Is There A Reserve Army of Labour

Is there a reserve army of labour in China and what impact does it have on total
demand and on accumulation? Will higher wages generate higher growth?
Peter J Muldoon – SID 200317718
So what do we mean and understand by the term “reserve army of labour”?
Marx in Capital described the reserve army of labour as comprising those members of
the working class who are unemployed or intermittently unemployed.1 Marx claimed
that the existence of this reserve army of labour or surplus population kept wages at
minimum levels because the presence of this pool of unemployed or the reserve
army of labour were available and prepared to work for subsistence level wages.
Marx claimed that the result of this pool of unemployed prevented employed
workers from gaining significant wage increases, because capitalists or employers
of labour could always draw from this plentiful pool of available and willing labour,
which in turn kept wages down and profits up2.
So how does this Marxian principle relate to China today and is there a reserve army of
labour in China? There is no doubt that the existence of a “reserve army of labour”
in China over the last 30 years has underpinned the industrial and economic
development and growth of China, with positive flow-on effects to the global
economy as a whole.3 However, certain economists and political researchers are
suggesting the China may be at a turning point and the halcyon days of cheap and
readily available labour are on the decline. This essay will explore if this argument is
well founded and determine the status of the reserve army of labour in China and
the impact this surplus labour has on total demand and accumulation. It will also
explore if higher wages will generate higher growth.
The Economist (Sep 4th, 2008) is one such party who suggests that the reserve army of
unemployed labour in China is drying up. The Economist asks the question; what is
the single most important price in the world today?
1
Marx, Karl, (1867) Des Kapital Vol 1
2
Stilwell, Frank ( 2002), Political Economy The Contest of Economic Ideas pp 123
3
Cai Fang, Migration and Social Protection in China, 25-26 September 2007, Beijing, China
ECOP 6016–China in the World Economy 1 Peter J Muldoon – SID 200317718

Although most people would immediately say the price of oil or the US$, The Economist
argues that Chinese wages are arguably the most important factor. The question is why?
The reason is that China has by far the world’s largest labour force, of around 800
million, almost twice that of America, the European Union and Japan combined.4
The key element of China’s rapid industrial and economic growth over the last 30
years since the political and structural changes of 1978 was the seemingly unlimited
supply of cheap workers which have underpinned China’s rapid economic growth.5
Thus recent claims that China is running short of cheap labour, if it were true would
have huge consequences not just for China, but also for the rest of the world
economy, because this ready supply of cheap labour has held down manufacturing
wages and inflation not only in China, but also throughout the world.6
Sir Arthur Lewis, the Nobel prizewinning economist in his paper Development with
Unlimited Supplies of Labor (1954), argued that a developing country with “surplus or
reserve army of underemployed rural labour” could expand industrial employment for
many years without causing wage inflation, because employers enjoy such a large
supply of cheap labour.7 Lewis’s theory in the case of China has over the last 30 years
proven to be correct, in that the flow of millions of workers from farms in the rural areas
to the coastal factories and industries has held down manufacturing wages, not only in
China, but also throughout the world.8 However, although the real wages of low-skilled
workers barely rose during the1980s and1990s, over the past couple of years since
2005, factory owners have complained of labour shortages and wages have risen more
rapidly, leading some economists to conclude that China’s “reserve army of labour” has
been used up.9
After 30 years of unhindered growth China may in fact be running up against steeper
barriers to continued growth and the decline in the reserve army of labour is one
important factor. The questions are, why are certain economists making these claims? Is
4
5
The Economist , (4th Sept 2008), http://www.economist.com/finance/displaystory.cfm?story_id=12052315
6
ibid
7
Lewis, Arthur, (1954), Development with Unlimited Supplies of Labor (1954)
8
9
ibid

China at a turning point and is the reserve army of labour in decline? And if so, what
factors have contributed to this decline in the “reserve army of labour” in China?
The most important factor in the decline in the reserve army of labour is by far a
declining population growth rate, the flow on effects of the one-child per family policy.
This policy introduced the Communist Government of China in 1979, was designed to
limit the escalating and unmanageable growth in the mainland Chinese population with
all its undesirable consequences. The success of this controversial policy has come at
enormous social cost such as; forced abortions, political coercion, heavy fines for non-
compliance, and an imbalance between the sexes, but it achieved the objective -
population growth has slowed.10
The flow-on effects of the one-child policy 30 years later has caused the growth in
China’s labour supply to slow sharply after rising by 1.3% a year during the decade to
2005, the working age population is expected to increase at a much slower annual rate
of 0.7% until 2015, and thereafter shrink by 0.1% a year until 2025.11
The above chart is from The Economist 4th Sept, 2008
10
ABC Commercial http://www.abc.net.au/abccontentsales/s1520153.htm, Sept 2008
11

Another factor impacting on the “reserve army of labour” is that overall population in
China is ageing; for example; by referring to the above chart, the number of workers
aged between 20 and 29 years fell from an estimated 233 million in1990 to an estimated
165 million in 2005.12
This has a direct flow on effect on many of China’s manufacturing companies and
enterprises in that there is a limited supply of appropriate labour. For example; textile
and electronics firms hire only young women in their early 20s from rural areas, as they
are considered to be more docile, less troublesome and more willing to work long hours
in tedious repetitious tasks. Heavy industry and construction firms on the other hand
favour young, strong, mobile, single men.13
Another factor that is impacting on the “reserve army of labour” is the declining flow of
workers from the farms in the rural areas to the coastal factories and industries. This
massive internal migration which is estimated to be in excess of 150 million people over
the last few decades is finally slowing down. The reason are that older workers who fall
outside of this general employment criteria as outlined above are not only less
employable, but they are also typically less mobile and unwilling to migrate if they have
children.14
Cai Fang, Director of the Institute of Population and Labour Economics at the Chinese
Academy of Social Sciences, argues that China has already reached the “Arthur Lewis
turning point”15 and by 2009 he predicted there would be a widespread shortage of
workers because China’s surplus reserve army of labour has been virtually exhausted
and this would result in higher industrial wages16. However, as so often happens in
China, this debate is clouded by the poor data. Until recently, most estimates of the
reserve army of labour varied between150 million and 200 million people, but the true
figure is probably much smaller, because government figures for the rural labour force
include millions of migrants who have already moved to the cities and others who work
in rural based industries and not farming17.
12
13
ibid
14
ibid
15
16
17

Does this mean the death of China’s growth model? Not necessarily, as there is a strong
body of argument that suggests the “reserve army of labour” has not been
exhausted and is not in decline. Stephen Green, an economist at Standard
Chartered in Shanghai, is one. In a BizChina interview on 22 Jul 2008,18 he argued
along similar lines to Cai Fang in that China has indeed reached a turning point,
however he disagrees with the suggestions that there is a decline in China’s reserve
army of labour and any thoughts along these lines are premature.19 He argued that
the labour surplus would not run out for another decade and although the number of
workers aged between 20 and 29 declined over the past decade their ranks are
rising again. Using the 2005 census Green estimates that the 20-something group
will increase by a third in the ten years to 2015, as baby-boomers’ children join the
workforce, only then will it start shrinking sharply20.
However, Green does agree that wages are rising with inflation and the Chinese
economy will turn down in the short term due to slowing exports and rising
inflation21. What is more, the recent spurt in urban wages is not necessarily proof
that the reserve army of labour has evaporated. Green argues that reason for the
increase in urban wages is that in order to attract migrant workers from rural areas,
urban employers have to pay more than rural incomes which have increased in
recent years, thanks to government policies and higher food prices.22
The World Bank is another party that argues that the death of China’s labour surplus has
been greatly exaggerated and the reserve army of labour has not run out23. Although,
factory owners in southern and eastern China have been complaining of the difficulty of
finding enough workers for the last couple of years, the World Bank argues that this is
more a sign that the workforce is becoming more mobile and more demanding, and not
18
Dr. Stephen Green, (22 Jul 2008), Biz China talked to Dr. Stephen Green,
Senior economist in global research with Standard Chartered Shanghai Branch.
english.cri.cn/3130/2008/07/22/1721s384206.htm
19
ibid
20
ibid
21
22
ibid
23
Wall Street Journal, (12th Sept 2007), World Bank Downplays Risk of China’s Surplus-Labor Death

necessarily an indication that the absolute numbers of workers in the reserve army of
labour is shrinking24.
24
ibid

The World Bank goes on to argue that the labour supply is determined more by
government policy than by demographics, for example; the World Bank argues that the
phasing out the household-registration system would encourage more people to move to
the city; that vocational training for rural residents aged over 30 would equip them better
for jobs in industry; and financial incentives to encourage workers to retire later could
also boost the labour supply, as only 60% of men and 30% of women aged over 50
years have jobs25.
If we revert to Cai Fang’s argument that China’s reserve army of labour has been
virtually exhausted, it was based in part on the estimate that 180 million workers or 24%
of total employment were needed for farming and agriculture.26 But this estimate was
based on the agriculture practices and technology in China today. This essay argues
that farming practices such as mechanisation and the consolidation of land plots will
boost agricultural productivity, meaning that fewer farmers will be needed and this will in
turn release more agricultural workers for industry and boost the reserve army of labour.
The World Bank agrees with this hypothesis and goes on to argue that improvements in
farm productivity will mean that fewer workers will be required to maintain agricultural
output, which means the supply of potential new workers for urban factories can still
keep growing in future years.27 Other changes that will ensure the maintenance of the
reserve army of labour are the changes the government has made in lowering the
administrative barriers that rural migrants face in moving to cities, helping further add to
the potential workforce and reserve army of labour28. In summary according to Louis
Kuijs Chief Economist for World Bank in China, “We do not think that China’s surplus
labor, what is out there in the rural areas, will be exhausted any time soon.”29
This essay will now turn to the issue of capital accumulation. So what is meant by the
term capital accumulation?
25
ibid
26
27
Hamlin, Kevin, Bloomberg.com, (19th June, 2008), China May Be Overwhelmed by Cash - World Bank
http://www.bloomberg.com/apps/news?pid=20601089&refer=china&sid=aXpyaIkN1JY
28
ibid
29
ibid

The driving force and purpose of the capitalist system is the accumulation of capital. It is
by increasing the amount of accumulated capital through retained profits that enable
businesses to grow.30 So it is for an economy or country as a whole; the overall rate of
economic growth depends on the rapidity of the capital accumulation process.31
The World Bank Quarterly Report of June 2008 has forecasted that inflation in China the
world's fourth-largest economy of 7% for this financial year up from a February 2008
estimate of 4.6%. This is due to and a direct result of the record capital accumulation
from the inflow of cash from trade, foreign direct investment and financial investors
betting on gains in the Yuan.32
The World Bank said in the same report, that Gross Domestic Product in China will grow
9.8 percent, more than the previous estimate of 9.6 percent and that the Yuan has
climbed 20 percent versus the US$ since the Chinese government scrapped the fixed
exchange rate in 2005.33
Stephen Green, Head of China research for Standard Chartered Bank Plc. said that
“Capital inflows in the first four months of 2008 reached $US324 billion nearly double the
amount a year earlier”34
Chen Deming the Trade Minister for China said “the country's foreign-exchange reserves
may rise to a record US$1.8 trillion by the end of 2008”35
Huang Yiping, Chief Asia Economist at Citigroup in Hong Kong said in reference to the
same report that “excess liquidity is already a problem and the expectation of significant
further appreciation of the Yuan is encouraging more capital inflows''36
30
Stilwell, Frank ( 2002), Political Economy The Contest of Economic Ideas
31
ibid
32
Hamlin, Kevin, Bloomberg.com, (19th June, 2008), China May Be Overwhelmed by Cash, - World Bank
33
ibid
34
ibid
35
ibid
36
ibid

Kevin Hamlin and Nipa Piboontanasawat, on Bloomberg.com (19th June 2008) quoting
the World Bank Report suggested that “China's monetary policy may be overwhelmed by
inflows of speculative capital if it doesn't allow greater exchange-rate flexibility”37
Louis Kuijs, Chief Economist for World Bank in China said on the release of the World
Bank’s Quarterly Report (June 2008) that “China is too large an economy not to have an
independent monetary policy''38
Based on these assertions, there is no doubt that the export oriented policies over recent
years based on a reserve army of cheap labour has created a torrent of capital inflow
into China. The question is what impact will this mountain of foreign exchange reserves
and capital accumulation have on domestic inflation and demand? Capital accumulation
typically generates an increase in the demand for labour because the abundance of
funds and the larger demand for outputs of goods and services usually require more
workers to make them.39
It is obvious that this flood of funds is feeding inflation in China as evidenced by the rise
in consumer prices of 7.7% in May 2008, after inflation reached a 12-year high of 8.7%
in February 200840. The main driver in the rise of the domestic consumer prices has
been the cost of food which has had a flow on effect to wages and the cost of consumer
related goods, while significant increases in the cost of commodities and raw materials
such as, iron ore and coal and other inputs to production have driven up industrial
manufacturing costs.41
The question is, what impact will this economic environment have on total demand?
Dr Stephen Green argues that wages are rising with inflation and therefore the demand
in the Chinese economy will turn down in the short term due to slowing exports42.
37
ibid
38
ibid
39
Stilwell, Frank ( 2002), Political Economy The Contest of Economic Ideas pp 123
40
ibid
41
42

Green argues that, the massive capital inflows and the expectation that China’s foreign-
exchange reserves may rise to a record US$1.8 trillion by Dec 200843 will feed local
inflation, raise local wages, increase the costs of domestic consumer and export related
goods, and slow local and international demand for these goods44.
In summary, this essay concludes as far as demand is concerned that; the wage driven
inflation in China will in the short term decrease local demand for consumer goods,
increase the prices of export related products, thus making China’s goods more
expensive and less appealing to overseas buyers and consequently reducing overall
demand.
So will the higher wages in China lead to higher growth? On the contrary, there is a body
of concern that the high inflation in China will have a negative effect on growth and there
is the potential to export inflation from China to the world, which will slow growth
internationally. Ben Simpfendorfer from the Royal Bank of Scotland, says, "slower
domestic and slower global growth may help to temporarily curb rising consumer prices
in China, however a structural tightening in the supply of labour and raw material inputs
means a repeat of the deflation as in the 1990s is very unlikely and inflation in China is
heading higher"45
Simpfendorfer, argues that countries whose imports from China account for the greatest
share of their total imports are most vulnerable to the resulting rising import prices and
will be subject to the export of inflation from China. To put this issue into perspective
exports from China represent approximately; 20% of Japans imports,15% for the USA,
15% for South Korea,14% for Australia followed by New Zealand, Malaysia, Singapore,
Indonesia and Thailand.46
43
Hamlin, Kevin, Bloomberg.com, (19th June, 2008), China May Be Overwhelmed by Cash, - World Bank
44
english.cri.cn/3130/2008/07/22/1721s384206.html
45
Rowan Callick, China Correspondent, The Australian, Higher wages, food prices spark fears of China
exporting inflation, February 26, 2008
http://www.theaustralian.news.com.au/story/0,25197,23275769-30538,00.html
46
ibid

In summary, on the balance of the evidence presented, this essay concludes that there
is a very significant reserve army of labour in China, and in spite of structural changes in
demographics of the population, the maintenance of a pool of inexpensive reserve army
of labour is likely to be maintained for the foreseeable future.
As far as capital accumulation in China is concerned, the evidence is overwhelming.

To quote Stephen Green, “Capital inflows in the first four months of 2008 reached
$US324 billion, nearly double the amount a year earlier”47 and Chen Deming, “the
country's foreign-exchange reserves may rise to a record US$1.8 trillion by the end of
2008”48
In reference to demand, under normal circumstances the mountain of capital

accumulated by China would drive demand for consumer goods and services however
there is a body of evidence as presented in this essay that suggests that there will be a
temporary decline in demand due to higher wages driven by inflation.
The essay also concludes that the higher wages will not lead to higher growth in the
short term. On the contrary, this essay concludes that China will experience a period of
slower growth both domestically and internationally and there is a potential risk to
China's major trading partners of exported inflation from China.
Peter J Muldoon – 1st October 2008 Word Count:- 2945
47
ibid
48
ibid

Bibliography
ABC Commercial
http://www.abc.net.au/abccontentsales/s1520153.htm, Sept 2008
Callick, Rowan, China Correspondent, The Australian, Higher wages, food prices spark
fears of China exporting inflation, February 26, 2008
http://www.theaustralian.news.com.au/story/0,25197,23275769-30538,00.html
Cai Fang, Migration and Social Protection in China, 25-26 September 2007, Beijing,
China, Institute of Population and Labor Economics,
Chinese Academy of Social Sciences
Green, Dr Stephen, (22 Jul 2008), Biz China talked to Dr. Stephen Green,
Senior Economist, Standard Chartered Shanghai Branch.
Hamlin, Kevin, Bloomberg.com, (19th June, 2008), China May Be Overwhelmed by Cash
- World Bank http://www.bloomberg.com/apps/news?
pid=20601089&refer=china&sid=aXpyaIkN1JY
Marx, Karl, (1884) Das Kapital, 1884
Stilwell, Frank, (2002) Political Economy - The Contest of Economic Ideas
The Economist, (4th Sept 2008),

http://www.economist.com/finance/displaystory.cfm?story_id=12052315
Wall Street Journal, World Bank Downplays Risk of China’s Surplus-Labor Death
http://blogs.wsj.com/economics/2007/09/12/world-bank-downplays-risk-of-chinas-
surplus-labor-death/trackback/
World Bank, World Bank Downplays Risk of China’s Surplus-Labor Death

worldbank.org/EXTEAPCHINAINCHINESE/Resources/cn-EAP-Update-Nov2007.pdf

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Is there a reserve army of labour in China and what impact does it have on total

demand and on accumulation? Will higher wages generate higher growth?

Peter J Muldoon – SID 200317718

So what do we mean and understand by the term “reserve army of labour”?

ECOP 6016–China in the World Economy 1 Peter J Muldoon – SID 200317718

ECOP 6016–China in the World Economy 2 Peter J Muldoon – SID 200317718

The above chart is from The Economist 4th Sept, 2008

ECOP 6016–China in the World Economy 3 Peter J Muldoon – SID 200317718

ECOP 6016–China in the World Economy 4 Peter J Muldoon – SID 200317718

ECOP 6016–China in the World Economy 5 Peter J Muldoon – SID 200317718

ECOP 6016–China in the World Economy 6 Peter J Muldoon – SID 200317718

ECOP 6016–China in the World Economy 7 Peter J Muldoon – SID 200317718

ECOP 6016–China in the World Economy 8 Peter J Muldoon – SID 200317718

ECOP 6016–China in the World Economy 9 Peter J Muldoon – SID 200317718

ECOP 6016–China in the World Economy 10 Peter J Muldoon – SID 200317718

As far as capital accumulation in China is concerned, the evidence is overwhelming.

In reference to demand, under normal circumstances the mountain of capital

Peter J Muldoon – 1st October 2008 Word Count:- 2945

ECOP 6016–China in the World Economy 12 Peter J Muldoon – SID 200317718

Lewis, Arthur, (1954), Development with Unlimited Supplies of Labor (1954)

Marx, Karl, (1884) Das Kapital, 1884

Stilwell, Frank, (2002) Political Economy - The Contest of Economic Ideas

The Economist, (4th Sept 2008),

World Bank, World Bank Downplays Risk of China’s Surplus-Labor Death

ECOP 6016–China in the World Economy 13 Peter J Muldoon – SID 200317718

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