Understanding China's Labor Unrest

'The idea of a 'Lewisian turning point' derives from a classic 1954 paper by Arthur Lewis called 'Economic Development with Unlimited Supplies of Labour'. That paper is 'widely regarded as the single most influential contribution to the establishment of development economics as an academic discipline'. It also won Lewis the Nobel Prize in economics.

In it, Lewis developed a dual economy model to explain economic take-off in developing economies. In his model, developing economies comprise a capitalist sector and a subsistence sector, and economic development involves the transfer of labour from the latter to the former. Key to the model is the argument that 'an unlimited supply of labour may be said to exist in those countries where population is so large relatively to capital and natural resources, that there are large sectors of the economy where the marginal productivity of labour is negligible, zero, or even negative.'

Under these circumstances, the capitalist sector can tap this supply of under-employed (or surplus) labour from the subsistence sector, and moreover can do so at a constant wage. This allows a rising share of profits in national income. These profits are then re-invested in the capitalist sector, and the large supply of surplus labour means that this increased rate of profit and investment can be sustained, powering the transformation of the economy.

Eventually, a turning point arrives when the supply of surplus labour is exhausted, at which point wages start to rise, the rate of profit falls, and the rate of investment slows.

'

'Some of the commentary to date has tended to focus on the potential implications for international supply chains and on the relocation of footloose manufacturing to economies where labour costs are lower. Other pieces have asked whether it could signal an end to cheap Chinese imports and a rise in the China Price (although some China analysts argue that the share of labour costs for many of China's exports is so low that any impact of even quite large pay rises will be very modest).

A more general point is that higher wage growth â?? and any consequent shift towards a higher wage share in China's national income â?? would be an important step forward both for China's own development and for the much-discussed objective of global re-balancing.

'