The wage transition in developed countries and its implications for China

TL;DR

This paper examines the wage stagnation in developed countries, compares it with China's wage-growth pattern, and predicts China's future economic growth based on labor transfer and productivity factors.

Contribution

It provides a comparative analysis of wage transition effects and introduces a model linking labor transfer to productivity growth, forecasting China's future wage and economic growth.

Findings

Wages in developed countries have plateaued over recent decades.

Labor transfer from agriculture to manufacturing drives productivity growth.

China's wages and GDP per capita have historically grown in tandem, unlike in developed countries.

Abstract

The expression "wage transition" refers to the fact that over the past two or three decades in all developed economies wage increases have levelled off. There has been a widening divergence and decoupling between wages on the one hand and GDP per capita on the other hand. Yet, in China wages and GDP per capita climbed in sync (at least up to now). In the first part of the paper we present comparative statistical evidence which measures the extent of the wage transition effect. In a second part we consider the reasons of this phenomenon, in particular we explain how the transfers of labor from low productivity sectors (such as agriculture) to high productivity sectors (such as manufacturing) are the driver of productivity growth, particularly through their synergetic effects. Although rural flight represents only one of these effects, it is certainly the most visible because of the geographical relocation that it implies; it is also the most well-defined statistically. Moreover, it will be seen that it is a good indicator of the overall productivity and attractivity of the non-agricultural sector. Because this model accounts fairly well for the observed evolution in industrialized countries, we use it to predict the rate of Chinese economic growth in the coming decades. Our forecast for the average annual growth of real wages ranges from 4% to 6% depending on how well China will control the development of its healthcare industry.