Adam Smith beats Mao in Rural China Labor Market

Recently, there have been reports of labor shortages in China's coastal manufacturing regions. A Sept. 30 article in the Farmers Daily provides some good economic analysis of the emergent labor scarcity.

The article notes that a July report from Zhejiang Province said employers were only able to hire 354,000 of the 603,000 they wanted, and a Shenzhen's labor shortage increased form 23,000 in April to 60,000 in June. The author asks, "Where did all those people go?" Moreover, there are seemingly contradictory reports of many rural workers who can't find satisfactory work and other factories who have no problem finding work.

The author argues that China doesn't have a shortage of labor; it has a shortage of cheap labor. The recent experience of factories hiring workers as commodities at rock-bottom wages is not the future of China. Rural Chinese people are gaining more skills and higher expectations for their lives. Moreover, they have more choices. There are more employment opportunities in cities in central or western provinces, or even in rural areas near their homes. Even agriculture is getting better--it's no longer the last resort. The article argues that China is entering a new stage where rural peasants no longer are consigned to a choice between grinding poverty in the rice fields or accepting low wages from factories in coastal cities.

The so-called labor shortage is a conflict between the diversity of choices available to rural migrants and the continued expectation of urban factory owners that peasants will still work for low wages.

The author points out that returns to labor and capital have been out of balance--labor gets a low return and capital a high return. He says some economists think a whole string of problems are due to this imbalance--overinvestment, trade surplus, curency appreciation, skyrocketing real estate values, high pollution, energy inefficiency. Upward pressure on wages may start to restore balance. The "backward" labor-intensive, polluting, energy-wasting companies that depend on low-wage labor may be driven out of business. Higher wages can wean China off its dependence on export industry by creating more domestic demand.

The Farmers' Daily argues that the "labor shortage" occurred due to laborers voting with their feet and the effects of the market's visible hand. Solid neoclassical economic analysis in the Communist Party's mouthpiece for peasants--Adam Smith prevails over Chairman Mao in China's countryside.