Pay rise doesn't necessarily hinder growth

Labor | Michele Geraci

A Chinese scholar has sparked a fierce public debate by saying that the rapid pay rise will hinder China's economic growth. The remark and the subsequent debate are suggestive of a big problem China is facing: the middle-income trap.

It is a phenomenon that occurs in countries whose economic growth relies on cheap labor to produce goods for export. With increase in wages, these countries lose their cost-based competitiveness. The countries ultimately fall into the trap if the wage levels increase beyond the critical point before they manage to transform the economic development model - and their products cease to be cheap for the global market and they cannot find any higher value-added alternative.