Surplus labour and Lewis turning points in China

Abstract

It has been widely recognised that China has had a large pool of surplus labour. However, despite its significant implications for wage levels and the Chinese economy, the current debates yield conflicting results as to whether a Lewis turning point has been reached. This paper clarifies a theoretical issue about the mechanisms of surplus labour absorption, subsequently indentifies two Lewis turning points and examines the factors that affect the reaching of these two points. It then applies the framework to China to study the labour absorption process and examines some of the likely implications of the removal of the Hukou system in terms of welfare and economic performance.

Keywords:

• dual economy
• surplus labour
• Lewis turning point
• China

JEL Classifications:

• J31
• 011
• 012
• 041
• 053

Acknowledgements

The authors thank the editors Xiaming Liu, Laixiang Sun, the anonmous referees, Prema-Chandra Athukorala, Xiaolan Fu, John Knight, Jun Li, Xiaohui Liu, Johanna Rickne, Kunal Sen and the participates at the CEA 2011 Dublin conference for valuable comments and suggestions. Xiaobing Wang thanks the Centre for Chinese Studies Research Fund for financial support.

Notes

1. The two contrasting sectors are also called subsistence and modern sector in this paper. See Wang and Piesse (2013) for more details on the classification of the two sectors.

2. If this sector were to employ all the surplus labour – this would require a lower wage, than the neoclassical ‘wage equals marginal product’ solution. This may drive remuneration below subsistence levels of consumption, which means that full employment by the industrial sector is not possible.

3. Ideally, there should be a distinction between the supply prices of migrants maximising their own income (their wages must be above household income per capita) and those maximising household income (their wages must be above household marginal product of labour). This distinction has big implications for the initial migration but as the discussion of Lewis turning points concerns the later stages of migration, this paper does not distinguish the two for simplicity.

4. Since there was no clear distinction between the two different types of surplus labour and the two turning points in the previous literature, which of the two turning points is the Lewis turning point is ambiguous. Fei and Ranis (1997) refer to the second turning point as the Lewis turning point, but much of the literature refers to the first as the Lewis turning point instead. Therefore, in discussing the exhaustion of surplus labour, the types of surplus labour must be clarified, and in the discussion of an economy approaching the Lewis turning point, the specific turning point being referred to must also be clarified, since this has significant implications in terms of differences in the likely rate of change of wages.

5. To be precise, the wage in the traditional sector begins to increase in Stage II if there is no labour growth in that sector. This scenario is studied in later section.

6. We assume that the industrial sector expands with employment expansion. That is, for simplicity, we do not consider jobless growth.

7. We assume, again for simplicity, there is no food constraint for now. That is, the urban industrial sector can supply its own food.

8. We also assume, again for simplicity, but this assumption will be relaxed later, that the productivity in agricultural sector does not change.

9. How much the modern sector expands in output and/or employment depends on the nature of technological change, the division of labour, the demand for its output and its terms of trade with respect to the traditional sector.

10. It is in this sense that the agricultural sector is known as the sink for surplus labour.