China’s working-age population is poised to decline, with big implications for China and the rest of the world
Fast-rising wages, worker activism, and intermittent labor shortages suggest that China, whose economic rise has depended on a vast supply of low-cost labor, is about to enter a period of widespread labor shortages.
As China crosses the line from being an economy with plentiful low-cost labor to one with higher-cost workers, the implications for both China and the global economy could be far reaching.
For China, the transformation will likely mean that its extensive growth model—which relies heavily on increasing the number of workers involved in production (called factor input accumulation)—cannot be sustained. As a result, the world’s second largest economy will likely change to an intensive growth model that uses resources more efficiently and would rebalance growth away from investment and toward private consumption. Successful rebalancing in China would, in turn, have significant positive global effects—including increasing output in commodity exporters and in the regional economies that now are part of China’s supply chain. Even advanced economies would benefit (IMF, 2011). Importantly, rising labor costs—which would affect prices, incomes, and corporate profits in China—would have implications for trade, employment, and price developments in key trading partners. For instance, foreign manufacturers may find it increasingly less profitable to produce in China, raising their domestic employment; Chinese goods could become less competitive in global markets, potentially raising export shares elsewhere; and rising Chinese prices could pass through to trading partners that rely heavily on imports from China.