The overall population and its age structure are the base of the labor supply. The current labor shortage is not a temporary phenomenon but signifies the coming of a turning point.

This is the transition from an underdeveloped to a developed economy. Before this, capital and labor are the drive for development; after this, economic growth depends on the increase in productivity. A few changes are currently under way in China.

First, both rural and urban areas are facing a shortage of labor. The new jobs added every year do not seem to have absorbed surplus laborers in the past few years.

Second, the wage level will increase for the average laborer. This has affected foreign investment and business operations to a certain degree.

Third, the high rate of personal savings will gradually decrease. The average worker's consumption habits change as wages increase. Together with the changes in the dependency rate and a more developed social security system, the high savings rate will decline.

Of course China's labor supply changes only incrementally. China's labor costs will still be low for a rather long period, compared with developed and many developing countries. The change in the personal savings rate will not happen overnight, either. It is still too early to worry about the Chinese economy's losing its comparative advantage and competitiveness.

This changing situation has put forward demands to change China's economic growth mode.

China should adjust to the change by cultivating greater productivity. When labor becomes scarcer, economic growth should be based on increased productivity. It is important to create a productive market environment for investors and enterprises so that rising labor costs do not increase prices.

Obstacles in the labor market should be cleared to keep the current comparative advantages for longer.

In urban areas, more employment channels should be opened. In rural areas, the further reform of the household registration system and the training provided to laborers can also expand the labor supply.

The advantageous period of the population bonus can be prolonged through adjusting policies. For example, increasing the retirement age increases the size of the workforce, which creates an added source for economic growth.

(China Daily 03/09/2007 page9)

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