Labor Productivity in China

By Siming Xiao

 

In the year 2010, China’s GDP was growing close to 2.4% [1] while the labor productivity was at 10%; 8 years later today, GDP growth rate and labor productivity is at 1.5% and 6.85% respectively. However, China’s labor productivity is relatively low compared to other developed economies such as the US, the EU and Japan; it is producing an output of 7,318 USD per worker, below the world’s average margin of 18,487 USD per worker and drastically lower than United States 98,990 USD per worker, [2] which is only 7.4% of US’s productivity. As labor productivity is closely related to GDP growth, this poses a great problem to the Chinese economy.

 

Breakdown of the low productivity

 

One of the main reason that contributed to the low productivity is the build-up of inventory, where production rate exceeds the consumption rate. Firms that produce traditional manufacturing goods such as steel, automobile and vessels; as well as firms from the emerging industries that produce goods like polysilicon, carbon fiber begin to cut down on production, prices plummeted, driving firms’ revenue down and lowering wages across the board.

 

Since wages provide a form of incentive for workers to work harder, a lower wage greatly reduces productivity among the Chinese workers, especially the lower income workers. This will cause a vicious cycle where investors pull away from the Chinese market, lowering their wages once more, which further exacerbates the productivity problem.

 

Low productivity is also caused by a falling total factor productivity (TFP), also known as the multifactor productivity growth. TFP measures the residual growth in total output of a firm, industry, or national economy that cannot be explained by the accumulation of traditional inputs such as labor & capital and is often taken as a measure of long-term technological change or dynamism brought about by such factors as technical innovation. [3]

 

China had a TFP averaging at 5.9% from 1991 to 2000, but the value has since fallen to 3.6% between 2011 and 2015, and according to the Solow residual model, a low TFP indicates that technological change and innovation played a minuscule role in influencing growth.

 

In order words, the Chinese market does not benefit much from technological advancement, but relies heavily on fiscal policies and investment for growth. However, solely relying on these policies and not tapping into the potential of riding the technological wave has hindered the Chinese productivity and growth.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 1: China’s Multifactor Productivity Growth [7]

 

A lack of intellectual and land property rights is also a cause for China’s low productivity. Chinese firms and residents have been suffering under poor intellectual and property protections, facing eviction from homes to path way for new developments and experiencing fierce competition with the lack of patents and copyrights. [4] 

The lack of property rights in China greatly reduces investment, as people are unwilling to plunge headlong into economic activities when the output can be taken away or get undercut, the labor productivity is greatly reduced.

 

What’s next for the Chinese economy?

 

China needs to establish property and intellectual rights protection. As reported by Xinhua, “securing property rights raise people’s sense of wealth security, boost social confidence, foster positive expectations and raise the impetus for entrepreneurship and innovation by various economic entities” [5], which translate to increased investment and increased economic activities; largely improving the business sentiments and productivity.

In addition, China needs to focus on helping provinces with low productivity. According to the labor productivity ranking among the Chinese provinces; provinces along the eastern coast, namely Shanghai, Beijing, Tianjin, Suning, Guangdong, generally have a high productivity.

On the flip side, provinces near central west China like Hebei, Hainan, has a lower productivity. Therefore, to fully raise the labor productivity per worker, China has to allocate greater resources to help these provinces further down the west.

Fortunately, China has been occupying the top ranks in terms of productivity growth rates; expanding from 1,535 USD per worker in 1996, to 7,318 USD per worker in 2015, close to 4 times increase in just a decade. This optimism reflects liveliness and hope in the Chinese economy, showcasing the huge potential in its ability to grow and expand to take over as the world’s number one economy. [6]

 

 

References

[1] CEIC. (n.d.). China Labour Productivity Growth | Economic Indicators.  https://www.ceicdata.com/en/indicator/china/labour-productivity-growthAccessed on August 30, 2018

[2] Johnson, D. (2017, January 04). These Are the Most Productive Countries in the World.  http://time.com/4621185/worker-productivity-countries/Accessed on August 30, 2018

[3] B. (n.d.). Boundless Economics.https://courses.lumenlearning.com/boundless-economics/chapter/capital-productivity-and-technology/Accessed on August 30, 2018

[4] Hsu, S. (2016, November 30). China Is Finally Improving Property Rights Protections. https://www.forbes.com/sites/sarahsu/2016/11/30/china-improving-property-rights-protections/#926a286e5c8fAccessed on August 30, 2018

[5] China Focus: China releases guideline on protection of property rights. (2016, November 27) http://www.xinhuanet.com/english/2016-11/27/c_135861977.htmAccessed on August 30, 2018

[6] Li, Nian, Qiao, Deng. (2016). China’s labor productivity report (translated)  http://www.chinareform.org.cn/Economy/industry/report/201601/t20160122_242602.htm ]

[7] The Heritage Foundation: The Prospects for Economic Transition in China Are Questionablehttps://www.heritage.org/report/the-prospects-economic-transition-china-are-questionableAccessed on August 30, 2018