China’s Rising Labor Cost: Myths and Realities*

China Economist - - Articles - Li Shi1 and Wan Haiyuan2 1BNU Business School, Beijing Normal University 2China Institute for Income Distribution, Beijing Normal University * Corresponding author: Wan Haiyuan, Room 403, Jingshi Conference Hall, Beijing Normal University, No. 19, Xinj

Abstract:

This paper examines whether China’s labor cost is too high and rising too fast from the five aspects of macro distribution, corporate cost structure, labor productivity, labor cost structure and international comparison, shedding light on the real causes of rising labor cost. On the basis of our analysis, we propose a few policy recommendations on China’s macroeconomy and corporate development.

labor compensation, corporate cost, macro distribution, burden of taxes and fees, operational efficiency

JEL classification: D33, J58, O15

Keywords:

The rising cost of labor in China over the recent years has drawn a great deal of attention from wage earners, businesses and the government alike. Public debates have focused on whether the labor cost is excessive and detrimental to China’s economy. As a basic element of economic growth, the cost of labor concerns not only the immediate interests of employees and businesses but the sustainability of the economy as a whole. In this sense, the issue of labor cost must be discussed in a broader context.

Over the years, China has followed an inefficient path of development fueled by high investment and consumption with low value-added. At the expense of wage, welfare and personal consumption, a high investment rate helped achieve the primitive accumulation of capital and kept the economy growing. Despite rapid progress of industrialization, labor compensation as a share in the economy has been low and has been eroded by excessive profit- taking. In the recent few years, however, the rising cost of labor coexists with the woeful performance of the corporate sector. Naturally, we may wonder whether there is any causality between the two. The answer to this question is of vital importance to decisionmaking in China’s economic growth pattern and determining what stage China’s economic

development is at.

In this context, we conducted a study on the cost of labor in China to answer the question of whether the cost of labor is excessive or justified and propose relevant policy recommendations. Against the backdrop of China’s economy entering the new normal characterized by slowing growth, restructuring and shift of growth momentum, we have arrived at the following assessments on the issue of labor cost in China.

1. Labor Cost Hiked to Some Extent 1.1 Labor Compensation as a Share in National Income Increased

According to the National Bureau of Statistics (NBS), China’s labor compensation increased by 11.7% on an annual average basis during 20092014, which exceeded the GDP growth rate during the same period by three percentage points. The share of labor compensation in gross national income increased from 49.0% in 2011 to 51.6% in

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