China is running out of workers. Around 60 per cent of China’s workforce, or 469 million people, are known as rural. But it seems that a big chunk of these people – around 145 million – spent at least six months away from home last year, presumably working in towns and cities. It is thought that around 225 million people are needed for efficient agricultural production. On top of that it is thought around 84 million rural Chinese worked in non-agriculture for more than half of the year.
So put all that together and what do you get? Well, around 15 million spare workers. Capital Economics reckons we could be just three years away from running out of workers to migrate into the towns.
And that means China could be close to what is known as the Lewis Turning Point. This is a state in economic development, named after former Nobel Memorial Prize in Economics winner Ken Lewis, when industrial wages begin to rise quite rapidly as the surplus labour from the countryside tapers off.
So what are the implications of that? Well, quite a bit, actually.
There are some other points, too. First there is the spoilt brat syndrome, or is that a generation who are unwilling to work for little more than slave labour wages. Call it what you will, but it seems that younger Chinese are less enthusiastic about living six months of the year away in dormitory-type accommodation.
Secondly, in any case the Chinese population is ageing. The Chinese baby boomers – typically born in the 1960s and early 1970s – are not getting any younger. The one-child-per-family policy was introduced in 1978, meaning the first of this generation are now 32. In fact, the number of Chinese workers between 15 and 34 is now declining quite rapidly.
So what will happen?
In part, it seems that some companies will relocate so that they are closer to the supply of labour. This in turn will help make income distribution across China a little more evenly spread.
But what is clear is that Chinese wages will rise. The process has already begun, and one assumes that for the next few years Chinese wage growth will be faster than the growth in China’s GDP.
This change is a good thing. It is good for the Chinese themselves, of course, but it is also good for the global economy.
As wages rise, consumer demand will go up, imports will increase, global imbalances will, theoretically at least, start to ease.
But does this mean inflation, not only in China, but across the world?
Well, if cheap Chinese labour over the last decade or so led to cheaper products in the West, then the obvious answer to that question is that higher Chinese labour will indeed lead to more expensive products, and that globally prices will go up.
But you need to bear in mind that much of the pressure on commodity prices, especially oil and metals, has come from Chinese investment. If consumption takes over from investment as the driver of Chinese growth, then some commodity prices may well fall.
The Chinese are already great meat eaters, so rises in wages are not likely to lead to a significant increase in demand for meat.
So maybe we will see a reversal of the patterns seen in recent years: manufactured goods will increase in price, and commodities fall.
But two other factors may help to stop global inflation from getting out of control.
First of all, just because China is running out of labour, it does not mean she is running out of capacity to increase productivity. In fact, Chinese productivity per head is still very low relative to the West, meaning there is lots of potential to improve productivity. So, for as long as the increase in wages per hour does not rise faster than the increase in productivity per hour, inflationary pressures will be minimal.
But secondly, we forget China is not the only developing country in the world. There are plenty of workers across the developed world who could yet migrate from their countryside into towns, from farms into factories. The truth is, the global economy has lots of surplus labour.
It does seem, however, that the underlying factors that created the credit boom and then the crunch in the West are unwinding. Chinese consumption is set to rise, investment growth will slow down, meaning China’s trade surpluses with the US and Europe will surely fall.
But put these changes in China in the context of a shift in the global economy away from the great savings glut that built up over the last 30 years: see yesterday’s piece: Interest rates set to rise as economic tectonic plates shift – is this good or bad news?
Right now there are four major factors at work. There’s the shift in China. There’s the global shift towards investment and away from savings as the developed world beyond China starts to catch up with the West. There’s the retirement of the baby boomers. And finally there’s technology, as growing computing power and the Internet in turn lead to remarkable advances elsewhere, such as in genetic science.
The next decade or so will probably see more changes in the global economy than any other decade for a very long time indeed.
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