The result may come to resemble Mexico (or Turkey or South Africa), which is a case of solid macroeconomic performance, export success, and accumulation of physical capital, yet little growth in the formal economy due to the problems and forces that are unleashed by a rapidly growing informal economy and falling low-skill wages (Levy, 2008).ĭoes China’s government know about this problem? In some sense China’s government seems aware that its labor force is undereducated. Taken together, it is plausible that China is now on the brink of systematic wage polarization. Meanwhile, strong demand for skilled work means higher wages for those with an education. The rapidly rising supply of workers (with a relatively slow rise in the demand for services) seems to be ushering in an era that may be characterized by stagnating wages for unskilled workers. Informal employment is currently the fastest-growing sector in China, increasing from 33% in 2004 to 56% in 2017 (National Bureau of Statistics, 2018). Informal jobs also are plagued by uncertainty regarding working hours and earnings. The only destination for China's unskilled workforce-whether new entrants or laid-off workers from manufacturing or the construction sector-is the informal service sector, a sector that is characterized as having no (or low) benefits and low coverage under the nation’s labor laws. These factors suggest some significant fraction of China's unskilled workers may be increasingly unemployable as the formal economy upgrades. Construction jobs have tapered off as investment in infrastructure cools. Unskilled wages are much higher, and the lure of cheaper labor elsewhere (Wolcott, 2018) and China's massive push to automate is potentially beginning to render a large share of China’s low-skilled workers redundant (Li et al. But China's growth model is changing as the country has moved toward upper-middle income. During the 1980s, 1990s, and early 2000s, unskilled wages were low and there was growth in employment in low-cost manufacturing and construction (Lin, Fang, and Zhou, 1996 Wei, Zhuan, and Zhang, 2017). Why has China not noticed this problem in the past? In fact, a large population of relatively uneducated workers was not a problem as China was in the process of moving from low to middle income. According to census data (that is, the government’s survey of 1.4 billion people), there are roughly 500 million people in China between the ages of 18 and 65 without a high school degree-or 70% of the labor force (National Bureau of Statistics, 2010 Khor et al., 2016 Yu et al., 2019). How does China measure up? One of the most surprising facts in our book, Invisible China: How the Urban-Rural Divide Threatens China’s Rise, published by the University of Chicago Press (October 2020), is that the share of uneducated workers in China's labor force is larger than that of virtually all middle-income countries. Finally, when a large share of the labor force faces stagnating income, this curtails demand, hampers growth, and can eventually lead to polarization and social problems, such as more crime, higher rates of unemployment, and social unrest. And, since these unskilled workers cannot work in the high-end, formal economy, they crowd into the unskilled sector causing their wages to stagnate. When there are too many unskilled workers, they are unable to find employment in upgraded industries. Having a large supply of educated workers ensures that enough talent exists to meet and drive demand for the high-skill jobs that exist in high-income countries, thereby sustaining growth (Diacan and Maha, 2015). Conversely, in countries that have failed to exit middle-income status, the share is much lower-36% on average. The share of workers in the entire labor force (individuals between 18 and 65 years old) with a high school degree in countries that graduated to high income was 72% when they were still middle income (OECD, 2016). Will China be one of those countries that gets stuck in what is called the “middle-income trap”? One key factor that may account for why some countries “graduate” from middle income to high income while others “get stuck” is education. But a large group of countries has remained middle income for decades, seemingly unable to reach high-income status. Others, like Myanmar and North Korea, remain poor. Some countries that were high income in 1960 are still high income today, such as Denmark and Japan. Examples include South Korea, Singapore, Israel, and Ireland. According to World Bank data, only a handful of economies have risen from middle to high income since 1960.
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