Free exchange

(Wage) inflationary China

Better days ahead for low skilled workers?

FOR a while, China was credited with holding down prices of goods for developed nation workers while their incomes grew, contributing to a period of great prosperity for a broad swathe of the population. Then, as China's share of global trade grew, the goods remained cheap but the wages of low-skilled workers stagnated. Finally, developed nation wages continued to stagnate, while soaring Chinese demand and inflation began making goods more expensive. The prosperity model was flipped on its head.

But China might soon be a force for upward global wage pressure. This week's Economics focus reads:


But as well as boosting growth, the flow of workers from farms to factories has held down manufacturing wages—not only in China, but also throughout the world. The theory behind this was first expounded by Sir Arthur Lewis, an economist from St Lucia, who won the Nobel prize for economics in 1979. He argued that a developing country with “surplus” (ie, underemployed) rural labour could expand industrial employment for many years without causing wage inflation, because employers enjoy such a large supply of labour. During the first 50 years of Britain’s industrial revolution, real wages remained more or less flat while profits soared. Likewise in China, as millions of migrants have quit the countryside for urban factories and construction sites, the real wages of low-skilled workers barely rose during the 1980s and 1990s, despite big productivity gains; only recently have they increased rapidly.


Read the whole thing, and find out.

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