When China will run out of cheap labor?

China most incredible economic stratospheric economical rise is nothing short of economical miracle of 2021. A prevailing view among economists [2] is that much of China's rapid economic growth can be attributed to two main factors: large-scale capital investment by both large domestic savings and foreign investment and rapid productivity growth. The two factors happened concurrently and created mutually amplified effects, rapid productivity lead to more investments, which led to more productivity gains.

Besides economical growth, both factors contributed to the largest social transformation resulting China lifting more than 100 million citizens from poverty and resulting in a mass movement of people from impoverished rural areas into metropolitan sections of the large cities. 

This article expresses quite different point of view with different foregoing conclusions about why this incredible growth happened and what is going to follow.

In my opinion, both contributing factors, were only possible because of vast amount of people available for work at a minimum wage, sending money back to their rural home. This facilitated both rapid growth and large domestic savings. In other words China achieved its economical miracle by tapping into the large pool of cheap labor. For the purpose of this article, let's treat the pool of cheap labor as a sort of economic growth fuel.

Chinese economy was burning "the fuel" of cheap labor at a steady rate of 30-50 million people per year, according to the World Bank numbers, [1] see the graph and the source below, i.e. that many people transitioned from living under $5.50 per day to above $5.50.

In the graph there are two lines, an orange line depicts a number of people in millions living under 1.9$ per day, and a blue line depicts number of people living under 5.5$ per day.

Starting with 1.1 billion population in 2000 and an annual stable birth rate of 0.59%, we would estimate number of people moving above poverty line is about 30 million per year.  This would mean that in around 2035 China will get have majority of the population living above poverty line. 

Factory workers make on average 47,500 CNY per year, which is $7600 annually or $21 per day. As you can see there is still a distance to go from $5.50 to $21.

Notice that there was a delay between when people living under $5.5/day start migrating from poverty and  when people with1.9$/day start their migration from extreme poverty. This would indicate that before Chinese economy can burn through extreme poverty, the migration of people living in poverty did not start. The delay between $1.9 and $5.5 was around 12 years.

By linear extrapolation we could estimate that there will be delay of about 60-70 years to arrive at $21 per day. That means that by 2075 China will burn out of pool of cheap labor. In reality amount of people living under $21 is decreasing exponentially, and assuming exponentially decreasing amount of time to transition masses of people from relative poverty to the level of average pay, we would arrive to about 25-30 years since 2015. 

Somewhere around 2045 majority of China population will approach living around $21/day. This is when we should expect conditions of so called "middle-income trap" to set.

This would imply risk of quite large economic shocks not only to the economy of China but the whole world, given how interconnected world economies are.

The above arguments are nothing new, and were published many times. There is a lot of times between now and 2045, and many economic assumptions can and will change, most obvious example is one-child policy is changing to three-child. But the latter only enforces conclusions of the article, as Chinese government is worried of rapidly aging population.

That said, the gist of this article is not to point to the obvious, but quite the opposite. We should not ignore the obvious fact that sooner or later China will run out of cheap labor.

Sources:

[1]https://www.bbc.com/news/56213271

[2] https://www.everycrsreport.com/reports/RL33534.html#:~:text=Database%2C%20April%202019%2C-,Causes%20of%20China's%20Economic%20Growth,gone%20together%20hand%20in%20hand.

[3]https://www.erieri.com/salary/job/factory-worker/china#:~:text=The%20average%20pay%20for%20a,education%20for%20a%20Factory%20Worker.