I was recently asked how the Lewisian Turning Point works, and how it is connected with the current hiring slowdown in China. (Or at least is proposed as one of many potential causes of the current slowdown.)

Scouring the net for graphs that illustrate the Lewisian Turning Point produces flowers called Lewisia. Finally, I found a graph, and this gets us half-way.

The source is Deloitte so we should be able to rely on it. The bars show the demand and supply for labor in China over the last 8 years. The increase in ratio of demand over supply is seen from the line drawn above. It shows demand/supply fast approaching 1.0.

According to the theory,  the supply of new labor from the countryside is not infinite. Eventually it has to decrease as more and more peasants move to the cities to work. Then industrial wages begin to rise, and quickly.

Back in 2001 there was still enough spare labor capacity in the Chinese economy, and salaries could be held in check, by comparison to other countries. Salaries increased after 2002 in tandem with the shortening of the supply, and to the point where China was no longer the first choice for Foreign Direct Investment (FDI).

That point appears to have been reached in 2007, and then the China Labor Law kicked in and increase staff costs more. This was followed immediately by the exit of many low-tech, labor-intensive companies in late 2007 and early 2008.

The current crisis will have shifted the graph downward, and reduced the labor demand, but it will not have fixed the issue of skills shortages. This take years to fix and many of the people on the labor market at the moment are not the ones that your company is looking for. There is no easy way out of this, as infrastructure companies are discovering right now.

“Plus ça change, plus c’est la même chose”, as the French say. Everything changes, but everything stays the same.