Why A Labor Shortage Is Good News For The Chinese Economy

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Why A Labor Shortage Is Good News For The Chinese Economy

English: "Thousands of workers in this fa...

English: “Thousands of workers in this factory assembling and testing fiber optic systems. In many places of the Chinese economy, human labor replaces automation (in contrast to Japan, for example).” (Photo credit: Wikipedia)

China may be turning from a labor surplus to a labor shortage economy.

According to data released by the Chinese National Bureau ofStatistics over the weekend, population of working age (15-59) was 937.27 million in 2012, a decrease of 3.45 million over the previous year.

While this decline is negligible in percent terms, it comes at a bad time, with the Chinese economy growing at a rate close to 8 percent. That’s where the labor shortage arises.

According to China observer Shaun Rein, the country is already in a labor shortage, which began during the Great Recession, as many American and European companies stepped up investment in China to offset a sales slow-down in their home markets.

“Technology companies such as MicrosoftIntel, and Google—even after it stopped offering its search engine in China—have embarked on huge hiring sprees or have set up research and development centers there,” writes Rein. “Citigroup announced it would triple its head count on the mainland within three years to 10,000, not for back office needs but to cater to local clients. Pepsi, Coca-Cola, and Disney all have announced multibillion-dollar investments. Investment banks like Goldman Sachs are increasing their business in China even as they pare their ranks in New York and London.”

In the short-term, a labor shortage is bad news for the Chinese economy, for two reasons. First, it is expected to push wages and inflation higher, and may eventually force the country’s central bank to raise interest rates, hampering the country’s economic recovery.

Second, higher wages will undermine China’s competitive advantage in the Asian region, as domestic companies are forced to cope with competition from low-wage countries like Vietnam.

In the long-term, a labor shortage is good news for the Chinese economy, as it will induce Chinese companies to innovate.

As I discuss in China Against Herself, which I co-authored with Yuko Arayama, labor shortages create the urgency for labor-raising techniques – and that raises labor productivity and living standards, stimulating innovation at the same time.

That’s what has happened in Great Britain, the United States and Japan during periods of labor shortages – the rise of labor-saving techniques and innovations — and without substantial social friction.

The bottom line: Labor shortages may be bad for the Chinese economy in the short-run, but they are good for the long-run. They provide the impetus for the country to make a Great Leap Forward, from imitation to innovation, as Great Britain, the US, and Japan have done in the past.

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