Abstract
This study reinvestigates the question of whether the Chinese economy passed the “Lewis turning point” in the early 2000s. The implication of reaching the turning point is that the rural labor surplus which is a source of comparative advantage of low labor cost in China is exhausted. This suggests that future economic growth is constrained by the contraction of labor intensive sectors, such as textile and processing industries. We estimated an agricultural production function more accurately from province-level panel data on Japonica rice production costs during the 1992-2009 period in order to appropriately control differences by province in agricultural technology and
to address the issue of endogeneity in input choice. Then we examined the existence of rural labor surplus in terms of differentials between the value of marginal product of labor (VMPL) and our proposed measure of the “subsistence wage” (on farm hired wage).
After testing wage differentials by various statistical techniques, we obtained a statistical proof that, on average, the VMPL fell below the farm hired wages. These results show that Japonica rice farmers in sample provinces still have labor surplus in the end of 2009. In some provinces, the VMPL for Japonica rice production substantially exceeded hired wages in 2004 and later years. However, qualitative findings suggest that this was caused not by the exhaustion of the rural surplus labor supply, as claimed in previous studies, but by a series of generous agricultural protection policies implemented by the central government starting in 2004 such as the abolishment of agricultural tax, the establishment of guaranteed prices of farm products, and the introduction of direct subsidies, which raised agricultural productivity and increased reservation wages for farmers’ labor supply in urban areas.
