Harnessing China’s Untapped Labor Supply

In recent years, China has experienced a significant shortage of urban unskilled labor, the direct result of a reduced supply of labor from the rural sector. Many argue that this is a clear sign that China has reached the so-called “Lewisian turning point”—the moment when the supply of excess labor diminishes to a point that puts upward pressure on wages.

But Xin Meng argues that this is not correct. In fact, she suggests, the shortage of unskilled labor in Chinese cities is mainly a consequence of institutional restrictions, explicit or implicit, on rural to urban migration. And her policy memorandum provides evidence for this argument, drawn from the latest data. She discusses how a misreading of China’s “shortage” of urban labor as an absolute shortage, rather than as the result of institutional restrictions, has led to policies that could generate challenges to China’s future urbanization and economic development.

Her memo offers topline recommendations to deal with and ultimately correct these problems. Put simply, she suggests that Chinese policymakers need to reduce their overreliance on central planning, reform the system that currently constrains migration, and make other changes that reflect economic development needs rather than the bureaucratic assumptions of a plan.

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