Gilles Sabrie for The Wall Street Journal
    Workers at a shoe factory in Wenzhou.

    China’s world-beating growth has been built on the backs of hundreds of millions of people willing to work for wages low enough to make a labor boss in the West weep. Economists in and out of China have warned that model is bound to play out as China eventually runs out of surplus labor.

    But when?

    Two International Monetary Fund economists say China will become a labor-shortage country sometime between 2020 and 2025—and there isn’t much China can do about it. In economist jargon, that’s when China will reach the “Lewis Turning Point,” named for British and St. Lucian Nobel laureate Arthur Lewis.

    That’s the point when labor becomes scarce enough that wages rise sharply, industrial profits are squeezed, investment falls—and developing countries hopefully have figured out a way to grow without relying on cheap labor.

    If China manages the change skillfully, IMF economists Mitali Das and Papa N’Diaye say, it would be a boon to itself and the rest of the world, “potentially raising output particularly in those countries within (China’s) supply chain (mainly emerging Asia) and commodity exporters.”

    Wealthy countries that export to China would also benefit, but less so, the economists say.
    But a lot of countries, particularly those in Latin America and Africa, don’t manage to round the Lewis Turning Point at all and get stuck at a relatively low level of development.

    What’s most striking about the IMF paper is that there’s relatively little China can do to push back the Lewis Turning Point and give the economy more time to adjust.

    “Demographics will be the dominant force driving the depletion of surplus labor,” they write.

    It has long been predicted that China’s working-age population will decline because of a declining birth rate and Beijing’s one-child policy. The IMF economists’ model uses United Nations forecasts that the decline will begin in 2020.

    But that forecast now looks optimistic. Earlier this month, China’s National Bureau of Statistics said the size of the working-age population fell by 3.5 million to 937 million in 2012—a shift to a shrinking worker pool from the growing workforce that buoyed Chinese growth throughout the last decade.

    The IMF examines four possible policy responses China could pursue to delay running smack into the Lewis Turning Point. Trying to boost fertility won’t do much because it takes a long time for babies to grow into workers. Liberalizing the financial sector by increasing interest rates for depositors would make things worse because people will feel richer and have less incentive to work, further reducing the workforce. Ditto for raising productivity, which would make companies more profitable and increase their need for workers.

    What could help, they write, is increasing labor mobility by reforming China’s work registration system, so more workers in urban areas are entitled to full social benefits. That would accelerate the movement of workers from rural areas to urban ones, where the low-wage factory jobs still predominate. That would delay the turning point by about five years, they figure.

    Still, the Lewis Turning Point is likely to come within the tenure of China’s two new top leaders, Xi Jinping and Li Keqiang. For China, that means a rough road ahead.

    – Bob Davis



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