1. The Lewis Turning Point
Chinese Economy
The Lewis Turning Point

2. Lewis Model of Development
Structural change/transformation of a subsistence economy
Process of labor transfer and industrial growth
A two-sector (agriculture, industry) model
Assume
Surplus rural labor. Overpopulated living at subsistence level
Fully employed urban labor
Competitive modern sector

3. Lewis Model Traditional (Ag) sector Modern (Industry) sector
To produce food, use land, capital, and labor
Land and capital stock fixed
Surplus of labor
Marginal product of labor is zero
Ag. Workers paid the average product of labor
Manufactured goods produced with labor and capital
Capitalist industrialists reinvest profits (retained earnings) into business, augments the capital stock.

4. W_A is average real subsistence level wage in traditional rural agriculture sector.
W_M is wage in manufacturing, modern industrial sector. At this wage, supply of labor is perfectly elastic. S_L is the labor supply curve.
At W_M > W_A, modern sector can hire as many workers as it wants without driving up the wage.
There are millions of people in agriculture, thousands in industry.
Show labor and capital’s share at L_1. All capital income (profits) are reinvested.
The process of modern sector self-sustaining growth continues until all surplus rural labor is exhausted and absorbed into the modern sector. After that, additional workers move out of agriculture only at higher cost of lost food production, because then, the marginal product of labor is no longer zero. This is called the Lewis turning point. It is the point at which the labor supply curve to industrial sector becomes upward sloping.
The structural transformation has taken place.

5. Lewis Turning Point
When the excess labor in subsistence sector is fully absorbed into the modern sector, further capital accumulation begins to increase wages.
When the labor supply curve to industrial sector begins to slope up.
Japan’s turning point was 1960s. Share of labor in agriculture 50% in the 1920s to between 24 and 29% during the 1960s.

6. Golly and Meng
Has China reached the Lewis turning point?

7. Has China reached the Lewis turning point?
If yes, would we expect capital to move to Vietnam, Cambodia, etc? These are alternative low-labor cost locations.
Anecdotal evidence of rising wages and some labor shortages suggest Lewis turning point may have been reached.

8. Hints that China may be at turning point
Recent rapid wage growth of unskilled migrants in some coastal urban areas.
Anecdotal evidence of labor shortages there
Demographic dividend ending. That is, fraction of population in retirement will soon be increasing.
Higher education attainment has reduced supply of unskilled workers
improvements in rural education have reduced the supply of unskilled workers
What to look for
Sharp increase in wages in both rural agriculture and urban industrial sectors.
Narrowing of wage gap between rural and urban, especially among unskilled
The data set is RUMiCI (Rural to urban migration in China and Indonesia).

9. China is more complicated due to hukou system
China is more complicated due to hukou system. It would be naïve and wrong simply to compare wage growth of urban versus rural.
A key assumption is that labour markets are perfectly competitive, so that all workers are paid the value of their marginal product and that unskilled workers will be paid the same amount wherever they are employed.
However, there are numerous reasons why the Chinese economy cannot yet be characterised in this sense as normal and why, therefore, rising wages in either sector may not indicate the arrival at the turning point but something else altogether
Labor market segmentation creates a wage premium for those with urban hukou (better jobs). Rural people are only able to get low-skilled and low wage jobs.

10. Question: Is urban skilled or urban migrant wage growing faster?
Golly and Meng look at wages of migrants in urban sector and urban skilled.
If urban migrant wages are growing faster, then there is evidence of Lewis turning point. Otherwise, no evidence.

11. Need to net out higher skill levels of urban workers
Coarse look at the data
This is a plot of the data (log wages of the two groups). No clear evidence here of turning point.
Need to net out higher skill levels of urban workers
Must run a regression.
log monthly earnings over the period 2000 to 2009 for urban skilled and migrant workers and the ratio of log monthly earnings for migrants to that for urban skilled workers (ln(YM)-ln(YU)).
They u8se average of first month and last month pay for each migrant's first job, and use an occupation-based definition to classify skilled urban workers.
The figure shows that migrant monthly earnings increased by less than 5% per annum (from log 6.45 to 6.92 in ten years), while for skilled urban workers the increase was over 10% per annum (from log 6.64 to 7.67). Over the ten-year period, therefore, we observe a significant rise in the earnings gap between the two groups, with migrant workers earning around 20% less than skilled urban workers at the beginning of the period, and 75 less at the end of the period. This certainly does not indicate a relative shortage of unskilled migrant workers, but would rather suggest a relative shortage of skilled urban workers — if we assume that changes in living costs for both groups were the same.

12. Do we see abnormal increase in migrant earnings?
‘Abnormal’ refers to over and above increases for skilled workers.
Use skilled urban workers as the control group, control for differences in the composition of worker ‘quality’ over time. Assume remaining time trend for urban workers measures the change in living costs plus other unobserved demand/supply driven real changes.
Relative increase in the time trend for migrant workers' wages vis-à-vis urban workers' wages is interpreted as ‘abnormal’.
Interpret as reflecting a tightening of the labour market for unskilled workers

13. Yijt: earnings of individual i in province j at time t
Xijt: vector of control variables
Age, age squared,firm tenure, its squared term, education, gender dummy.
Run these regressions for urban skilled workers and urban migrant workers
Variable of interest is the time fixed effects.
Plots of the estimates in Figure 2.

14. Full results in Table 1. Summarize by plotting time trend
Comparisons of annual increases in skilled urban and unskilled migrant earnings suggest that, apart from the period between 2005 and 2006, there were no abnormal earnings increases for migrant workers.
Relative earnings of unskilled migrant workers and skilled urban workers indicate that the growth of migrant earnings during the period 2000 to 2009 has been largely offset if not outweighed by increases in living costs in cities

15. Additional analysis
Currently only a little over 20% of China's total rural labor force migrates to cities.
Are those rural people who stay, fully employed? Do they earn wages comparable to those who migrate? If yes, evidence of end of surplus labor.
Currently only a little over 20% of China's total rural labour force migrates to cities.

16. 47% of agricultural labor force work less than half time
47% of agricultural labor force work less than half time. HIGH underemployment in agricultural sector.

17. Comparable wages b/t rural stayers and migrants
Rural ag. workers have no observable earnings.
Proxy with household income per laborer
Estimate log monthly earnings equation, control for age and its squared term, education, gender, and regional indicators.

18. The two dummy variables of rural farming and off-farm jobs are compared to the omitted category of migrants.
Real earnings differentials between migrants and farm workers in 2008 were 53%
Compared with off-farm workers, migrant earnings were 27% higher.
The evidence shows still abundant workers who are under-employed and earning very low incomes; that migration rates are extremely low