China's labour market is at a turning point
Sydney Morning Herald
Tuesday February 8, 2011
Professor Cai Fang destroyed his back during the Cultural Revolution, digging the vast maze of bomb shelters that now lies beneath Beijing. In those junior high school days he was an enthusiastic revolutionary."Revolution is the biggest festival of the working class, like Lenin said," Cai says. "I worked hard to avoid going back to the classroom."Professor Cai is a Communist Party member who never lost the egalitarian ideals that he sacrificed his body for, even if his injured back prevents him from flying economy class on international flights.He works harder than he ever did and has more than made up for the years he missed from school. He is still fighting to protect the working masses, if no longer from the nuclear threat posed by Soviet revisionists and American imperialists.Cai heads the Institute of Population and Labour Economics at the Chinese Academy of Social Sciences, where he is recognised as the world's leading authority on China's stunning labour market transformation.Critics used to scoff at Cai's warnings that China was entering a structural turning point characterised by diminishing surplus labour and growing bargaining power for workers. Now, with surveys showing the wages of China's 150 million internal migrant workers are rising 20 per cent a year, the debate has moved on from whether it is happening to what should be done.Cai is telling political leaders they should not fear the rising bargaining power of Chinese workers, but embrace it. He points to the stark lessons from neighbouring countries that have travelled this path."Some economists suggest China should not enact more labour laws or develop a system of collective bargaining because these might give more incentives for workers to demand higher salaries and act collectively against employers, and that would harm social stability and competitiveness in manufacturing," Cai says. "They have some influence. That's why I take every moment to talk about the comparison between Japan and Korea."The "Lewisian turning point" the Chinese labour market is now experiencing was reached in Japan in about 1960 and Korea in 1970, Cai says. The Japanese political system embraced those changes and developed institutional mechanisms such as a social safety net and collective bargaining to give workers a better say.Japan reaped the dividends. "Japanese income distribution very quickly improved."Korea chose a different path: "The political system and labour market institutions remained restricted. There was unrest, strikes and demonstrations for many years until the late 1980s. Korea paid a very high price politically."Professor Cai points out that China's transformation promises to be much more dramatic. That is because birth control policies have prematurely slowed the growth of the working-age population.The labour pool is projected to stop growing from about 2013 and then begin to shrink. Korea will reach the demographic tipping point in the same year, even though it is already rich. Japan reached that point in 1990, when its citizens were the richest in the world."Ageing before affluence poses the danger of the middle-income trap," Cai says. "You are losing your competitive advantage in labour but you haven't gained your competitive advantage in capital, technology and skills."Cai isn't game to say whether China's control-obsessed leaders will follow the Japanese path by loosening their grip. But at least they are listening. On December 27 Cai briefed the 25 members of the Politburo on the subject of the Twelfth Five-Year Plan, which he has spent the past year helping to draft and which will be published next month.The goals of the plan are clear and laudable, Cai says. The leadership aims to create a more sustainable economic model by weaning the country off its reliance on inputs (such as labour and capital) in favour of productivity. The aim is to shift away from exports, manufacturing and investment and make the service sector the new driver of growth.But whether policymakers can overcome their central planning instincts and allow the labour market to naturally achieve these goals is a different question altogether.