Lewisian Turning Point in the Chinese Economy

Comparison with East Asian Countries

R. Minami, F. Makino, K. Kim, R. Minami, F. Makino, K. Kim

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN: 9781137397256
• eBook ISBN: 9781137397263
• Topic: Business
• Subtopic: Business General
• Index: Business

This volume is concerned with labor market developments in China from a comparative perspective on selected East and South Asian countries. It closely examines the changing structure of China's labor market in the context of the Lewisisan turning point in ecomomic development.

Part I

Lewisian Turning Point in Asian Countries

2

Turning Point in Japan: Structural Change in the Labor Market and Significance

Ryoshin Minami

Under what conditions does surplus labor exist and what effects does it have on an economy? Is surplus labor inevitable in underdeveloped economies? Under what conditions will it disappear, passing the Lewisian turning point? To address these questions, this author uses the case of Japan for illustration.

When W. A. Lewis developed the theory of turning point in the 1950s (1954), Japan was still characterized as a dual economy consisting of a traditional subsistence sector with labor-using technologies and a modern capitalist sector with labor-saving technologies imported from developed countries. He pointed out, however, that surplus labor (unlimited supplies of labor) in its subsistence sector would disappear in the near future due to a rapid decrease in the birth rates (1958, p.29). Later, Fei and Ranis reformulated his theory in a mathematical model, stating that the turning point had already been reached in Japan in the period 1916–19 (1964, pp.129, 263–4). D. W. Jorgenson criticized the Fei and Ranis model, arguing that Japan’s surplus labor had already dissipated before 1917 (1966, pp.59–60).

A number of Japanese economists (Ohkawa, 1972, 1975; Ohkawa and Minami, 1964; Shinohara, 1962), on the other hand, considered that Japan did not reach its turning point until the beginning of the post-World War II period. This writer later estimated the marginal productivity of agricultural labor and compared it with agricultural wages and the size of surplus labor, concluding that Japan had passed the turning point in around 1960 (Minami, 1968, 1973). This demarcation has now been widely accepted inside and outside of Japan.

This chapter consists of five sections. Section I describes the criteria used for demarcating the turning point. In the following sections, statistical analyzes based on these criteria are presented. In Section II, changes in the real wages of agriculture and wage differentials are investigated. In Section III, agricultural wages are compared with marginal productivities of agricultural labor to estimate the size and proportions of surplus labor. In Section IV we argue about the impacts of surplus labor and the turning point on functional and personal income distribution. Section V concludes with a summary of the main results of this chapter.

I Methodology for finding the turning point

Five criteria

In finding the turning point, the following five criteria should be taken into account (Minami, 1973, pp.72–85).

Criterion 1: Comparison between real wages and marginal productivity of labor in the subsistence sector

Before the turning point (TP), the marginal productivity of labor (MPL) in agriculture is lower than its real wages (W) determined by the subsistence level of income (SL). After TP is passed, W becomes equal to MPL. This would be a rigorous test to find the turning point.

Criterion 2: Correlation between real wages and marginal productivity of labor in the subsistence sector

Close correlation between the two variables suggests that W is determined by MPL, even if they are not at the same level. Non-existence of a correlation suggests that W is determined by SL. This benchmark is less rigorous than the previous, but given limited availability of reliable data, this test can be more feasible.

Criterion 3: Movements in real wages in the subsistence sector

On the graph, which draws time series of real wages in the subsistence sector, it should show a kink at TP, or a shift from a constant (or slowly increasing trend) to a rapidly increasing trend. This may verify the relationship of W = SL and W = MPL, respectively before and after TP. Increase in SL (caused by a change in cultural, institutional factors) may appear less than that in MPL.

Criterion 4: Changes in wage differentials

Before TP, unskilled workers are supplied from the subsistence sector to the capitalist sector at SL. On the other hand, if urban skilled workers, who are not explicitly accounted in the Lewisian theory, are assumed limited in numbers in the initial stage of development, wage differentials between unskilled and skilled workers will tend to rise over time. However, after TP the differentials will dissipate.

Criterion 5: Elasticity of labor supply

Before TP, as unlimited labor supplies are available in the subsistence sector, the elasticity of labor supply is infinite (at a given SL, for simplicity). After TP, the intersectoral transfer of labor leads to equalization of wages. The elasticity of labor supply takes on a positive value between zero and infinite. With the wages of unskilled workers (measured on a logarithmic scale) along the horizontal axis and the number of workers supplied from the subsistence to the capitalist sector (also measured on a logarithmic scale) along the vertical axis the slope of the labor supply curve indicates the elasticity of labor supply. The point in time when the slope shows a kink from a sharp increase to a slow increase can be identified as TP.

Among these five criteria, Criterion 1 is the most direct and rigid benchmark for finding the turning point.

Remarks

In finding the turning point the following points should be noted (Minami, 1973, pp.69–72).

(1)Two sectors composing the Lewisian theory (subsistence and capitalist sector) should be substituted by respective industries in empirical studies. Usually agriculture (or primary industry) and manufacturing (or non-primary industry) are used as substitutes of the former and the latter respectively. A problem in this general practice is that small-scale enterprises in manufacturing (or non-primary industries) should be considered as belonging to the subsistence sector. This is because they are similar to self-managing firms that depend heavily on unpaid family workers and are not managed under the profit maximization principle. Due to the limited availability of statistics, however, the general method of industry substitution will be adopted in this chapter.

(2)Workers in either of the two sectors in the Lewisian theory are unskilled. Before TP, they are supplied from the subsistence sector to the capitalist sector at institutionally determined wages (unlimited supplies of labor). Skilled workers, however, who are not included in the theory, should be in short supply (limited supplies of labor) even before TP, and their wages tend to increase.

(3)Although TP is theoretically defined as a specific point in time, it is difficult to distinguish it as a specific point in time or even as a certain year since it extends over a number of years. In a time-series study, therefore, moving year averages should be used.

(4)Transition from a labor-surplus to a labor-shortage economy is a structural change in the economy or a trend phenomenon. Thus it should be distinguished from phenomena caused by economic fluctuations, such as business cycles with seven or eight years duration and long swings which have an approximate twenty-year cycle. There may be some cases in which the economy passes TP “temporarily” with an increase in the demand for labor in the capitalist sector during an upward phase of economic fluctuations. This cannot be taken as a real TP.

The importance of these points is evident by referring to the defects in the previous studies by other economists.¹

Fei and Ranis referred to an increase in real manufacturing wages as evidence for the turning point in 1916–19. There are two problems here. First, their wage statistics included skilled workers, which were limited in supply. Second, the period of 1916–19 saw the upward phase of a long swing and in the following downward phase wage increases were deterred. As shown later, real wages of agricultural laborers, which can be taken as the best substitute for unskilled workers in the subsistence sector, fell absolutely in the 1920s. Consequently, wage increases for the entire prewar period were very limited.

Jorgenson argued that Japan did not have unlimited supplies of labor even before 1917, because agricultural labor did not decrease in this period. His evidence, however, cannot be taken as evidence for the non-existence of unlimited supplies of labor. There is no direct relationship between a change in the size of the subsistence labor force and the availability of unlimited supplies of labor.

II Real wages and wage differentials

In this section, agriculture and manufacturing must be taken as standing for the subsistence and the capitalist sector, respectively, in the Lewisian dualistic economy model. We trace here changes in agricultural real wages (Criterion 3), in wage differentials between the two industries (Criterion 4), and in the value of labor supply elasticity (Criterion 5).

Agricultural real wages

Agricultural wages here stand for real income of “annual contract workers”² in this industry. Admittedly, these wage data may not be an accurate index since many agricultural workers are unpaid family workers. However, the job opportunities in agriculture available to sons and daughters other than the eldest sons are limited to unpaid family workers or agricultural wage workers. We assume that wages for annual contract workers are equal to implicit wages (opportunity earnings) for family workers and therefore, to all workers in this industry.

Figure 2.1 Long-term changes in ...

Table of contents

• Cover
• Title
• Introduction
• Part I Lewisian Turning Point in Asian Countries
• Part II Structural Change of the Labor Market in China: Facts and Factors
• Part III Summary and Conclusions
• Index