A Laborious Matter

By+Mei+Xinyu

The labor market is important to the economy， as reflected by its impact on economic performance and the governments decision-making process for related policies. Take the United States， for example， in which the unemployment rate maintained a steady decline from 8.9 per- cent in 2011 to 6.2 percent in 2014. During the first 10 months of 2015， U.S. unemployment rate dropped from 5.7 percent to 5 percent—indicating an economic recovery. It therefore comes as no surprise that， even though financial markets around the world suffered turmoil during 2015， the U.S. Federal Reserve opted to kick-start its plans to raise interest rates.

In China， the labor market is also playing an increasingly important role， affecting many aspects of the economy， including inflation. The effect has been verified by price indexes， the unemployment rate， and the total wages of employed persons in urban areas. Particularly after 2012， while Chinas producer price index （PPI）—a major measure of inflation at the wholesale level—has kept declining， its consumer price index（CPI）—a main gauge of inflation—has still been rising. This indicates that the growth of the consumer inflation index is mainly driven by the price increases of agricultural products， human resource costs and real estate prices， instead of industrial products. Particularly in the past year， human resource costs， which are decided by the supply and demand of the labor market， have become a major source of inflation.

Rise of labor costs

Usually， costs of commodities and services come from three sources： the costs of raw materials， energy and equipment， of human resources and of land. Due to economic growth and demographic changes， Chinas surplus labor force is becoming exhausted， rapidly pushing the costs of the labor market to new heights. Therefore， human capital has become a major factor behind inflation pressures—this has also had a remarkable impact on services prices.

Measured by dollar-denominated commodity prices in international trade， the primary commodities market—composed of materials in a raw or unprocessed state—was booming from 2002 to 2011. As a result， throughout this period， Chinas PPI was higher than its CPI， and the purchasing price index of raw materials was higher than the PPI. As for consumer prices， the price rise of consumer goods was higher than that of services. For instance， in 2011， prices of consumer goods rose by 6.2 percent， as opposed to a 3.5-percent rise in services prices.

According to the World Economic Outlook issued by the International Monetary Fund in April 2015， the dollar-denominated costs of nonfuel commodities dropped by 10 percent in 2012. Meanwhile， oil prices rose by 1 percent and the costs of finished products climbed 0.6 percent， meaning that the primary commodities market had entered a period of recession. It will take some time， however， for the effects of the recession to be transmitted to Chinas consumer market. Correspondingly， consumer goods prices in China rose by 2.9 percent in 2012， still higher than the 2-percent growth in services prices. This activity came against the backdrop of the CPIs growth plummeting from 5.4 percent in 2011 to 2.6 percent in 2012.

Since 2013， the recession in the international commodities market has worsened. At the same time， Chinas labor market remains close to full employment. During the period of 2011-14， the registered unemployment rate in urban areas stood at 4.1 percent， 4.1 percent， 4.05 percent and 4.09 percent， respectively. At the end of the third quarter of 2015， the rate dipped to 4.05 percent.

Wages have also kept rising. Data from the National Bureau of Statistics showed that in the third and fourth quarters of 2012， the total wages of employed persons in urban areas grew by 23.6 percent and 18.3 percent respectively. In the first three quarters of 2013， the index rose by 17.2 percent， 17.3 percent and 18.9 percent respectively. Even in the fourth quarter of 2014， during a clear economic slowdown， the total wages of em- ployed persons in urban areas still went up by 10.5 percent.

The increase of wages therefore pushed up services costs at a rate faster than prices of consumer products could keep up with during the past three years （see graphic）.

According to the China Employment Index Report jointly issued by Renmin University of China and Zhaopin.com， in the third quarter of 2015， labor market supply still fell short of demand， but the gap between them was narrowing.

Future price trend

Based on the tendency that the costs of human resources in China are likely to maintain rapid growth， it is expected that for some time， the growth of the CPI will be higher than that of the PPI. Also， among consumer prices， the growth of consumer goods prices will be higher than that of services prices. For some time， the value of traditional laborintensive products will grow faster than that of capital and technology-intensive products. In addition， the fast growth of labor-intensive products will finally lead to a curb of their price increase. Among services， the growth of traditional labor-intensive service prices， such as catering and home services， will be higher than that of capital-intensive services. This is due to the fact that it is difficult to improve the productivity of labor-intensive services solely through equipment upgrades， while capital and technology-intensive services can be offered in a variety of places through back-office outsourcing or back-up centers.

A review of changes in the prices of consumer goods， services， traditional laborintensive services and capital-intensive services within the past two years has verified my conclusion.

But， will the prices in 2016 follow the described trends？ Considering the prices of international primary commodities and Chinas employment indexes， I can draw the following conclusion： Unless the yuan sharply depreciates against the U.S. dollar， imported deflationary pressures brought by declining PPI and purchasing price index for raw materials will continue throughout 2016. Furthermore， the trend wherein the CPI grows faster than the PPI and services prices grow faster than consumer goods prices will also be maintained. However， due to the economic slowdown and a shrinking gap between labor market supply and demand， the difference between the growth rates of consumer goods and services prices will gradually be narrowed.

Moreover， since the services prices have increased substantially and mobile commerce has developed rapidly， traditional labor-intensive services， such as catering and home services， are facing severe pressures to restructure. Because of decreased intermediate costs and increased supplies of labor—for example， the use of mobile applications making it possible for housewives to provide cooking services—prices of labor-intensive services will grow less rapidly， or may even stop.