Recently there has been much talk in economic circles about China reaching the Lewisian Turning Point.

In a nutshell, this notion suggests that a developing country that achieves a surplus of agricultural labour can grow its industrial sector for years without wage inflation. The labor surplus comes from an increase in farm productivity, and the reduction in need for farm laborers.

The laborers then head up to the city and look for work. The salaries they look for is a function of the income they received before, and therefore they seek a salary that is lower than their true output. The country avoids salary inflation because there is an ongoing supply of such labourers. Productivity remains high until such time as the worker’s salaries increase to the level of their true output.

The Coming Challenge

The problem that China faces is that it may have reached the point where the endless supply of new workers ceases, and factories have to actually compete for labor. Then inflation kicks in, and the situation becomes more difficult for government and industry to manage.

In practice we can see that the surplus of labor is already ending on the east coast, and inflation has become a problem. Factories complain of a serious lack of workers after major events like the Chinese New Year holidays. Companies have responded by moving factories inland to the western provinces. They have also been forced to increase factory wages.

The Solution?

Readily available, cheap labor is now a part of China’s history, so China can no longer be described as a low-cost country. This has been the case for some time but low-cost-China is a meme that has not achieved any sort of critical mass. No doubt it’s hard to change a narrative that has worked so well for so long for both the media and the Chinese government.

The reports that I have seen suggest that this Lewisian Turning Point will become a big problem in 2009, and that after that time there will be a much more serious shortages of labor. The aging population seems to be a contributing factor here, with more and more dependents supplanting the working age population.

In this context, the governments decision to introduce China’s new labor law, and the implied focus on higher valued added industries, may actually be transformational. Inspired even.

The Lewisian Turning Point becomes an opportunity to move to the next level, not a problem to be endlessly debated by the dismal profession.