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How Did Rising Labor Cost Erode China's Global Advantage?


Time:10:30am - 12:00pm, May 24, 2019

Venue:Room 359S, Overseas Exchange Center, Peking University

Speaker:Liugang Sheng

(Department of Economics, CUHK)



Abundance of cheap labor has been the key factor for China rising from a marginal player to the largest exporter in the world market. However, labor cost in China has recently increased dramatically, spurring the worries that China may be losing its comparative advantage in manufacturing and its position as the “world factory”. We first develop a model with multi-regional production and trade to show that low labor cost helps China to attract multinational production, which further promotes technology and competitiveness in Chinese manufacturing exports. The gravity equations of production and trade analytically exhibit the detrimental effect of labor cost shocks. Then we explore the variations in minimum-wage distortion across cities and skill intensity across industries for the period 2000–11 to study the empirical effects of rising cost of unskilled-labor on China’s attractiveness for multinationals and the country’s competitiveness in manufacturing exports. Consistent with model predictions, we find that rising minimum-wage distortion reduces more of the exports in unskilled-labor intensive industries. Moreover, bridge exports by foreign invested firms are more sensitive to changes in labor cost than exports by domestic firms, and both the intensive and extensive margin matter for the differential effects between these two types of exports.



Professor Liugang Sheng is an Associate Professor of the Department of Economics in the Chinese University of Hong Kong. He is also the director of the Trade and Development Programme of the Economic Research Centre of the Hong Kong Institute of Asia-Pacific Studies. Prof. Sheng’s research interests cover international trade, international macroeconomics, and economic development. His papers have been published in many reputable international and Chinese journals including Quarterly Journal of Economics, Journal of Development Economics, Journal of Applied Econometrics, Pacific Economic Review, Asian Economic Papers, China Economic Quarterly, and Law and Social Sciences. Prof. Sheng received his PhD in economics from University of California, Davis in 2012. He also obtained MA in economics from Virginia Tech in 2008. Before he went to US, he received the bachelor and master degree from Peking University in 2002 and 2005 respectively.