The payroll is not the enemy of innovation

Chronic. Wages have risen sharply in China for more than two decades: the average nominal wage of urban workers increased 13 times between 1998 and 2020. On average, it is now higher than in most non-OECD countries , which raises the question of the current and future drivers of Chinese growth, which until the 2000s had relied on low labor costs.

However, it appears that this wage growth has favored innovation, which suggests that the latter is today one of the engines of the country's growth (Wage increase and innovation in manufacturing industries: Evidence from ChinaJunwei Shi and Hongyan Liu, Journal of the Asia Pacific Economy, September 2021). Several theories compete to understand the consequences of a rise in wages on innovation.

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In short, this increase can be an obstacle to innovation by reducing the profitability of companies and their ability to invest in new technologies. But, alternatively, innovation can be an effect of rising wages, following at least two channels: on the one hand, companies can introduce technologies to replace labor, which has become too expensive; on the other hand, they may seek to maintain employment but increase its productivity through new technologies.

China is no longer a low labor cost country

The two economists, Junwei Shi and Hongyan Liu, analyzed 37 manufacturing sectors between 2002 and 2019, showing that on average there is a positive link between wage growth and innovation (measured by the annual number of patents filed at the sector level). However, this result varies greatly over time and depending on the sector.

Thus, the effects measured became significant and positive only after 2008 and the entry into force of the new law on employment contracts, which made it possible to standardize the wage relationship, after a period of deregulation of the labor market in the 1990s. In addition, the strongest effects are measured in industries intensive in primary resources (mines and energy) and, to a lesser extent, in those based on the mobilization of labor (textiles) on the one hand and technologies (chemistry, electronics) on the other hand. On the other hand, they are not significant in industries based on the accumulation of capital (steel).

Finally, this study shows that the main underlying mechanism is the increase in labor productivity thanks to technologies, and not a substitution of one by the other. These results indicate that China is no longer a country with low labor costs and that wage growth has led to a transformation in the mode of development of this country, from " Made in China " to “Designed in China” based on the advancement of technologies.

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