ABSTRACT
China responded to the global financial crisis of 2008 with a massive fiscal and monetary stimulus, amounting to nearly 15 percent of total output over a two-year period. The main structural challenge that China faces is a demographically driven shift in the labor market, which will push up wages and long-run inflationary pressure. In 2008 one of China’s leading labor economists, Cai Fang of the Institute of Population and Labor Economics of the China Academy of Social Sciences, published a controversial book arguing that China’s economy was about to hit a crucial turning point: the supply of “surplus labor” from the countryside was on the verge of drying up. While rapid wage growth is in general a good thing, since it will boost household incomes and enable household consumption to become a much stronger driver of economic growth, the cost is a higher rate of consumer price inflation.
