries are still in the middle-income trap. One important reason is how they learn from the “growing pains.” Failures in Latin American countries were due to their populism policies, which made inflated promises and greatly raised the people’s expectations. In the meantime, these countries neither dared to hurt vested interests nor kept their promises, which resulted in increased income differentials. Therefore, they had to turn to coercion policies that led to social unrest. In contrast, those developed countries painfully set up a complete labor market institutional framework that solved the conflicts and oppositions between workers and firms when friction between workers and firms was aggravated. There was no other choice for them, though this one was costly. Regulating and coordinating the relationship between workers and firms within the labor market institutional framework is the only way to avoid transferring oppositions between employees and employers to firms and workers’ dissatisfaction with the government.

Since 2004, while keeping the flexibility of labor market, the central government and local governments have made great efforts in improving social protections through legislation, law enforcement, minimum wage, wage guidelines, and other labor market institutions, as well as the social security system. Western countries always try to find a panacea that simultaneously solves the flexibility and security of the labor market — they even invented the compound word “flexicurity.” China’s practice is very successful because the labor relations have, so far, been in control. China’s experience is acknowledged by the world and has the advantage of backwardness in institutions building.

Compar...

Table of contents

• Cover
• Halftitle
• Series on Chinese Economics Research
• Title
• Copyright
• Preface
• Contents
• Chapter 1 The Arrival of the Lewis Turning Point
• Chapter 2 The Disappearance of Demographic Dividends
• Chapter 3 End of the Unlimited Labor Supply Era in China
• Chapter 4 Employment Challenges After Reaching the Lewis Turning Point
• Chapter 5 Further Propelling Urbanization and Balanced Regional Development
• Chapter 6 Avoiding the Middle-Income Trap
• References
• Index