When it comes to China's recent economic downturn, one criticism has pointed to the country's disappearing demographic dividend. This is a valid argument, but one based on a traditional economic model. While the country has greatly benefited from sufficient and low-cost labor over the past 30 years, circumstances have changed, and this round of wage increases, which began in 2002, is now determined by the supply and demand of labor.
The mainstream opinion seems to be that increased wages are a bad thing. The idea is that without cheap wages, products will lose their competitive edge. However, in the world we live in, wages are generally higher both in powerful economies and competitive enterprises.
According to my recent co-authored paper that studies the influence wage gap in different enterprises could have on the product, the data analysis has shown that wage gap can drive up product quality. In other words, within an enterprise, if the wage of its highest-paid employee is around eight times of the lowest-paid, the enterprise usually manufactures products of higher quality.
One crucial reason behind China's relatively lower product quality is that the workers are paid less. Meanwhile, given the current situation of rising wages, it can be expected that the overall level of quality in Chinese goods will also rise in the future. Higher wages not only allow workers to invest in themselves, but consciously encourage them to produce better quality products.
But China lacks effective incentives in this pursuit of better quality products.
On the supply side, lower wages, being one of the factors of production, make it difficult for workers to invest in further learning and education and, consequently, unable to produce products of higher quality that would be a result of improved expertise. Meanwhile, excessively low salaries may affect morale which means workers slack off, or rather are not incentivized to work harder than the job requires. This can increase regulatory costs for enterprises and even develop into a vicious cycle of sliding quality and morale.
On the demand side, consumers have pushed down prices of high quality goods to a level similar to lower quality ones, which renders many enterprises unable to deliver high-quality products at a matching high price, instead forcing them to stop producing higher quality good and invest in the production of shoddy ones, leading to a situation where "bad money drives out good."
Greater incentives are needed if China wants to elevate its level of product quality, and the most important method lies in increasing wages. In this regard, China's continued rising wages are just another example that the old model of economic growth is being discarded, with an era of high-quality growth around the corner.
The author is director of the Wuhan University Institute of Quality Development Strategy.