Harnessing China’s Untapped Labor Supply

February 13, 2015 Xin Meng

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.

About the Author

Xin Meng

Professor of Economics, College of Business and Economics at Australian National University (ANU); Fellow, Australian Academy of Social Sciences

author

Xin Meng is professor of economics in the College of Business and Economics at Australian National University (ANU) and a fellow of the Australian Academy of Social Sciences. She received her PhD in economics from ANU in 1993 and is also a graduate in economics of the Chinese Academy of Social Sciences. She has published papers in Science, Journal of Economic Perspectives, Journal of Labor Economics, Journal of Public Economics, Journal of Development Economics, Labor Economics, Oxford Economic Papers, Journal of Development and Cultural Change, Review of Income and Wealth, Journal of Comparative Economics, and Journal of Population Economics. Her research has clustered around four main themes: (1) the Chinese labor market during transition, including changes in income distribution and poverty, the impact of labor market rigidities on economic development, and the effect of economic shocks on consumption; (2) the influence of institutions and culture on gender discrimination in China, Taiwan, and developed countries; (3) the economic implications of rural-urban migration in developing countries and the economic assimilation of immigrants in developed countries; and (4) the economic implications of major catastrophes, such as the impact of the Chinese famine and Cultural Revolution on lifetime earnings and the welfare of individuals and families.