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Home Publications Blogs Beat the Press Economics in China: Employers That Can't Pay the Prevailing Wage Go Out of Business

Economics in China: Employers That Can't Pay the Prevailing Wage Go Out of Business

Monday, 14 January 2013 04:24

The NYT has a confusing analysis of the China's economy in which it tells readers that the country suffers from a labor shortage because employers in certain sectors (nursing homes and restaurants) can't afford to pay workers enough to pull them away from other sectors. This is not evidence of a labor shortage, this is the way capitalist economies work.

As an economy grows and goes through sectoral shifts there will always be businesses and sometimes whole sectors that collapse because they are no longer competitive. For example, in the United States millions of farms went out of business because they could not afford to pay workers as much money as they could earn in manufacturing. This did not mean that the United States had a labor shortage, it simply meant that many farms had become uncompetitive.

Similarly, if China has restaurants or nursing homes that can't afford to pay the prevailing wage then it means that they are not competitive. If there is real demand for these services in China, then they should be able to raise their prices enough to pay higher wages. (There may be demand for nursing home care which is not being met because people cannot afford to pay for it, but this is a problem of income distribution, not evidence of a labor shortage.)

Comments (4)Add Comment
written by JDM, January 14, 2013 5:14
Economics in China: Employers That Can't Pay the Prevailing Wage Go Out of Business

Ah, the mysterious East. And the even more mysterious Western press, which can't seem to wrap it's mind around this apparently incredibly bizarre fact.
written by Brett, January 14, 2013 8:38
To be fair to the NYT, they don't really make any sort of "normative" comment about the fact that nursing homes can't find cheap employees due to labor scarcity.

That said, I sympathize with your sentiment. Every now and then, the NYT publishes an article that basically consists of US manufacturers whining that they can't find highly skilled machinists willing to work for $10/hour. And every time that happens, I feel like shouting, "If you aren't able or willing to pay to get the necessary labor, then you're uncompetitive by definition!"
NYT using the wrong country's definition
written by Matt, January 14, 2013 9:02
It was an easy mistake to make - the NYT just assumed that Chinese policymakers use the same definition of "labor shortage" that US policymakers appear to, namely "a labor market condition where workers have any bargaining power whatsoever".
Equalibrium wages what?
written by Lrellok, January 14, 2013 10:10
I think you might be missing the broader point here Prof Baker. The implicit assumption is that wages need to lower until business becomes competitive. This in turn implies that labor will not stop working at (hypothetically) any wage offered, that is, that workers will continue to sell the same quantity of labor at any price. The only way that could be justified is if 1) workers have been historically paid below market equilibrium for labor so it is rational for employers to expect that, or 2) It is rational to expect in the near future that labor would be willing to work at below market equilibrium price, or 3) Labor has no equilibrium price, IE supply and demand do not function in labor markets.

A serious examination of this point is critical. What is the equilibrium price of labor and is labor currently being paid above of below that price?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.