A Study On The Impact Of Rising Labor Costs On Chinese Manufacturing Industry

The main conclusions of this paper are as follows:Firstly,we compare unit labor cost in China with that in major competitive countries,and find that it is higher than that in Indonesia,Thailand,and Malaysia.Unit labor cost in East China is higher than that in Indonesia during 2002-2011,surpassed that in Mid-West China and Thailand in 2007,and topped that in Malaysia:in 2011,while unit labor cost in Mid-West China is higher than that in Indonesia during 2002-2011,exceeded that in Thailand in 2008,and overtook that in Malaysia in 2011.Our research also shows that the phenomena are mainly driven by the excessively rapid growth of hourly labor cost in China.Moreover,given China’s disadvantage in labor cost and demographic structure,Mid-West China is not as attractive as Southeast Asia countries or other countries to manufacturing enterprises.Secondly,this paper investigates the effects of rising labor costs on firms’ innovation.The empirical results indicate that although the rising of labor costs has increased the pressure on industrial firms,the rising labor costs actually induces increasing of innovation activities in firms,specifically,it increases the number of patent applications,the value of new products,the input of R&D,the employment of innovation employees.For the firms from labor-intensive firms,eastern provinces,non-SOEs,and domestic firms,the induced-effects of labor costs are significantly positive.However,for the firms from capital-intensive firms,central and western China,SOEs,and foreign firms,the induced effects of labor costs are not significant.This indicates that when confronted with the rising of labor costs,the responses of different types of firms are different.Thirdly,to overcome the limitation in data time range,we study the impact of rising labor costs on listed Chinese manufacturing companies.We find that,overall,rising labor costs promotes the quantity and quality of innovation.Specifically,we find that there is a positive significant correlation between rising labor costs and the total patent and the total patent citation counts.Rising labor costs also promotes invention and invention citation counts,but has no significant influence on utility model and utility model citation counts.We further conclude that the positive effects of rising labor costs on innovation outputs are more pronounced when firms are labor-intensive firms,non-SOEs,low labor productivity firms,and firms in non-governent favored industries.Fourthly,we study the impact of rising labor costs on manufacturing sectors-labor-intensive sector and capital-intensive sector.We find that,overall,rising labor costs promotes the development of the capital-intensive sector but impedes the development of the labor-intensive sector.The paper also finds that labor-intensive manufacturing industry shifts aboard rather than to central and western areas of China.The rising of labor costs leads to the shifts,upgrades,or exit of manufacturing enterprises,especially of those labor-intensive enterprises,which accelerates the structural transformation in the sector.Fifthly,the macro and micro calculation methods of return on capital are not suitable to estimate the return on capital of the manufacturing industry in China and its subsectors.In the paper,a new estimation method is constructed and our estimation shows that the return on capital of the manufacturing industry is from 5%to 10%,which is far lower than that on macroeconomic capital.The paper also studies the effect of rising labor costs on the return on capital.We find that rising labor costs enhances the return on capital in the eastern region,but has no significant effect on the return on capital in the central and western regions.This effect is only related to where the enterprise is and has no significant relation to the type of industry.