Shifting to a Market-Based Wage Setting Mechanism for Low-Skilled Labor: Macroeconomic Effects*

Yang Ruilong and Yang Jidong
The Academic Group in Renmin University of China for Analyzing and Forecasting on China’s Macroeconomy1, Beijing, China

 
Abstract: After the emergence of a severe labor shortage in 2004, wage levels for rural migrant workers (hereafter referred to as “migrant workers”) ceased their long time stagnation and began to rise rapidly. This rise can be attributed to various factors, such as demographics, business cycles, policy, and China’s economic structure. As the wage-setting mechanism for migrant workers changes from traditional minimum wage to negotiated pricing rules subject to the reservation wage, China’s economy indicates that it is embracing a new era of rapid wage increases. Changes in China’s income distribution will bring opportunities to the turning point of Kuznets “Inverted-U” Curve, and allow China to narrow its significant income gap. These changes will transform China’s economic growth model from one that is export and investment-dependent to one that is driven by domestic consumption.
Key words: low-skilled labor, wage-setting mechanism, income distribution

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