The End of Cheap Chinese Labor

Abstract

In recent decades, cheap labor has played a central role in the Chinese model, which has relied on expanded participation in world trade as a main driver of growth. At the beginning of China's economic reforms in 1978, the annual wage of a Chinese urban worker was only $1,004 in U.S. dollars. The Chinese wage was only 3 percent of the average U.S. wage at that time, and it was also significantly lower than the wages in neighboring Asian countries such as the Philippines and Thailand. The Chinese wage was also low relative to productivity. However, wages are now rising in China. In 2010, the annual wage of a Chinese urban worker reached $5,487 in U.S. dollars, which is similar to wages earned by workers in the Philippines and Thailand and significantly higher than those earned by workers in India and Indonesia. China's wages also increased faster than productivity since the late 1990s, suggesting that Chinese labor is becoming more expensive in this sense as well. The increase in China's wages is not confined to any sector, as wages have increased for both skilled and unskilled workers, for both coastal and inland areas, and for both exporting and nonexporting firms. We benchmark wage growth to productivity growth using both national- and industry-level data, showing that Chinese labor was kept cheap until the late 1990s but the relative cost of labor has increased since then. Finally, we discuss the main forces that are pushing wages up.