Journal of Economic Perspectives—Volume 26, Number 4—Fall 2012—Pages 57–74 The End of Cheap Chinese Labor Hongbin Li, Lei Li, Binzhen Wu, and Yanyan Xiong n rrecentecent decades,decades, ccheapheap llaborabor hashas playedplayed a centralcentral rolerole inin thethe ChineseChinese model,model, wwhichhich hhasas rreliedelied onon eexpandedxpanded participationparticipation iinn wworldorld tradetrade aass a mmainain ddriverriver ofof I ggrowthrowth ((Lin,Lin, CCai,ai, aandnd LLii 22003;003; BBernsteinernstein 2004).2004). AtAt thethe beginningbeginning ofof China’sChina’s eeconomicconomic reformsreforms iinn 1978,1978, tthehe annualannual wwageage ofof a ChineseChinese urbanurban workerworker waswas onlyonly $$1,0041,004 iinn UU.S..S. ddollars:ollars: tthathat iis,s, 661515 rrenminbienminbi yyuanuan ddividedivided bbyy CChina’shina’s ooffiffi cialcial exchangeexchange rrateate ooff 11.68.68 yyuan/dollaruan/dollar inin tthathat yyear,ear, aandnd tthenhen ddeflefl atedated toto thethe 20102010 levellevel byby thethe U.S.U.S. GGDPDP ddeflefl aator.tor. ((TheThe ooffiffi cialcial exchangeexchange raterate waswas overvaluedovervalued atat thethe ttime,ime, bbutut iitt isis usefuluseful iinn mmeasuringeasuring tthehe ppricerice tthathat UU.S..S. cconsumersonsumers ppayay fforor CChinesehinese llaborabor eembodiedmbodied iinn CChinesehinese ggoods.)oods.) BBackack iinn 1978,1978, China’sChina’s wagewage waswas oonlynly 3 percentpercent ofof thethe averageaverage U.S.U.S. wwageage aatt tthathat ttime,ime, andand iitt wwasas alsoalso ssignifiignifi ccantlyantly lowerlower thanthan thethe wageswages inin neighboringneighboring AAsiansian ccountriesountries ssuchuch aass tthehe PPhilippineshilippines aandnd TThailand.hailand. TheThe CChinesehinese wwageage wwasas aalsolso llowow rrelativeelative ttoo pproductivity.roductivity. AAccordingccording ttoo CeglowskiCeglowski aandnd GGolubolub (2007),(2007), China’sChina’s “unit“unit llaborabor ccost”—wageost”—wage aass a ppercentageercentage ooff llaborabor pproductivity—relativeroductivity—relative toto thethe samesame ratioratio iinn tthehe UUnitednited SStatestates ddeclinedeclined ffromrom ooverver 7700 ppercentercent iinn tthehe 11980s980s ttoo aaboutbout 3300 ppercentercent iinn tthehe mmid-1990s.id-1990s. HHowever,owever, wwagesages aarere nnowow rrisingising iinn CChina.hina. IInn 2010,2010, tthehe annualannual wwageage ofof a ChineseChinese uurbanrban wworkerorker rreachedeached $5,487$5,487 iinn UU.S..S. ddollars—thatollars—that iis,s, 37,14737,147 yuanyuan ddividedivided bbyy tthehe ■ Hongbin Li is C.V. Starr Professor of Economics, Lei Li is a Ph.D. student, and Binzhen Wu is Assistant Professor of the School of Economics and Management, all at Tsinghua University, Beijing, China. Yanyan Xiong is Associate Professor, School of Economics and Management, Southeast University, Nanjing, China. All four authors are also affi liated with the China Data Center, Tsinghua University. Their email addresses are [email protected], [email protected], [email protected], and [email protected], respectively. Yanyan Xiong is the corresponding author. http://dx.doi.org/10.1257/jep.26.4.57. doi=10.1257/jep.26.4.57 58 Journal of Economic Perspectives eexchangexchange rrateate ooff 66.77.77 yyuan/dollar—whichuan/dollar—which iiss ssimilarimilar ttoo wwagesages eearnedarned bbyy wworkersorkers iinn tthehe PPhilippineshilippines aandnd TThailandhailand aandnd ssignifiignifi cantlycantly higherhigher thanthan thosethose earnedearned byby workersworkers iinn IIndiandia aandnd IIndonesia.ndonesia. CChina’shina’s wwagesages aalsolso increasedincreased fasterfaster thanthan productivityproductivity sincesince tthehe llateate 11990s,990s, ssuggestinguggesting tthathat CChinesehinese llaborabor iiss bbecomingecoming mmoreore eexpensivexpensive iinn tthishis ssenseense aass wwell.ell. TThehe openingopening sectionsection ofof thisthis paperpaper discussesdiscusses China’sChina’s risingrising wageswages inin moremore ddetail.etail. ForFor example,example, thethe increaseincrease inin China’sChina’s wageswages isis notnot conficonfi nedned toto aanyny ssector,ector, asas wwagesages havehave iincreasedncreased forfor bothboth skilledskilled andand unskilledunskilled workers,workers, forfor bothboth coastalcoastal andand iinlandnland areas,areas, andand forfor bothboth exportingexporting andand nonexportingnonexporting fi rrms.ms. WeWe thenthen benchmarkbenchmark wwageage growthgrowth toto productivityproductivity growthgrowth usingusing bothboth national-national- andand industry-levelindustry-level data,data, sshowinghowing thatthat ChineseChinese laborlabor waswas keptkept cheapcheap untiluntil thethe latelate 1990s1990s butbut thethe relativerelative ccostost ooff laborlabor hashas increasedincreased sincesince then.then. Finally,Finally, wewe discussdiscuss thethe mainmain forcesforces thatthat areare ppushingushing wageswages up.up. ForFor example,example, thethe reformsreforms inin thethe latelate 1990s1990s re-establishedre-established a fl eexiblexible llaborabor mmarketarket iinn CChina,hina, eenablingnabling fi rmsrms ttoo ppayay wworkersorkers aaccordingccording ttoo pproduc-roduc- ttivity.ivity. CChina’shina’s llaborabor fforceorce mmayay hhaveave aalreadylready rreachedeached iitsts ppeakeak iinn 22011;011; aandnd CChina’shina’s rrural-to-urbanural-to-urban mmigrationigration wwillill aalsolso sslowlow ddownown bbecauseecause tthehe rruralural yyoungoung aarere hhighlyighly mmobile;obile; aalmostlmost aallll rruralural yyouthouth iinn tthehe 116–206–20 aagege bbracketracket aarere aalreadylready wworkingorking ooffff tthehe ffarmarm ((Rozelle,Rozelle, HHuang,uang, ZZhang,hang, aandnd LLii 22008).008). TTherefore,herefore, ffutureuture iincreasesncreases iinn mmigrantigrant llaborabor mmustust ccomeome ffromrom tthosehose wwhoho aarere oolderlder oorr tthosehose wwhoho hhaveave eestablishedstablished ffamilies,amilies, wwhoho wwillill rrequireequire tthehe pprospectrospect ooff llargerarger wwageage ggainsains tthanhan mmigrantsigrants ooff tthehe ppastast iiff ttheyhey aarere ttoo fi nndd mmigrationigration wworthwhile.orthwhile. Rising Wages in China CChina’shina’s uurbanrban aareasreas hhaveave a ddualual llaborabor mmarket:arket: oonene fforor uurbanrban workersworkers andand thethe ootherther fforor llow-skilledow-skilled mmigrantigrant wworkers.orkers. UUrbanrban wworkersorkers ((bothboth sskilledkilled aandnd uunskilled)nskilled) hhaveave uurbanrban hukou ((householdhousehold rregistration),egistration), wwhichhich mmeanseans thatthat theythey aarere rregisteredegistered wwithith tthehe ggovernmentovernment aass llivingiving ppermanentlyermanently iinn ccities.ities. MMigrantigrant wworkersorkers hhaveave rruralural hukou, aandnd ttheyhey aarere vveryery mobilemobile iinn ttwowo aaspects.spects. First,First, ttheyhey lliveive temporarilytemporarily inin thethe pplaceslaces wwherehere ttheyhey wworkork dduringuring tthehe yyearear aandnd rreturneturn toto ttheirheir rruralural hhomesomes dduringuring tthehe CChinesehinese NNewew YYearear hholidaysolidays aandnd thethe peakpeak agriculturalagricultural seasonsseasons (Wang(Wang andand ZuoZuo 11999).999). AAlthoughlthough moremore mmigrantigrant wworkersorkers hhaveave chosenchosen ttoo sstaytay inin citiescities permanentlypermanently iinn rrecentecent yyears,ears, aann aaverageverage mmigrantigrant wworkerorker sspentpent 22.2.2 mmonthsonths iinn ttheirheir rruralural hhomesomes aandnd 9.89.8 monthsmonths inin off-farmoff-farm workwork awayaway fromfrom homehome inin 20112011 (2011(2011 SurveySurvey ofof Off-farmOff-farm LLaborersaborers bbyy CChina’shina’s NNationalational BureauBureau ofof Statistics).Statistics). Second,Second, thesethese workersworkers oftenoften cchangehange ttheirheir mmigrationigration ddestinationsestinations aandnd jjobs.obs. AAfterfter tthehe CChinesehinese NNewew YYearear hholidays,olidays, wwhichhich iiss a pperioderiod ooff oneone toto twotwo months,months, theythey returnreturn toto thethe citiescities toto work,work, butbut theythey aarere hhighlyighly llikelyikely toto changechange jobsjobs oror mmigrateigrate toto a newnew city.city. TheyThey alsoalso changechange jobsjobs andand llocationsocations wwithinithin a yyear,ear, wwhichhich makesmakes trackingtracking themthem iinn regularregular householdhousehold surveyssurveys vveryery ddiffiiffi ccult.ult. WWithith tthehe ddiffiiffi cultyculty ofof ssurveyingurveying tthishis particularparticular group,group, nono large-scalelarge-scale ssurveyurvey ddataata tthathat ccoverover aallll ChineseChinese workersworkers aarere aavailable.vailable. However,However, China’sChina’s NationalNational BBureauureau ooff SStatisticstatistics ddoesoes hhaveave ggoodood ddataata fforor uurbanrban wworkers.orkers. Hongbin Li, Lei Li, Binzhen Wu, and Yanyan Xiong 59 Figure 1 Real Annual Wages of Chinese Urban Workers (defl ated to 2010 prices) 40,000 10,000 37,147 RMB Left: Deflated by U.S. GDP deflator, U.S. dollars 9,000 Right: Deflated by China's PPI, RMB 35,000 8,000 30,000 7,000 5,487 25,000 6,000 U.S. dollars 5,000 20,000 4,000 15,000 3,000 10,000 2,000 1,004 U.S. dollars 5,000 1,000 2,607 RMB 0 0 1978 1982 1986 1990 1994 1998 2002 2006 2010 Source: China Statistical Yearbooks. Note: PPI is producer price index. IInn tthehe fi rrstst ttwowo ddecadesecades ofof thethe reformreform periodperiod fromfrom 19781978 upup toto thethe laterlater partpart ooff tthehe 11990s,990s, tthehe ggrowthrowth ooff wworkers’orkers’ wwagesages iinn CChinesehinese