The role of structural and political factors in the determination of Chinese wages: a critical

analysis of the Lewisian model of development with unlimited supply of labor

Esther Majerowicz Gouveia

1. Introduction

Since the beginning of the 21st century, several academic and journalistic articles, as well as

corporation’s reports have questioned the continuity of the fundamental feature responsible for China’s

rise as the “factory of the world”: the low wages of its enormous contingent of unskilled laborers.

Export enterprises located in the main coastal cities are reporting labor shortages; statistics show a

rapid increase in real wages; and a great part of academic literature is alerting to the exhaustion of labor

surplus in China’s agriculture, which would be responsible for the rising wages. For many scholars, the

increases in real wages are a tendency that will persist, compromising China’s position as a big

exporter of cheap manufacturing, which, by its turn, would have impacts all around the world.

The authors that associate the rising wages with the end of labor surplus in agriculture refer, in

their majority, to the model of dual economy proposed by W. Arthur Lewis (1954), in which labor

transfer between economic sectors leads to fast economic growth and stagnant wages. According to

Lewis, when labor surplus is exhausted real wages begin to increase. For this reason, many authors are

proposing that the Lewisian turning point – moment when real wages start to rise in response to the end

of labor surplus - has arrived in China, conferring, through such expedient, a structural nature to the

increase in real wages. If such hypothesis is true, then Chinese manufacturing international

competitiveness will quickly erode, impelling large exporting enterprises to look for other countries

where labor is cheaper.

If industrial wages are in a trajectory of rapid and persistent growth, given the structural nature of

the process behind it, the low cost positions held by large multinational enterprises in China would be

directly affected, eroding profit margins and giving impulse to a new movement of geographical

reconfiguration of productive capital. In this sense, the objective of the present paper is to assess if

China’s international insertion as an exporter of cheap manufacturing is being eroded due to structural

upward pressures over industrial wages. Answering this question is fundamental, because if China

loses this position in the international economy we may be able to watch, in a brief lapse of time, other

radical process of transformation in the international division of labor, with capital moving through the

globe seeking for new frontiers of cheap labor’s exploitation. In contrast, if China ceases to be this vast

space of super-exploitation and if capital does not encounter new strongholds of cheap labor in

sufficient scale, it is possible that industrial wages around the world will experience upward pressures

emanated from China, which would contribute to revert the great historical offensive, instituted with

neoliberalism, of capital over labor.

In order to investigate if this hypothesis is true and to expose the debate over the nature of the

rising Chinese wages, especially in industry, the present paper is divided in five more sections besides

this introduction. In the first one, we will expose the main theoretical framework that has been utilized

by academic literature to explain the rising wages and to project its future evolution: Arthur Lewis’

formulation on the development with unlimited supplies of labor. In the following section, we will

briefly analyze Chinese statistics on employment to see if the thesis of agricultural surplus labor’s

exhaustion still holds when faced with empirical evidence. Conversely, the third and the fourth sections

are dedicated to theoretical analysis; in the former we will discuss China’s peculiarities in Lewis’

model, while in the latter we will proceed to a critique of Lewis’ formulation itself. Finally, the fifth

section will be dedicated to final conclusions, proposing some general guidelines to interpret Chinese

wage dynamics and the problem of labor surplus in the country.

2. Economic development with unlimited supplies of labor

There is a vast academic literature, which gained spotlight in the first years of the 21st century,

centered on debating whether Chinese capitalism has reached the end of its era of unlimited supply of

labor. The controversy rests on Arthur Lewis’ (1954) formulation regarding capitalist development

on overpopulated and underdeveloped economies. According to the author, these economies would

mainly be characterized by duality, as it would be possible to distinguish a non-capitalist or archaic

sector and an expanding capitalist or modern sector. The criterion that guides this separation is, as

defined by Lewis (1954), the utilization of reproducible capital by the capitalist sector, utilization

which is remunerated. Lewis’ (1954) analytical focus is on the necessary relationship that the non-

capitalist sector must establish with the capitalist one in order for the latter to expand, that means, the

non-capitalist sector must operate as a supplier of labor to the capitalist sector. In the case of

overpopulated countries, such as the Asian ones, this relation gains a particular feature, since there is

what many authors designated as “disguised unemployment”, or, according to Lewis (1954),

marginal productivity of labor being negligible, zero or negative. Thus, it follows that there can be a

transfer of labor to the capitalist sector without impacting the level of production of the non-capitalist

one, assuming that the workers which remain in the latter accept more hours of work. As a result,

these economies are characterized by labor’s abundance and by the scarcity of capital and natural

resources, configuring a situation of development with unlimited supplies of labor.

Given the worker’s remuneration in the non-capitalist sector, the corollary of the above

mentioned proposition is that the wage in the capitalist sector is constituted by this remuneration plus

an additional capable of addressing the higher urban costs of living and the subjective inconvenience

brought by migration. Therefore, if the wage in the capitalist sector is determined by what can be

gained outside of it, the sector can expand itself without pressuring up wages until labor surplus is

exhausted. According to Lewis (1954), the remuneration in the non-capitalist sector corresponds to the

subsistence level if peasants pay rent. Nonetheless, if they own the land, their remuneration will be

equal to the average product of the farmer. Since in China rural land is a collective/state property, the

second situation constitutes the parameter for establishing the minimum level of wages in the capitalist

sector.

According to the author, the non-capitalist sector is composed by the farmers, the casuals, the

petty traders and the retainers. Additionally, the author highlights two other sources of labor supply:

women entering in the labor market, a process that would be regulated by employment opportunities,

and demographic growth. Once started the process of releasing the labor surplus towards the capitalist

sector, the level of employment in the latter will be the one in which the marginal productivity of labor

is equal to the real wage, as defined earlier. Capital accumulation, or amplified reproduction, will entail

a rise in marginal productivity, enabling the increase of the level of employment in the capitalist sector

by the absorption of labor surplus, at constant real wages. The gradual absorption of surplus workers by

the capitalist sector will elevate the productivity of the economy as a whole, since there is a differential

of productivity between the two sectors.

Lewis points out the impacts of the capitalist sector expansion over the functional distribution

of income:

“Abstracting from population growth and assuming that the marginal product of labour is zero, this

subsistence income remains constant throughout the expansion, since by definition labour can be yielded up

to the expanding capitalist sector without reducing subsistence output. The process therefore increases the

capitalist surplus and the income of capitalist employees, taken together, as a proportion of the national

income. … because real wages are constant, all that the workers get out of the expansion is that more of them

are employed at a wage above the subsistence earnings. The model says, in effect , that if unlimited supplies

of labour are available at a constant real wage, and if any part of profits is reinvested in productive capacity,

profits will grow continuously relatively to the national income, and capital formation will also grow

relatively to the national income.”

Notwithstanding, according to Lewis, the capitalist sector’s expansion process at constant real

wages can be interrupted without exhausting all the available labor surplus. Since the parameter for the

determination of real wages in the capitalist sector is the remuneration that can be obtained in the

traditional sector, in Lewis (1954), everything that elevates this remuneration, will also rise real wages

in the capitalist sector. With this in mind, the author lists different reasons for an increase in real wages,

despite the existence of labor surplus:

a) The average product of the worker outside the capitalist sector increases due to a pace of

capital accumulation that is superior to the rate of demographic growth. In such case, the

reduction of the absolute number of workers in the traditional sector elevates the average

product per men as a result of the reduction in the number of people to be fed within this

sector, and not by any alteration in production.

b) Supposing that the two sectors produce different goods – specifically, that the traditional

sector produces food and the capitalist one all the remaining goods – the real terms of trade

between the two sectors can be negatively altered in relation to the capitalist sector due to an

increase in the size of the capitalist sector vis-à-vis the traditional one. Thus, in order to

maintain real wages constant in the capitalist sector, a bigger part of the sector’s product must

be paid to workers. In such case, real wages rise relatively to the fraction of product

appropriated by capital, and not in absolute terms.

c) The non-capitalist sector absorbs technical progress, elevating its productivity. Without a

corresponding alteration in the terms of trade, the increase in the average product per person

will raise real wages in the capitalist sector.

d) Workers in the capitalist sector can be impelled to mimic the capitalist lifestyle, transforming

the conventions regarding what composes the subsistence wage. Thus, by means of unions’

pressures, these workers could amplify the wage differential between the two sectors.

Aside from these circumstances, the continued expansion of the capitalist sector will proceed at

constant real wages until it absorbs all labor surplus. When the process of absorption exhausts itself, the

economy shifts from a situation characterized by unlimited supply of labor to one marked by the

scarcity of labor; this moment is better known in the academic literature as the Lewisian turning point.

In this point, wages are decoupled from the subsistence level, or the average product of farmers, and

start rising. As a result, the increased wages have an impact on the functional distribution of income,

reducing the share of profits on national income. In this way, Lewis concludes that: “When capital

accumulation catches up with the labour supply, wages begin to rise above the subsistence level, and

the capitalist surplus is adversely affected” (LEWIS, 1954). For the author, since amplified

reproduction depends on savings (that determinate the investment), which, by its turn, would be a

function of the share of profits over income, the rising wages will eventually stop the capitalist sector

expansion. Because rising wages reduce the share of profits, they would diminish the savings that are

destined to new investments.

Once exposed the general traits of Lewis’ (1954) theoretical proposition on economic

development with unlimited supplies of labor, we will briefly analyze Chinese employment structure in

order to see if there are empirical evidences that would corroborate the alleged exhaustion of

agricultural labor surplus as an explanation to the rising wages.

3. China’s employment structure: empirical evidences concerning the hypothesis of

agricultural labor surplus exhaustion

According to Yang, Chen and Monarch (2010), average urban real wage had grown 13,2% per

year from 1998 to 2007. Nevertheless, as we shall see, this number tends to portray only the wages of

legal urban residents, which are better paid than illegal rural migrants. Knight, Deng and Li (2010)

discuss several studies with different sources of data showing that, at least from the mid-2000s, also

rural migrants’ wages have been rising, even though the amount of this increase is controversial.

Notwithstanding, this growth has not yet impacted qualitatively Chinese competitiveness, which,

according to Ceglowsky and Golub (2011), is still based on the low Chinese wages. The latter authors

analyzed China’s relative unit labor costs – a measure that considers both productivity and wages – and

found out that, aside from Chile, only Indonesia and India have lower relative unit labor costs than

China. This reveals that the level of wages was so low that even in the presence of fast growth they

remained very low in international standards.

In face of such context, several academic studies guided by the theoretical framework of the

development with unlimited supplies of labor seek to verify whether the Chinese economy has reached

the turning point through an estimative of the number of surplus laborers. In this section we will not try

to assess the number of surplus workers, but merely give a broad panorama on Chinese employment

structure. Before we proceed with this analysis, we shall make some considerations regarding the data

that will be used in the present section.

3.1 General problems about Chinese official statistics on employment

When it comes to dealing with Chinese official statistics on employment and wages, one cannot

assume immediately its face value. First of all, it must be considered that the transition to a capitalist

economy has made the statistical methods used during the socialist period improper to China’s new

reality. In order to address this mismatch, over the last three decades several changes have been made

not only in the methods applied to collect data, but also in the definitions of the statistical categories,

which collaterally created ruptures in the statistical series and data that are not directly comparable. As

a result of these changes, presently there are two different statistical systems coexisting side-by-side in

China based on all distinct methods of data collection, definitions and coverture, producing data that in

many occasions are conflictive. While the system from which all wage’s statistics and most of the data

on employment are drawn has an administrative nature – data come from administrative registers and

annual reports in which every economic unit is responsible for the production of its own numbers,

sending them up in a vertical chain –, aggregate data on employment, such as total employed persons

and its composition by sector and by rural/urban areas, come from censuses and national sample

surveys.

The distinct nature of these systems has its higher expression when it comes to migrant workers.

Despite the intense flows of population from rural to rural and rural to urban areas, either permanent or

seasonal, migration is still legally forbidden for the vast majority of those who actually do it. When

born, the person inherits her/his mother’s register of residence in a determined area, and only with legal

authorization, which is still extremely difficult, one can change this register from rural areas to cities

and from cities to bigger cities (CHAN, 1999). When all enterprises were collective or state owned, the

denial for changing the register of residence was a de facto one, since those who tried to illegally

migrate could not find jobs in these enterprises or even remain for long periods in cities for it was not

possible to acquire food outside one’s registered area of living (CHAN, 1999). Nevertheless, with the

economy being privatized, the acceptance of illegal migrants has become generalized in private

enterprises, with capitalists being very inclined to contract these legally unprotected workers in order to

run its labor costs down. Given this situation, the tendency to fraud accounting numbers in order to

boost profits – a tendency, by the way, spread all around the capitalist world – is even worsened, and

has a tremendous impact on national aggregate data considering that the main source of data on

employment and all data on wages come from enterprises’ annual reports. So, as described by Banister

(2005), it is very widespread through enterprises the practice of having two sets of books, one for

management purposes and other for tax purposes, in which illegal migrants and their smaller earnings

are not reported (sometimes they are left outside the two sets of books). As a result, with the intense

process of privatization, urbanization and structural change, post-reform migration in China – the major

flow of population in the humankind history – in a great extent translates into missing data.

To address this enormous illegal flow of population, the National Bureau of Statistics (NBS)

incorporated in censuses and sample surveys the criterion of de facto residence for more than six

months in the same place to determine a person’s residence regardless of her/his register. This change

adapted the statistical system to cope with permanent migration, but does not deal with seasonal

migration, which is a relevant flow of population in contemporary China. Notwithstanding, the

difference in the general statistics produced by censuses and the specific data generated by the

administrative system (based on annual reports) are not unreported illegal permanent migrants, because

the two systems use different definitions of urban areas: “The NBS-defined urban areas therefore are

rarely in total congruence with the administratively defined urban areas (city districts).” (CHAN,

2007, p. 387). As a result, for instance, general data on total urban employment, although more

accurate, is not dealing with the same universe of population that specific data on urban employment or

wages are drawn.

Another major problem in Chinese statistics is the unemployment/employment measurement. In

cities, unemployment is assessed based on the number of registered unemployed persons, which leave

out migrants and, as discussed by Naughton (2007), excludes many laid off workers from the massive

privatizations of the late 1990s. The problem of measurement only applies to urban areas, since:

“In rural areas, the household responsibility system guarantees that everybody has his or

her share of land, so it is a reasonable assumption that rural overt unemployment according to

the International Labor Organization (ILO) definition is almost negligible because these

laborers either work in non-agricultural sectors or in agriculture. Therefore, this category of

“rural employed persons” can be viewed as the stock of rural laborers as well.” (CAI &

WANG, 2008: pp.55)

With all these considerations in mind, we will proceed with the analyses of Chinese official

statistic in order to give a broad picture of the Chinese employment structure.

3.2 A panorama of China’s employment structure

China’s transition to capitalism was accompanied by deep alterations in its employment

structure. Based on censuses and sample surveys, the graphic 1 shows the percentage of each of the

three economic sectors on total employment. In 1978, 70,5% of workers were employed in the primary

sector, 17,3% in the secondary and 12,2% in the tertiary, characterizing an economy predominantly

agrarian and rural. Approximately three decades after, the labor transfer between sectors has been

reflected in an accentuated drop in the participation of agricultural employment on the total

employment. Thus, in 2010, 36,7% of workers were employed in the primary sector, while 28,7% and

24,6% were occupied respectively in the secondary and tertiary sectors. The tertiary sector was the one

that had more growth in the last decades, and its participation on employment overpassed the secondary

sector in the first half of the 1990s.

With regard to agriculture, although its participation on total employment had dropped

practically in its half between 1978 and 2010; its size on total employment is still very high when

compared to developed countries, such as the USA, where only 3% of the population are employed on

agriculture. In Brazil, an “emerging” country, the share of agriculture on total employment is 10%.

Nevertheless, the share of agriculture on total employment is overestimated by the Chinese censuses

since it counts seasonal migrants, whose main occupation is in manufacturing, as agricultural workers

(BANISTER, 2005).

Graphic 1 – Employment structure

(primary sector, secundary sector, tertiary sectorterciário, in percentage)

Sources: China Statistical Yearbook 2011

Concerning employment’s distribution between urban and rural areas, it is also clear the drastic

shift towards urbanization. In the first year of the economic reforms, in 1978, China had 401 million

workers employed, with 95,14 million in urban area and 306,38 million in rural ones, which was

respectively 23,7% and 76,3% of total employment. Approximately three decades after, in 2010, the

Sixth National Census reveled that overall employment had dramatically grown due to the growth on

the economic active population, with 761,05 million employed persons in an economic active

population of 783,88 million. In 2010, 346,87 million were urban workers and 414,18 were rural,

corresponding respectively to 45,58% and 54,42% of total employment. Graphic 2 shows the evolution

of rural and urban employment between 1990 and 2010.

Graphic 2 – Employment evolution by rural and urban areas

(number of employed persons in urban and rural areas, in millions)

Sources: China Statistical Yearbook 2011

During the two last decades, urban employment, which has grown every single year, doubled its

size, while rural employment, in absolute terms was stagnant in the 1990s and started declining in the

2000s. Before its stagnation, rural employment had experienced a great expansion between 1978 and

1990: in the period 1978-1985, it had expanded in 20% and from 1985 to 1990 it augmented in 28,7%.

Therefore, associated with the vigorous process of urbanization, the two last decades experienced the

intensification of rural to urban migration, which, notwithstanding, only started to impact rural

employment in absolute terms in the 2000s.

Rural employment decline as a share of total employment was much slower than the drop in

primary’s sector participation. This responds mainly to one of the most prominent features of Chinese

rural employment, which is the great participation of industrial employment. The strategy of

geographic decentralized industrialization of the Maoist period, which promoted industry both in rural

and urban areas, has flourished in post-reform period through the form of township and village

enterprises (TVEs). Graphic 3 shows the structure of the rural employment from 1990 to 2010.

Graphic 3 – Rural employment structure

(number of employed persons in TVEs, in rural private enterprises, statistical residual,

in millions)

Sources: China Statistical Yearbook 2011

TVEs and private enterprises – the latter is a misleading term, since a great part of TVEs is

private, so that the term could be generically defined as small private business – correspond jointly to

non-agricultural rural employment. In 1990, the share of rural non-agricultural employment in rural

employment was 22,8%, while in 2010, this number jumped to 52,6%. This drastic increase responded

both to the own growth of non-agricultural rural employment and to the decrease of rural employment

in absolute terms. TVEs had grown very rapid between 1984 and 1988, but the velocity of their growth

sharply declined after the beginning of the process of privatization in the mid-1990s. During the last

two decades, private enterprises (small business) also grew significantly, amounting 27% of total non-

agricultural rural employment in 2010, while in 1990 is was only 14,8% .

The difference between non-agricultural rural employment and rural employment assessed by

the censuses is the statistical residual, which, in 2010 corresponded to 25,8% of total employment. It is

tempting to infer that this residual would be agricultural employment. Nevertheless, as discussed

earlier, the difference between the classification of urban areas in the statistical systems (TVEs and

private enterprises are subjected to annual reports and administrative registers, respectively) does not

allow us to directly do so. Aside from the question of how it would be proper to count seasonal

migrants, censuses tend to count towns surrounded by rural areas as urban, while they appear in TVEs

and private enterprises as rural. If we discounted all TVEs and private rural enterprises from rural

employment we would be improperly discounting the TVEs and private rural enterprises that are

located in such towns, since they appear as urban employment by censuses criteria. As a result, the

residual would be a biased estimate of agricultural employment. Nevertheless, since censuses

overestimate agricultural employment and the statistical residual underestimate it, we can use these

estimates to construct an interval for agricultural employment. Graphic 4 shows the discrepancy

between both estimates.

Graphic 4 – Difference between the employment in primary sector and the statistical residual

(in millions of employed workers)

Sources: own calculations based on China Statistical Yearbook 2011

In 2010, the measures diverged in 83 million workers, almost 11% of Chinese total

employment, setting agricultural employment somewhere between 25,8% to 36,7%. These are the kind

of problems, insufficiencies and imprecisions that do not recommend an attempt to assess the number

of surplus workers in agriculture. The academic literature that seeks to evaluate the size of the labor

surplus still available in agriculture is not consensual in its estimates. The numbers presented in these

studies vary enormously, either by the lack of comprehension of the Chinese statistical systems, or by

the different presuppositions made by the authors in order to fulfill the gaps in statistical data. In

general, the attempts to estimate the labor surplus in agriculture are made in two main steps. The first

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of them consists in, given labor productivity and the total production in agriculture, estimate the

number of laborers that are necessary to achieve this level of agricultural product working at the so

mentioned productivity. Once determined the number of necessary laborers required by agricultural

production, the second step involves the identification of agricultural laborers in the rural employment

structure, as to provide the universe of workers from which the “necessary laborers” will be subtracted

in order to obtain the surplus workers. Since the identification of this universe of workers, i.e.

agricultural employment, can be misleading and estimates vary widely, so will the estimates of surplus

workers, almost consisting in a task of guessing. Nevertheless, what should be considered is that

whether the actual number of agricultural employment is 25,8% or 36,7% of total employment, these

numbers are extremely high. They also imply that there is plenty of room for agriculture to absorb

technological progress, reducing dramatically the number of “necessary laborers”.

On empirical grounds, even taking in consideration the broad range of problems presented by

Chinese statistics, the end of the era of unlimited supplies of labor is a non-issue. This widespread

controversy in face of such strong evidence against the proposition that labor has become scarce in

China can only derive from an urgent need to mechanically relate wages with quantities of labor, an

expedient erected upon a simplistic and erroneous interpretation of Lewis’ theoretical framework. In

order to clarify this affirmation, we will consider the peculiarities of the Chinese case on Lewis’

framework, supposing that its underlying premises are correct. Afterwards, we will proceed to the

critique of the theoretical framework itself.

4. Particularities of the Chinese case in the theoretical framework of the development with

unlimited supplies of labor.

How we should characterize the Chinese situation over the last decade regarding the Lewis’

development with unlimited supplies of labor? According to Majerowicz (2012), there are the

following stylized facts:

a) The evolution of the functional distribution of income has been benefiting profits, with a drastic

reduction in the share of wages, which dropped at least by 6,3 percentage points from 1995 to

2007 (BAI & QIAN, 2010; MAJEROWICZ, 2012)

b) Rural employment is reducing in absolute terms, while rural non-agricultural employment has

been expanding. Notwithstanding, data problems related to migrant workers, to the treatment

applied to seasonal employment and to distinct definitions of urban areas arise difficulties in the

task of assessing the amount of reduction in the level of agricultural employment. These

difficulties, in a context of rising agricultural productivity, impart an almost speculative nature to

the attempts in quantifying labor surplus in agriculture.

c) Real wages has been increasing in urban and rural areas, inclusive, apparently, among migrants

without local register. However, official statistics offer a panorama on wages limited to the share

of workers that are better paid. Those workers, in industry, had their real wages growing at an

average rate superior to 12% per year in the period 1998-2008.

In face of the above mentioned facts, what can surely be affirmed is that the release of labor from

the non-capitalist sector to the capitalist one – a process that gained momentum in the beginning of the

1990s – has been accompanied by fast real wage growth since 1998 for those workers which are

captured by official statistics and, apparently, since around the mid-2000s for migrant workers

(MAJEROWICZ, 2012). However, these rises have not altered the pattern of evolution of the

functional distribution of income as described by Lewis (1954). In light of the contradiction between

theory, as described until now, and reality, how is it possible to read fact “a” as being compatible with

facts “b” and “c”? Part of the answer may arise from the monetization of worker’s remuneration, so

that monetary wages increase without pressuring up labor the labor share in national income,

considering everything else constant.

The rest of the answer is found in gains of productivity that are superior to worker’s

remuneration growth. These relative gains can occur due to structural change effect as well as to

within-sector effect; the latter dominated by changes in the industrial sector (BAI & QIAN, 2010).

Regarding the structural transformation effect, it is assumed that both productivity and wages are

constant, resulting in the fact that each sector’s labor share also remains constant. Consequently, shifts

in the share of labor for the whole economy are derived from a change in the composition of sectors,

meaning that although sectorial labor shares are constant, their level are distinct from one another so

that changes in sectors’ weights in the economy alter the aggregate labor share. Certainly, over the last

decade, the structural change effect in China, for the larger share of labor in the appropriation of the

agricultural sector’s income vis-à-vis other sectors, concurs to make the three stylized facts compatible,

so that even in the presence of wage growth the transfer of labor between sectors reduces the labor

share in national income. In relation to the within-sector effect, it is assumed that the weights of the

sectors in the economy remain constant, while wages and productivity are allowed to vary; as a result,

it is the difference between their velocities of growth that will determine whether there will be a change

in the labor/capital sectorial share and which direction it will take. So, if productivity grows faster than

wages, the capital’s share on national income will rise despite the fact that wages are no longer a

constant, a situation that is neglected by Lewis (1954). This is the case of China’s industry over the last

decade, as argued by Cai e Wang (2011): “Nationwide data from manufacturing firms shows that while

workers’ compensation in real terms increased by 91.8 per cent between 2000-2007, marginal product

of labour increased by 178.8 per cent” (CAI & WANG, 2011)

Therefore, when wages’ increases (fact “c”) are considered in light of productivity gains, it is

possible to note that the behavior of Chinese real wages in Lewis’s general framework – which regards

the amplified reproduction of the capitalist sector – has not negatively impacted the functional

distribution of income (fact “a”). Consequently, the turning point understood as the moment in which

the share of profits in national income start to diminish has not yet been achieved, even with the

reduction of the population employed in agriculture (fact “b”).

However, in the majority of the studies which apply the theory proposed by Lewis to

contemporary China, facts “b” and “c” observed at the same time (that means, the reduction of

population employed in agriculture simultaneously with the verification of rising real wages in the

capitalist sector) are considered as proof of the arrival of the turning point in the stricter sense of the

Lewisian analysis, seen merely as a theory about the level of wages. Nevertheless, we will argue that

this methodological approach is not only improper to the application of Lewis’s framework to China,

but also that it is derived from an equivocated reading about the sectors in Lewis. In contrast, the fact

that the majority of the academic literature ignores fact “a” in the analyses regarding the turning point

derives from the theoretical insufficiencies of the Lewisian framework itself, which is responsible to

make fact “a” incongruent with facts “b” and “c” mainly as a result of the treatment given by the author

to capitalist sector’s productivity.

Starting by either the analysis of wages or of employment, when dealing with the most common

strategies utilized by the academic literature in order to assess if the Lewisian turning point has arrived,

the first issue that comes out is the negligence that these strategies incur regarding the functional

distribution of income. In Lewis (1954), constant real wages – resulting of labor surplus – are relevant

in its relation to the amplified reproduction of the capitalist sector, which, by its turn, elevates the

productivity of the economy as a whole, enabling economic development. According to the author, the

profits as a share of national income are the main source to the concretization of new investments that

are responsible for the expansion of the capitalist sector:

“Our problem then becomes what are the circumstances in which the share of profits in the national

income increases? The modified classical model which we are using here has the virtue of answering the

question. In the beginning, the national income consists almost entirely of subsistence income. Abstracting

from population growth and assuming that the marginal product of labour is zero, this subsistence income

remains constant throughout the expansion, since by definition labour can be yielded up to the expanding

capitalist sector without reducing subsistence output. The process therefore increases the capitalist surplus and

the income of capitalist employees, taken together, as a proportion of the national income …. The model says,

in effect , that if unlimited supplies of labour are available at a constant real wage, and if any part of profits is

reinvested in productive capacity, profits will grow continuously relatively to the national income, and capital

formation will also grow relatively to the national income.” (LEWIS, 1954)

In this sense, the preoccupation with the elevation of real wages corresponds to the concern

with the reduction of the share of profits in national income, depressing the current rate of investments

until the level of the latter becomes just enough to cover depreciation, as to maintain the capitalist

sector’s stock of capital constant and the economy in a trajectory of simple reproduction. As a result,

through its effects on profits as a share of national income, the increase in real wages leads to the

stagnation of the capitalist sector, hindering its expansion and gains in productivity for the economy as

a whole therefore obstructing the process of economic development. From this perspective, the turning

point as the moment in which the share of profits ceases to grow and starts to diminish has not been yet

reached; the capitalist sector’s expansion is not by any means compromised by falling profits in the

national income. Raising the issue of real wages in Lewis outside of its relationship with capitalist

amplified reproduction – a relationship that is mediated by the functional distribution of income – is to

extirpate from the Lewisian analysis its objective, its central concern: economic development.

Regarding the misinterpretation of the model, most of the problems are derived from the

improper translation of the Lewisian economic duality into a dichotomy between industry and

agriculture (FIGUEROA, 2004). Firstly, this inappropriate simplification affects what should be

considered as labor surplus, restraining it to agriculture. As a result, the estimate of surplus laborers in

agriculture, fact “b”, captures just a fraction of the reservoir of the Lewisian non-capitalist labor

surplus. Secondly, this interpretation of duality affects the form through which the capitalist sector

relates itself with the non-capitalist one, particularly in the way whereby the augmentation of

productivity in the non-capitalist sector impacts real wages in the capitalist one. Lastly, and in general

due to the inobservance of the various specific forms through which both sectors can establish

relations, it is necessary to highlight the academic literature negligence towards the diverse situations,

pointed out by Lewis (1954), in which the rise of real wages in the capitalist sector – fact “c” – can

occur without the exhaustion of the non-capitalist sector labor surplus. In order to clarify these issues,

we shall discuss the concept of duality in Lewis (1954) in a more detailed way whereas the difficulties

that arise from Lewis’ theoretical formulation itself turning facts “a”, “b” and “c” incompatible shall be

addressed separately afterwards.

4.1 The two Lewisian sectors and the relationship between them

In the theoretical framework proposed by Lewis (1954), neither the identity between agriculture

and the non-capitalist sector, nor the one between industry and the capitalist sector can be assumed. On

the one hand, as already mentioned, the non-capitalist Lewisian sector is compounded by other workers

besides farmers, such as the petty traders and the retainers; on the other hand, the capitalist sector can

be composed exclusively by agriculture as well as by all sorts of economic activities, with the industrial

ones among them. The particular configuration of economic activities in the two sectors and the

specific relationship between them will entail different conclusions about the process of labor transfer

as well as about wage’s behavior in the capitalist sector. Aiming to demonstrate the distinct

implications of the Lewisian framework, we will consider three different cases of economic

arrangements between the capitalist and the non-capitalist sectors.

Let us consider “Case 1”, in which the non-capitalist sector is the subsistence sector, belonging,

as in Lenin terms (1964), to the sphere of natural economy, and the capitalist sector is composed by

both industrial and agricultural activities. If the non-capitalist sector is considered as being the

subsistence sector, mainly agricultural, we necessarily need to assume an autarchic capitalist sector.

The subsistence sector, by definition, produces for itself; only eventually will appear surplus product

susceptible to commercialization with the capitalist sector. Nevertheless, this eventual surplus is not

capable to sustain the whole population of the capitalist sector, under permanent bases, yet more when

the process of continuous expansion of this population in the context of the development with

unlimited supplies of labor is taken into account. As a result, the capitalist sector must be able to supply

food for its own population. In this configuration, the relationship between the two sectors occurs

solely by the supply of labor from the subsistence sector to the capitalist sector demand for workers;

consequently, the non-capitalist sector appears fulfilling the function of creator of cheap work. In this

case, the rise of agricultural productivity in the subsistence sector elevates real wages in the capitalist

one, since real wages need to augment in order to restore the remuneration gap between sectors

enabling migration to keep occurring.

It should be noted that the increase of wages only will take place if the workers of the non-

capitalist sector are able to appropriate the fruits of the elevated productivity. In contrast, if the growth

on productivity is verified in the capitalist agriculture, the wages of the modern sector’s workers will

not increase, for laborers in the subsistence sector continue to “gain” the same. Instead, the productivity

elevation will make the basket of goods consumed by workers cheaper, tending to reduce labor costs.

Nevertheless, Lewis (1954) considers productivity in the capitalist sector as being constant, inasmuch

as he translates productivity elevations in the capitalist sector into increases in the stock of capital,

expedient that shall be later discussed.

Assuming “Case 2” as being the arrangement in which the non-capitalist sector is the

subsistence one and the capitalist sector is composed by industrial and/or agricultural activities for

exportation, the relationship between the sectors remains the same (i.e. the subsistence sector is the

producer of cheap labor). The capitalist sector’s “autarchy” should be found in the world’s capitalist

sector. Thus, if the national capitalist sector is centered in export monoculture, export’s income must be

utilized to import the necessary foods to the population employed in this sector, thereby the “national

capitalist agriculture” is substituted by the external capitalist sector. Conversely, if the national

capitalist sector is concentrated in industry, the latter cannot produce solely for the domestic market

(which is equivalent to the capitalist sector itself), imperiously needing to export in order to acquire

foods.

Finally, let us consider “Case 3”, in which the non-capitalist sector is agricultural, though its

production is aimed to the market (i.e. its activity is not of subsistence) and the capitalist sector

produces all the remaining non-agricultural goods. In this context, there is trade of goods between the

two sectors, making the relationship between them more complex. This case may be the most difficult

to picture/imagine, for the production with commercial purposes is, in general, associated to capitalist

labor relations (i.e. salaried work/hired labor). The situation is yet more complicated in face of Lewis’

confuse proposition regarding the possibility of interchange between the two sectors:

“This assumes that the capitalist and subsistence sectors are producing different things. In practice this is a

question of the relationship between industry and agriculture. If the capitalists are investing in plantation

agriculture side by side with their investment in industry, we can think of the capitalist sector as self-

contained. The expansion of this sector does not then generate any demand for anything produced in the

subsistence sector, and there are therefore no terms of trade to upset the picture we have drawn. To bring the

terms of trade in, the simplest assumption to make is that the subsistence sector consists of peasants producing

food, while the capitalist sector produces everything else.” (LEWIS, 1954)

In the above passage, either the situation of interchange described by the author is impossible,

since the subsistence sector composed by peasants, by definition, has capacity to produce only for

itself; or one must consider that the agricultural sector is neither capitalist nor a subsistence sector

simultaneously. At first sight, the fundamental distinction between this agricultural sector and the

subsistence one would be labor productivity. In the case under examination, labor productivity in

agriculture should be much higher than labor productivity in the subsistence sector, since the non-

capitalist agricultural commercial sector must be capable of providing foods to its population and to the

capitalist sector’s one. Furthermore, the productivity of the non-capitalist agricultural commercial

sector should not only be much superior to the subsistence sector, but it also need to be growing over

time, since the dynamics of the development with unlimited supplies of labor imposes that this non-

capitalist commercial agriculture provides foods as well as labor, so that fewer and fewer women and

men in farming could feed increasingly more people outside it.

In this specific case, the relationship between the sectors is altered, since the non-capitalist

sector is no longer solely a producer of cheap labor, as it encompasses the production of a great part of

the goods that compose the basket of goods consumed by workers employed in the capitalist sector.

Therefore, once there is an increase of labor productivity in the non-capitalist sector, its impact on

capitalist sector’s real wages is not the same as in cases 1 and 2. On the one hand, an elevation of labor

productivity pushes wages up due to the non-capitalist sector’s role as a provider of labor; on the other

one, an increase of productivity tends to cheapen the basket of goods consumed by non-agricultural

workers. The net effect of the rise of non-capitalist sector’s productivity on wages will depend on the

way in which these factors will interact with each other within a broader institutional context. In the

case in scrutiny, Lewis (1954) considers that the elevation of productivity in agriculture can be more

than compensated by prices reduction, benefiting the capitalist sector; however, he also highlights a

series of other means that can be utilized in favor of the capitalist sector, so that agriculture finances

industrialization:

“If there is no hope of prices falling as fast as productivity increases (because demand is increasing),

the capitalists' next best move is to prevent the farmer from getting all his extra production. In Japan this was

achieved by raising rents against the farmers, and by taxing them more heavily, so that a large part of the

rapid increase in productivity which occurred (between 1880 and 1910 it doubled) was taken away from the

farmers and used for capital formation ; at the same time the holding down of the farmers' income itself held

down wages, to the advantage of profits in the capitalist sector. Much the same happened in the U.S.S.R.,

where farm incomes per head were held down, in spite of farm mechanisation and the considerable release of

labour to the towns ; this was done jointly by raising the prices of manufactures relatively to farm products,

and also by levying heavy taxes upon the collective farms.” (LEWIS, 1954)

At this point, we should ask ourselves what would be, in practice, this non-capitalist agricultural

commercial sector that is able to provide wage earners’ laborers to the process of expansion of the

capitalist sector. Here we shall return to the association between mercantile production and salaried

work/hired labor, that is, capitalist relations of production. Could it be, for instance, composed by

landowner peasants employing only family labor? In such case there is private property, although there

is no hired/salaried labor in agriculture. Nevertheless, at this moment, a fundamental difference

between the subsistence sector – the natural economy – and the mercantile economy emerges, a

qualitative one, namely, the operation of the law of competition and its effects, as highlighted by Lenin

(1964) when analyzing USA’s agriculture:

“What is more, in such cases the point is always the evolution of agriculture under capitalism, in

connection with capitalism, under its impact, or the like. To evaluate this impact the greatest efforts must

above all be made to draw a line of distinction between “natural” and commercial economy in agriculture. It

is well known that “natural” economy, i.e., production for consumption on the home farm and not for the

market, has a relatively important part to play in agriculture, and is giving way to commercial farming at an

extremely slow pace. If the accepted principles of political economy are not to be applied mechanically but

intelligently, the law of the displacement of small-scale by large-scale production, for instance, can be applied

only to commercial agriculture.” (LENIN, 1964: pp. 65)

According to Lenin (1964), in commercial agriculture, competition tends to promote the

elimination of small agricultural production units by larger ones, taking into account as criterion for

assessing the size of an agricultural unit the value of its product instead of the extension of its surface.

As a result, a considerable share of former small landowners’ peasants is proletarianized, opening the

way to capitalist relations of production in the countryside. The enlargement of agricultural production

units will require landowners to hire workers, and the richer peasants will hence be transformed into

capitalists. Therefore, the existence of private property under conditions of commercial production, that

is, in which the tendency towards the specialization of production imposes the necessity of acquiring

through the market the goods that peasants cease to produce, brings the seed of labor commodification

into the countryside. In this case, the process of labor releasement from the non-capitalist sector is its

own transformation into a capitalist sector, not properly corresponding to the existence of a dual

economy.

Considering that “hired labour is the chief sign and indicator of capitalism in agriculture”

(LENIN, 1964; pp. 101), what would be a non-capitalist agricultural commercial sector that provides

hired labor? The hypothesis raised here is that post-reform China is probably one of the few cases

where “Case 3” is the fundamental form of the Lewisian dual economy. In post-reform China, the

maintenance of rural land as state/collective property has been preventing the expanding capitalist

sector to develop in agriculture. At the same time, the household responsibility system conferred a

mercantile nature to agricultural production since it imposed households the obligation to sell

production quotes to the Chinese state, in exchange of the right to exploit the land. The Chinese state

also provided initial stimuli for peasants to commercialize the agricultural production that exceeded the

quota, selling it in the market or directly to the state, by assuring that all the exceeding production

would be bought at favorable prices, resulting in a strong incentive towards the specialization of

production in peasant units (MORAIS, 2011). Consequently, production aiming self-sufficiency – the

logic of natural economy as well as of Maoist peasant communes – has been undermined by productive

specialization, which takes root in the modus operandi of mercantile economy. As a result, peasants

have become dependent on the market to satisfy their basic needs. As we will discuss later, if the

elimination of small agricultural units is not yet possible in China due to the legal status of rural land,

this dependence transform peasants and their real income vulnerable to prices.

Given this particular characterization of China in Lewis’ theoretical framework, we shall

explore what it implies to the application of the development with unlimited supplies of labor’s

proposition to the Chinese case. Since in “Case 3” it is necessary that the non-capitalist sector

experiences successive gains in productivity over time, and simultaneously that the real income of

peasants remains stagnant; the corollary derived from these requirements is that peasants must be

constantly alienated from the additional product of their labor. In China, the state is the only one that

has the conditions to fulfill this task, for, besides having the tributary mechanisms at its disposal, it has

fundamental role in determining prices. The state therefore has the mechanisms either to impede or to

allow the peasantry to appropriate the gains of productivity in agriculture. Despite the fact that, in

theory, peasants cannot be expelled from land, there are in China several available means to forge the

ruin and the misery of peasants, causing their proletarianization. We can also find this perception in

Hung (2009):

“… an unlimited supply of labour is not a natural phenomenon given by China’s population structure, as is so

often assumed. Rather, it is a consequence of the government’s rural agricultural policies which, intentionally

or unintentionally, bankrupt the countryside and generate a continuous rural exodus.” (HUNG, 2009, pp. 10-

12)

It is by the utilization of these means that Lewis (1954) characterizes the role of the capitalist

state in the process of capital accumulation: “The state capitalist can accumulate capital even faster

than the private capitalist, since he can use for the purpose not only the profits of the capitalist sector,

but also what he can force or tax out of the subsistence sector” (LEWIS, 1954). We shall add to this

proposition that in China the state not only can accumulate capital in a faster way, but also that he must

do it, or else there is no labor transfer at constant real wages. It is this fundamental mediation that is

derived from the singular arrangement of the property of the means of production in China that escapes

the academic studies discussed in the previous section.

As a result, when seeking to estimate the number of remaining people employed in agriculture

or the rise of real income as natural expression of the entrance in a labor scarcity era, these studies treat

the labor transfer between agriculture and the capitalist sector as a natural and spontaneous

phenomenon, like air masses that move from high pressure areas to low pressure ones. On the one

hand, they do not consider that in order for the Chinese agriculture to elevate its productivity and

simultaneously supply labor at constant real wages, this high pressure zone must be artificially built by

the state; one the other one, they ignore that this pressure might be reduced by state’s action, impacting

peasant’s real income as well the level of real wages in the capitalist sector without labor surplus being

exhausted. For this reason, these studies neglect the secret of the development with unlimited supplies

of labor in China: the role of state in the primitive accumulation of capital. As a consequence, the

coercive nature of the process of peasantry’s proletarianization is masked, so that many authors give a

beneficial aura to migration, seen as a positive factor in peasants’ lives, even recommending it stimulus

as a policy of poverty reduction. Nevertheless, if we look at the process on the contrary, this rural

exodus is presented as a consequence of a policy of creation and/or reproduction of poverty between

peasants led by the Chinese state, which is the engineer of the constant real wages of the Lewisian

model.

Furthermore, a differential of remuneration is not enough if labor transfer is to happen. This

differential should be built upon a baseline that impedes peasants to appropriate all the necessary

product needed for their reproduction, as to make the proletarianization of part of the members of the

productive agricultural cells a strategy for complementing this necessary product (since there are

remittances made by migrants to their families), implying, as in Lewis (1954), that those who remain in

agriculture will work more hours. This qualification seems fundamental given that this migration

implies not only a rupture between the individual and his community, but also between the individual

and the traditional way of life. This rupture is a qualitative one and cannot be described by homo

economicus’ rationality. If peasants retain a significant part of the additional product brought by

improvements in productivity, it is probable that the logic of the traditional way of life will conduct

them to work lesser hours a day, instead of impelling them to migrate for a differential of remuneration.

The peasant of the non-capitalist sector is not imbued with the logic of accumulation, which is specific

of capitalism. The decision to migrate to cities is mainly a response to factors of expulsion from the

countryside, coercive ones.

Other element that tends to shadow this nature is the fact that there is a de jure possibility to

remain in agriculture. In this sense, the coercive element is neither expropriation (although it is already

happening), nor the mobilization of state’s repressive apparatus, but a political-economic mechanism

that hinders the peasants to substantially appropriate the gains of agricultural productivity:

“Capital finds the most diverse types of medieval and patriarchal landed property—feudal, “peasant

allotments” (i.e., the holdings of bonded peasants); clan, communal, state, and other forms of land ownership.

Capital takes hold of all these, employing a variety of ways and methods.” (LENIN, 1964: pp. 22)

“Capital subordinates to itself all these varied forms of land ownership and remoulds them after its own

fashion, and if one is to understand, evaluate and express this process in statistical terms, one must learn to

modify the formulation of the question and the methods of investigation in accordance with the changing

form of the process. … In all these cases, the development and victory of capitalism is similar, though not

identical in form. ” (LENIN, 1964: pp. 59)

According to Lenin (1964), the process of peasants’ proletarianization should not be regarded

solely as immediate expropriation:

“Displacement also implies the ruin of the small farmers and a worsening of conditions on their farms, a

process that may go on for years and decades. This deterioration assumes a variety of forms, such as the small

farmer’s overwork or malnutrition, his heavy debts, worse feed and poorer care of livestock in general, poorer

husbandry—cultivation, fertilization and the like—as well as technical stagnation on the farm, etc.” (LENIN,

1964: pp.70)

While in the above passage Lenin (1964) focuses in the material elements that underlie the

process of proletarianization, Harvey (2003) points to a larger concept of primitive accumulation of

capital:

“The process of proletarianization, for example, entails a mix of coercions and of appropriations of

precapitalist skills, social relations, knowledges, habits of mind, and beliefs on the part of those being

proletarianized. Kinship structures, familial and household arrangements, gender and authority relations

(including those exercised through religion and its institutions) all have their part to play. In some instances

the pre-existing structures have to be violently repressed as inconsistent with labour under capitalism, but

multiple accounts now exist to suggest that they are just as likely to be co-opted in an attempt to forge some

consensual as opposed to coercive basis for working-class formation. Primitive accumulation, in short, entails

appropriation and co-optation of pre-existing cultural and social achievements as well as confrontation and

supersession.” (HARVEY, 2003: pp.146)

Despite the existence of elements of co-optation, when questioned, migrants mention poverty to

explain their move to cities (WEBBER, 2008). We are not affirming that these elements of co-optation

do not concur to rural-urban migration. Notwithstanding, the scale presented by migration in China is

such that the process of labor transfer would not be possible if it were not built upon the economic

coercion imposed by the policy pursued by the Chinese state. As we will discuss later, the recent

increase of peasants’ real income has not undermined the differential of remuneration between the two

sectors, nevertheless it had a negative impact almost immediately on the flow of rural migrants to

cities.

5. Critics regarding Arthur Lewis’ theoretical formulation on the development with

unlimited supplies of labor

Regarding the insufficiencies of Lewis’ formulation on the development with unlimited

supplies of labor (1954), the main problem arises from the treatment given by Lewis to productivity

gains in capitalist sector. The translation of productivity increases in the capitalist sector as elevations

in the stock of capital is the main responsible to the apparent incompatibility between facts “a” and “c”,

that is, the situation in which the labor share in national income reduces at the same time in which real

wages grow. Therefore, in Lewis (1954), increases in real wages are always reductions in the share of

profits in national income: “inside the capitalist sector knowledge and capital work in the same

direction, to raise the surplus and to increase employment…. Capital formation and technical progress

result not in raising wages, but in raising the share of profits in the national income.” (LEWIS, 1954)

These passages shed light in the two main difficulties derived from the treatment given by

Lewis to technical progress in the capitalist sector: the first is, as already discussed, to make facts “a”

and “c” incongruent; the second is discarding the possibility of the technological displacement of

workers, affecting directly the stock of available workers to the expansion of the capitalist sector (fact

“b”). It is through this last expedient that the author manages to propose the validity of both classical

political economy and neoclassic economics According to Lewis, classical political economy is the

world of labor abundance, while neoclassical economics is the transmutation of this world of

abundance into one of labor scarcity. Here, the turning point appears as the passage from classical

political economy to neoclassical economics (a similar expedient to the one neoclassical synthesis

operated in face of Keynesian economics). Since there is no unemployment associated with

technological progress, the expansion of the capitalist sector will imply, sooner or later, in the

emergence of a world where labor is the scarce “factor”.

According to Lewis, in this scarce labor world, technological progress makes wages – as a

synonym of marginal productivity of labor – either to grow faster than profits (that are determined by

the marginal productivity of capital), or to increase at the same pace of the latter so that there would be

no impacts on the functional distribution of income:

“The model also covers the case of a technical revolution. Some historians have suggested that the

capital for the British Industrial Revolution came out of profits made possible by a spate of inventions

occurring together. This is extremely hard to fit into the neo-classical model, since it involves the assumption

that these inventions raised the marginal productivity of capital more than they raised the marginal

productivity of labour, a proposition which it is hard to establish in any economy where labour is scarce. (If

we do not make this assumption, other incomes rise just as fast as profits, and investment does not increase

relatively to national income). On the other hand the suggestion fits beautifully into the modified classical

model, since in this model practically the whole benefit of inventions goes into the surplus, and becomes

available for further capital accumulation.” (LEWIS, 1954)

We can affirm therefore that is by the treatment given to productivity that the author operates a

theoretical turning point, switching the analytical instrumental of classical political economy to that of

the neoclassical economics. It is this theoretical turning point that responds for the conceptual

imprecision that permeates Lewis’ formulation on the development with unlimited supplies of labor,

utilizing theoretical categories that are defined in relation to closed conceptual systems that do not

dialogue with each other since they come from premises and methods that are fundamentally divergent.

As a result, concepts such as marginal productivity (moreover, of capital) and reproducible capital –

which in political economy sounds strange, since it implies that there can be some capital that is not

reproducible – stand shoulder to shoulder with theoretical categories such as surplus and subsistence

wages, in an attempt to give substance to a formulation that lest it is contradictory, we are forced to opt

for the vaguest possible reading. This lack of theoretical rigor is also expressed in the discussion we

made in the last section, regarding the improper usage of the concept of subsistence production to

characterize a sector that has intense commercial activities and feeds a whole growing urban

population.

Other insufficiency of the proposition of development with unlimited supplies of labor is that its

focus on the latent component of Marx’s industrial reserve army – denying the existence of

technological unemployment and neglecting the cyclical oscillations of the capitalist economy – fails to

capture that the process of absorption of the non-capitalist workforce occurs simultaneously with the

production of redundant laborers. This fact is aggravated when we consider the short work span which

the new proletarians are subjected to:

“Because of the weak bargaining position of labor, employers in the export industry are also able to

“cherry-pick” workers with the most “desirable attributes.” Often these are conceived in Dickensian terms so

as to run the lowest-labor-cost manufacturing system possible: stressing the physical abilities of young

workers, such as easily trainable dexterity to handle fast-paced, often military-style, repetitive assembly work

(especially in electronics industry) and endurance for long work-day hours (routine overtime daily work, and

often for 28–29 days per month); and their “work attitudes” such as obedience to orders and “capacity” for

long periods of residence in dormitories or barrack-type shelters. … In short, the older labor becomes too

“costly” to both the industrialists and the local government. The end result is that the work span of these rural

migrant workers in factory jobs is substantially shortened from the usual 40 years to only 15–20 years.

Combined with limited job training and useful skills gained from working in these industrial jobs, the short

work span points to a very consumptive, wasteful, and extremely “low cost” (to the employer) way of using

labor..” (CHAN, 2010: pp. 516)

According to Chan (2010), this pattern of migrant labor utilization generates a reduction in the

supply of labor to industry, whose counterpart is unemployment and rural underemployment. After

entering in their 30s, migrant laborers cease to afford submitting themselves to the conditions of urban

industry’s super-exploitation, either abandoning the jobs or being fired. The work conditions are

aggravated by the difficulties of building a family in cities due to the high costs of habitation outside

the dorms and to the impossibility of putting their children in urban educational institutions, among

other mishaps. Thus, they return to the countryside, to their families and to the agricultural work. As a

consequence, an apparent paradox of labor scarcity between agricultural labor abundance is generated.

This contradiction was already envisaged by Marx (1867):

“That the natural increase of the number of labourers does not satisfy the requirements of the

accumulation of capital, and yet all the time is in excess of them, is a contradiction inherent to the movement

of capital itself. It wants larger numbers of youthful labourers, a smaller number of adults. The contradiction

is not more glaring than that other one that there is a complaint of the want of hands, while at the same time

many thousands are out of work, because the division of labour chains them to a particular branch of industry.

The consumption of labour power by capital is, besides, so rapid that the labourer, half-way through his life,

has already more or less completely lived himself out. He falls into the ranks of the supernumeraries, or is

thrust down from a higher to a lower step in the scale. It is precisely among the work-people of modern

industry that we meet with the shortest duration of life.” (MARX, 1867: p. 443)

In this sense, considering the Chinese case, while surplus workers diminish in agriculture, a

share of them reappears as surplus in cities, either by the incapability of the capitalist sector to absorb

them, or by the fact that they ceased to be useful to it:

“With millions of workers laid off by industry and abandoning farming, a huge labour surplus is

building up in the cities. Estimates are tricky, given the government’s distaste for admitting the gravity of the

situation, but the International Labour Organization puts the figure at over 20 per cent of the workforce.”

(WALKER & BUCK, 2007: pp. 44)

It is interesting to note that the concept of unemployment only appears in 1954 Lewis’ article

when the author makes reference to Marx’s and Keynes’ theories. In Lewis’ formulation (1954) there is

solely disguised unemployment or underemployment. This particularity in the Lewisian theoretical

framework is derived from the conclusion that, on the one hand, in the traditional sector the only thing

that exists is disguised unemployment – that is, everyone works, although not necessarily contributing

to the expansion of the product of the sector –, and, on the other hand, that the capitalist sector only

absorbs labor without turning it away from the process of production. As a result, unemployment as the

absence of occupation regardless of its contribution to the product becomes an irrelevant theoretical

category. Therefore what exists in the theory of the development with unlimited supplies of labor is just

the misuse of the workforce, whose solution is capitalist development. The corollary of the end of

economic duality is full employment. We shall not extend ourselves on how unemployment is not

irrelevant in concrete terms either to dual economies or to developed ones.

Finally, if we consider that labor surplus is also composed by the petty traders, the retainers and

the casuals, a share of workers that has been rapidly rising in Chinese cities, the net result is that labor

surplus is declining in a slower pace than Chinese worker’s egress from agriculture. Nevertheless, in

the Lewisian framework, this process does not appear as it actually is: entrance and exit of laborers in

the capitalist workforce, a process that at the same time that violently removes laborers from the

traditional life, also leave them to their own devices, generally in active age, as violently as they

entered the capitalist workforce. Moreover, if we consider the other categories of surplus workers that

are included in the Lewisian non-capitalist sector, we shall find out that while the capitalist sector is

expanding, it is also creating a “new traditional sector”, a situation in which the theoretical strangeness

is solely not worse than the semantic one. This results not only from the definitions of the archaic/non-

capitalist sector and the modern/capitalist sector in Lewis, but also from the fact that the author

discards the hypothesis that the capitalist sector creates labor surplus. Thus it seems fundamental to

distinguish the latent component of the industrial reserve army – which is the base of Lewis’

elaboration – from the rest of the labor surplus, since, if the “traditional sector” is constantly being

rebuilt by capitalist dynamics, than the latent component of the industrial reserve army as it is

understood by Lewis difficultly will be exhausted.

6. Final considerations

Given the critics posed along the present paper, we advocate that the analysis of labor surplus and

capitalist sector’s real wages must contemplate the two poles associated to the labor transfer: the pole

that expels and the pole that absorbs laborers. In this context, there are two main focuses on which

theoretical reflection must rely: the state’s policy towards peasants’ real income and the dynamics of

labor absorption by the capitalist sector.

The main tool for peasantry’s proletarianization in China has been state’s policies of taxation,

investment and prices. This does not mean that expropriation – which in many countries was the main

expedient utilized to build the proletariat – is not happening in China, but only that its role is still

marginal. According to Hung (2009), since the second half of the 1980s, the Chinese state policy

provoked an agrarian social crisis responsible for the low and relatively stagnant wages of the capitalist

sector:

“Over the last twenty years, the Chinese government has largely concentrated investment in the urban-

industrial sector, particularly in coastal areas, with rural and agricultural investment lagging behind. State-

owned banks have also focused their efforts on financing urban-industrial development, while rural and

agricultural financing were neglected. In the last two decades, rural per capita income has never exceeded 40

per cent of the urban level. The result of this urban bias has been relative economic stagnation in the

countryside and a concomitant fiscal stringency on the part of rural local governments. From the 1990s

onwards, the deterioration of agricultural incomes and the demise of collective rural industries… forced most

young labourers in the countryside to leave for the city, creating a vicious cycle which has precipitated a rural

social crisis. China’s agrarian sector was not only neglected, however, it was also exploited in support of

urban growth. A recent study has found that there was a sustained and increasing net transfer of resources

from the rural-agricultural to the urban-industrial sector between 1978 and 2000, both through fiscal policy

(via taxation and government spending) and the financial system (via savings deposits and loans). The

exceptions to this trend were the years when the urban economy experienced a temporary downturn, such as

the aftermath of the 1997–98 Asian Financial Crisis” (HUNG, 2009: pp. 13-14)

As highlighted above, this broader state policy was supplemented by an incipient process of

expropriation of peasants. Urban land, in China, cannot be sold. Nevertheless, this land is passible of

leasing for periods of time so long as up to seventy years, so that in the second half of the 1980s a

“primary market” of urban land was created, whose main promoters were the local governments and

the state owned enterprises (WALKER & BUCK, 2007). In the beginning of the 1990s, with the

permission for transacting leasing rights, a “secondary market” of urban land has developed

(WALKER & BUCK, 2007). In this context, several local governments in rural areas have been

transforming the status of part of peasants’ lands in urban areas, so that it can be leased in order to

obtain new sources of income to local administration: “local governments are motivated, above all, by

a fiscal regime in which their revenues depend more on local taxes and rents than on redistribution of

national revenues.” (WALKER & BUCK, 2007, pp. 63). As a result, expropriation by converting rural

in urban lands has become an important expedient to the process of urbanization, as highlighted by

Walker and Buck (2007): “annexation of territory, seizures of farmland and extension of infrastructure

have all been useful in urban expansion” (WALKER & BUCK, 2007, pp. 63). Moreover, the

decentralized fiscal structure has also been responsible for enabling and stimulating the imposition of

an enormous variety of taxes on the peasantry, many of them considered arbitrary.

Rural poverty and expropriation of peasants’ lands have been creating huge tensions and social

conflicts in the countryside:

“In 2004, 74,000 protests and riots took place, involving more three million people – many of them

were by the rural poor. Clashes between police and peasants have become more bitter. In the village of

Dongzhou in Guangdong province last month, paramilitary police opened fire on protesting villagers, killing

at least three. Beijing fears that these localised protests will lead to the formation of a broader and more

politically dangerous anti-government movement.” (CHAN, 2006)

The reaction of the peasantry to the violent process of primitive accumulation of capital

that is taking place in China since the second half of the 1980s, together with countless waves of

protests and discontentment in cities, entailed a reorientation of the CCP’s policy towards peasants’

real income and, consequently, towards real wages in the capitalist sector. Nonetheless, this

reorientation cannot be characterized as a radical shift neither in the CCP’s political and economic

project, nor in the state’s role in the promotion of an accelerated accumulation of capital. Rather, this

shift must be seen as an attempt to ease the social conflicts generated by the model of labor transfer at

constant real wages that has been put forward by the Chinese state.

Over recent years, the abolition of the agricultural tax and the improvement in agricultural

prices have been pointing to a relaxation on the utilization of the political-economic mechanism that

appropriates peasantry’s surplus product (and also part of the necessary product) by the state, relieving

the situation of poverty in the countryside and diminishing a little the pace of the process of peasants’

proletarianization. According to Hung (2009), state policies destined to raise peasants’ real income

started in the middle of the 2000s:

“The first wave of such initiatives included the abolition of agricultural taxes and a rise in government

procurement prices for agricultural products. Though these measures to raise rural living standards were no

more than a small step in the right direction, their effect was instantaneous. Slightly improved conditions in

the rural agricultural sector slowed the flow of migration to the cities, and a sudden labour shortage and wage

hike in the coastal export-processing zones ensued” (HUNG, 2009: pp. 20)

Nevertheless, the abolition of the agricultural tax cannot be overestimated, since innumerous

local taxes still persist, constituting a large burden on peasants. Moreover, the agricultural tax, in 2004,

was estimated as being just a small share of peasants’ income. According to Cao Jinqing (apud CHAN,

2006): “It [the abolition of the agricultural tax] will give farmers psychological comfort. But the real

financial benefit to farmers will be small compared to its political windfall.” (Cao Jinqing apud CHAN,

2006). Thus, a small improvement in peasants’ real income would be capable of providing the political

dividends necessary to CCP for easing social tensions and breathing new life into the accelerated

process of capital accumulation. This perception can also be found in Chan (2006): “For all its high-

sounding slogans about reducing the burden on farmers, Beijing is careful to ensure that its

agricultural policies do not disrupt the continuing flow of cheap rural labour to urban areas.” (CHAN,

2006)

As a result, regarding the first analytical focus, we have seen that it was the shift in the direction

of CCP’s policy the element responsible to elevate agricultural real income since approximately mid-

2000s, pressuring up migrants’ real wages as well as the wages of the rest of capitalist sector’s workers.

These wage increases that have been seen as the end of labor surplus are a result of workers’ political

struggles in the factories as well as in the countryside and the CCP’s response to them, operating a

political adjustment inside its general strategy of accelerated accumulation of capital.

Regarding the second focus, the capitalist sector in China has been unable to absorb the totality

of labor repelled from the countryside; additionally, a huge share of the workers absorbed by this sector

is made redundant considerably sooner than the age of retirement due to the nature of industrial

activities (which are based on young laborers), to the cyclical oscillations of the economy and to the

emergence of technological innovations that require less work to the production of the same amount of

product. As highlighted previously, it is important to distinguish the latent component of the industrial

reserve army from the labor surplus built by the expansion of the capitalist sector, such as Patnaik has

made:

“Patnaik’s argument is clarified by his use of a dual reserve army model: the “precapitalist-sector

reserve army” (inspired by Luxemburg’s analysis) and the “internal reserve army.” In essence, capitalism in

China and India is basing its exports more and more on high-productivity, high-technology production, which

means the displacement of labor, and the creation of an expanding internal reserve army. Even at rapid rates

of growth therefore it is impossible to absorb the precapitalist-sector reserve army, the outward flow of which

is itself accelerated by mechanization. (Foster, McChesney e Jonna, 2011)

As a result of these factors, unemployment and disguised unemployment grow in cities – side-

by-side with the expansion of the capitalist sector – while part of the agricultural labor surplus is

rebuilt, as workers made redundant by capital accumulation return to the countryside. Nevertheless, this

characterization of the result of labor transfer, which is not predicted by the Lewisian model, in no way

is specific of China:

“In the dominant view, these workers would then be absorbed by industry, primarily in urban centers,

on the model of the developed capitalist countries. But Britain and the other European economies, as Amin

and Indian economist Prabhat Patnaik point out, were not themselves able to absorb their entire peasant

population within industry. Rather, their surplus population emigrated in great numbers to the Americas and

to various colonies. In 1820 Britain had a population of 12 million, while between 1820 and 1915 emigration

was 16 million. Put differently, more than half the increase in British population emigrated each year during

this period. The total emigration from Europe as a whole to the “new world” (of “temperate regions of white

settlement”) over this period was 50 million.

While such mass emigration was a possibility for the early capitalist powers, which moved out to seize

large parts of the planet, it is not possible for countries of the global South today. Consequently, the kind of

reduction in peasant population currently pushed by the system points, if it were effected fully, to mass

genocide.” (FOSTER, MCCHESNEY & JONNA, 2011)

Despite the fact that Chinese enterprises are taking abroad with them Chinese workers,

especially in construction projects, and that there are agencies specialized in the exportation of laborers,

the number of workers involved in these flows is marginal in relation to the Chinese workforce, so that

in 2008, according to the Ministry of Commerce, only 740,000 of workers were outside China

(Ministry of Commerce apud WONG, 2009). From the angle of the absorption of workers by the

capitalist sector, the recent alteration in the CCP’s policy regarding peasants’ real income appears as a

brake in the growing number of surplus laborers in cities - unemployed as well as underemployed - or

even as an attempt to partially revert this process of rising urban labor surplus resulting from the

expansion of the capitalist sector. The control over the pace of agriculture’s modernization and over

rural exodus seem to be the main challenges presented to the Chinese state and to the accelerated

accumulation of capital in China. This perspective also allows us to comprehend why peasants’

expropriation has not been the main road to proletarianization in China, although it fits, in this context,

to make use of this method in a gradual and slow way as has been happening in China. The potential

destabilizing social effects of a too rapid pace of growth in the relation between repelled labor from the

countryside and net absorbed labor by the capitalist sector can not only compromise the Chinese

political system, but also the own existence of capitalism in China.

The high-sounding complaints made by multinational exporting corporations regarding the fast

wages’ growth in the 2000s – which even so remained in an extremely low level – had its impact on

many scholars that were led to affirm that the stock of labor surplus in China was exhausted, or almost

so, even though China has the hugest workforce in the entire world – with 26% to 37% of its workforce

still occupied in agriculture – and in face of growing urban unemployment and underemployment. The

misinterpretation of Lewis’ model and its improper application to China, as well as its own limitations,

are the main factors responsible for such conclusion. Therefore we endorse the perspective adopted by

Hung (2009):

“The prc’s urban-biased development model, then, is the source of China’s prolonged ‘limitless’ supply

of labour, and thus of the wage stagnation that has characterized its economic miracle… Just as China’s

‘unlimited’ supply of labour was more a consequence of policy than a natural precondition of its

development, the arrival of the Lewisian Turning Point was in fact the outcome of state attempts to reverse a

previous urban bias rather than of a process driven by the market’s invisible hand. The concomitant to rising

peasant income and industrial wages was unprecedented, soaring retail sales, even controlled for inflation”

(HUNG, 2009: pp. 21)

In this sense, we conclude that, first of all, even with the deficiencies of Lewis’ theoretical

framework, if the development with unlimited supplies of labor in China has a political nature, given

by the state’s role, the rising real wages in the capitalist sector cannot have a structural determined

character, so that its future evolution could be priorly known, i.e. real wages will continue rising

rapidly over time. Therefore, the verified tendency of fast real wages’ growth can be maintained due to

state’s policy, but, probably, it will be interrupted or even reversed if it starts to qualitatively impact

China’s international insertion as an exporter of cheap manufacturing. Nevertheless, not always the

state manages to concretize his objectives; the reversal of the tendency of fast wages’ growth can

encounter obstacles in the struggle and organization of workers. To predict the results of such political

clashes and, consequently, the future evolution of wages is to escape from the scientific field.

Secondly, we conclude that, even if Lewis’ model (1954) operated in China without the state’s

mediation, there is still an enormous contingent of laborers to be released from agricultural activities by

mechanization. Thus, we advocate that there is no structural upward pressure over wages that will

prevent China from keep being the “factory of the world”. Nevertheless, China can pursue a different

insertion in the international economy, but such a shift would depend on her strategies and on the

political disputes inside and outside the Chinese state.

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