How Do Rising Labor Costs Affect China’s Industrialization?

Abstract

China’s uninterrupted high-speed economic growth depends on promoting the process of industrialization. Based on provincial data during 2003—2016, this paper empirically estimates the impact of labor costs on China’s industrialization and examines its mechanism and path. The results show that the rising labor costs such as wages and social security premiums may lead to China’s “de-industrialization”. With endogeneity excluded, the conclusion still holds. The following policy suggestions are proposed: increasing the effective labor supply in the industrial sector to slow down the increase in wages, implementing social insurance premium reform to reduce social security premium rate, reversing the situation of investment “fl eeing from the real economy and into the virtual economy” in a multi-pronged manner, and optimizing the combination of labor, capital and technology in various ways.