Low wages dampen consumption

Sun Liping, China Daily, Asia News Network/Beijing

Against the backdrop of the Chinese economy's rapid growth over the past two decades or so, millions of ordinary workers remain underpaid.

The excessively low wage level is acting as a drag on further economic progress, preventing a switch in the economy's dependence from exports to consumption.

Statistics indicate that the percentage of wages in the country's GDP has been dropping steadily over the years.

The State revenue, for example, increased from 1.3 trillion yuan (US$160 billion) in 2000 to 2.6 trillion yuan ($320 billion) in 2004. The volume of total wages, however, failed to keep up with this GDP growth. In 1989, for instance, the proportion of total wages in GDP was 16 percent, but in 2003, this had slid to 12 percent. This shows that in 14 years, the wages of the masses have risen very slowly.

Disputes have arisen over the low-wage issue. Some argue that the wage level is dictated by supply and demand. Low wages mean there is excessive supply of labor while demand for labor remains relatively low.

So, they maintain, it is unnecessary to bother about working out minimum wage standards.

In addition, according to this point of view, raising the wages of ordinary workers would turn away foreign investors who invest in China because of low labor costs in the country.

Artificially raising the price of labor would also rob some workers of employment opportunities, holds this opinion.

In my view, however, the laissez-faire theory about labor price being dictated purely by demand and supply borders on legend.

Besides demand and supply, two other factors help determine the price of labor in modern-day market economies.

First is the government's intervention in determining wage levels. Second is the role played by trade unions.

At present, a mechanism that incorporates the functions of the government, the market and the society to balance various interests is yet to take shape in China. And the government's role in coordinating and regulating the market is far from desirable.

Under such circumstances, leaving the wages issue totally at the mercy of market forces is bound to lead to serious disequilibrium in benefit sharing.

The wide gap between the sharp GDP rise and the stagnant growth in wages best illustrates this point.

Viewed in a wider perspective, the negative effects of the low-wage stratagem over a long time stand out more sharply.

It is especially so in today's context when economic growth is being increasingly dictated by demand but subject increasingly less to the sway of supply.

It is rather safe to state that the bottlenecks that are dragging down the country's economic development today are more or less the outcome of the excessively low wages.

In the first place, low wages bring down the percentage of total wages in the distribution of national wealth, leading to abnormal relations in benefit sharing and social inequality.

According to the calculation of economist Zhong Wei, enterprises across the country can reap a total extra profits of 440 billion yuan ($54 billion) each year by pressing down workers' wages and spending less on their social security needs. In other words, workers are robbed of 440 billion yuan.

Second, slow income increases in the hands of urban and rural residents hamper consumption, especially consumption of durable goods such as houses, apartments and automobiles, which are deemed to be the new engines driving economic growth.

A weak market and dull consumption demand have become chronic diseases of the country's economy in recent years.

An example is offered by the fact that economic growth's dependence on exports are exacerbated rather than lessened.

In the final analysis, slow income increases lie behind all this.

The United States also ran into such troubles in the 1920s and 1930s but it managed to pull out of them eventually.

Universal wage increases proved to be one of the best means to shore up consumption demand for durable commodities. This, in turn, helped usher in a phase of durable-goods consumption. It also helped the growth of a massive middle class, introducing a brand-new social structure.

Third, an excessively low labor price hinders the course of urbanization, which has specific connotations in China -- millions of farmers flock to urban areas to work as construction workers, waiters, waitresses, security guards, or for other manual jobs.

It is this group of people which bears the brunt of low wages.

Without the identity as formal urban residents, who enjoy permanent residence permits in China, these people constitute the most disadvantaged group, at the mercy of employers who many a time randomly suppress already low wages and even default on payments.

For long, we have been singing praises of their contributions to urban development but have ignored the fact that they are terribly underpaid. To make matters worse, many have failed to see the long-term negative effects of all this -- low pay means low demand.

Many people realize that urbanization offers a way out for both issues related to rural areas as well as the smooth operation of the national economy. Urbanization, in the case of China, requires that the "mobiles," namely millions of farmers- turned workers, settle down in the cities.

The problem is: How?

It is simply impossible for them to support themselves and their families as "permanent urban residents" with extremely poor wages, often less than 1,000 yuan a month ($123).

In some cities, the urbanization process, with regard to migrant workers becoming formal urban residents, progresses pretty slowly despite the easing of restrictions on urban residency permits. Excessively low wages are the main reason for this.

True, it is by no means easy to shift the economy's heavy dependence on investment and exports to strong consumption demand overnight. But it is better for us to begin addressing the problem right now and come up with an effective mechanism than putting off the issue to some time later.

The author is professor with the Sociology Department of Tsinghua University.