China’s minimum wage

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Early this month a number of Chinese provinces raised their minimum wage by one-third, and the Director of  the Wages and Labour Institute at China’s  Ministry of Human Resources and Social Security has suggested that it ought to be possible to double wages within 5 years. Normally economists would be worried about the employment effects of such a large increase in legislated wages, but in China there is reason to believe that these wage increases will have a positive effect on the economy. As with any economy, the key to growing wages without having employment fall is rising productivity. In China this productivity needs to be underpinned by rising human capital, and the physical capital to support growth. In both areas there is no reason to believe that reason trends won’t continue to support strong labour productivity growth. The other factor supporting strong wages growth is the fact that the wage share of income has steadily declined in recent years, from 53% of GDP in 1999 to below 40% today. By comparison this share is 57% in the US and 51% in Japan (so who’s  the communist here!). Raising wages will of course reduce the profits share, but there seems to be room for profits to shrink without harming employment too much. As always with reform in China all of this is a bit of a balancing act – higher wages require continued investments in education, infrastructure, and also a slow appreciation of the exchange rate – fast appreciation and fast wages growth would be place too much risk on profits and employment. But if wages do double in the next 5 years the implications for the global economy are very positive. That would lead to a huge increase in China’s middle class, and to consumption spending and imports. This is likely to  have a much greater impact on closing the US-China trade deficit than changes in the RMB/USD exchange rate.

3 Responses to "China’s minimum wage"
  1. The minimum wage in Shanghai was just increased to 1120 RMB/month – around US$180 or roughly US$2200/year. Definitions of the middle class vary but a doubling of that number would give even those on minimum wages some discretionary income. There’s no official data on numbers of Chinese on the minimum wage, but the Ministry is also expecting other lower income salaries to rise…pushing many into middle income.

  2. It is not clear that an increase in wages will cause “profits to shrink” as China is the Low Cost Producer – if costs for all participants rise also, due to the higher wages, then all the firms will be able to raise their prices to cover their costs leaving their margins (and profits) little affected.
    It is not clear that higher wages will have a greater impact on closing the trade deficit than change in the exchange rate.
     
    The reason the trade deficit exists is China’s deliberate policy of maintaining a capital account deficit which produces a current account deficit (the external sector must be in balance). We know this because China is constantly buying up excess dollars (treasuries etc.). Were the Chinese to stop buying excess dollars, the RMB would appreciate and the trade deficit would dissipate.  This would have a more certain impact than the effect of wages doubling and would also reduce the inflationary pressures within the Chinese economy.

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