Changes In Labor Costs And Its Effects On The Manufacturing Sector In Shandong Province

Since the Reform and Open Policy, China’s manufacturing industry has been grea tly relying on cheap labor as its comparative advantage in the global supply chain. Ho wever, during the same period of development, the labor share of GDP is relatively lo w and declining in the past years, especially in the manufacturing industry. Shandong Province, which is a large manufacturing industry, has the comparative advantage in t raditional manufacturing with natural resources and is currently faced with enormous challenges in industry upgrading. This paper focuses on the factors influencing the lab or cost and the consequences of wage changes in large-scale manufacturing companie s in Shandong Province under the background of societal ageing.This paper demonstrates the trends of labor cost, the input-output information and labor cost per unit in different sectors of manufacturing industry in Shandong Provinc e from the perspective of Lewis inflection point. Concerning the mechanism causing t he rising labor cost, this paper analyzes the productivity of labor, profit rate of capital and the contribution of human capital to the increase of labor cost in labor intensive a nd capital-technology intensive sectors using GMM model with the 1994-2004 panel datasets. Econometric results show that the wage is the most important factor accounti ng for the labor cost and the wages are more sticky in the capital-technology intensive sectors. Moreover, the influence of the increase of labor productivity is not significan t and the growth rate of wages is much less than that of labor productivity during that period. Furthermore, the profit rate of capital is not a significant independent variable in explaining the increase of overall wages. In labor intensive sectors, wages are more sensitive to the profit rate of capital than that in capital-technology intensive sectors, meaning that capital factor exploits labor factor to a larger extent in the capital-techno logy intensive sectors. In addition, human capital variable is not significant in all the e conometric models of different sectors, which may be related to the relative lower hu man capital level in those sectors and skills mismatch between the industry and huma n capital.This paper also investigates the effects of rising labor cost on sectors’competitive strength using the indicators of labor cost, fixed capital investment per capita, skills 1 evel and employment. The analysis results demonstrate that the rising labor cost has p ositive impact on labor productivity, which can further promote the industry upgradin g and narrow the income gap in society. In the capital-technology intensive sectors, n umber of employees has negative influence on labor productivity whereas it is much s maller in the labor intensive sectors. Moreover, capital per capita positively impacts th e labor productivity significantly and its effects are most prominent in labor intensive sectors, meaning that capital deepening can promote productivity in those sectors. Fur thermore, technology has relatively smaller effects on labor productivity in the overall manufacturing industry and labor intensive sectors, which means that investment in t echnology can hardly increase productivity significantly.