China's abundant supply of cheap labor has played an important role in its remarkable economic and social development. Recently, however, China has experienced a labor shortage and rising wages, implying that the country's long‐lasting competitive advantage based on its “unlimited” labor supply and low costs is vanishing. We find that structural demographic changes, regional economic growth disparities and the household registration system may have caused the labor shortage. Furthermore, China's continued low wages, relatively low labor share of gross national income, declining proportion of household consumption to GDP, and productivity improvements as well as increasing unit labor costs can be used to explain the recent wage increases. The dramatic development of its labor market signals that China is entering a new stage of economic development. The country's prior successful model of economic development needs to be adjusted to adapt to the new situation in its labor market to achieve sustainable economic development.
The rapidly rising wages and renminbi (RMB) revaluation have attracted lively debate about whether China can continue its rapid economic growth by relying on labour‐intensive goods exports. By comparing the competitiveness in labour costs between China and ASEAN countries, with a particular emphasis on unit labour costs, we find that China has lost its competitiveness in labour costs relative to ASEAN countries. However, our results show that some regions in China, such as the northeast and northwest, still have an advantage relative to ASEAN countries. Thus, China can duplicate Akamatsu's Flying Geese Paradigm by transferring labour‐intensive manufacturing industry from its coastal areas to non‐coastal areas.
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