Wage Gap Between China an Us Essays

Wage Gap Between China an Us Essays Wage Gap Between China an Us Essay Wage Gap Between China an Us Essay The importance of international trade increased dramatically for the US as well as China. The ratio of the sum of exports and imports to GDP approximately doubled from the early 1970s to the mid 2000s for the US. And there is a striking feature that China was involved in about 7% percent of world trade by the mid-2000s. There is no doubt that the international trade have influenced the wage level around the world. Do wages equalize between US and China? It is the most remarkable conclusion of the Heckscher-Olin theory that trade can equalize the price of each factor of production across countries. Nevertheless, the long-term effect didn’t complete in the real world, especially in China. On majoy trend has been a rising gap between the wages of china and US. For instance, from 2000 to the year of 2009, the average wage of Chinese to that of American decreased about %. In 1970, the two countries Per capita wage level difference for 4965 dollars. On the contrary, in 1980 it turned to be 11976 dollars, 1990 for 22885 dollars. And in year of 2000, it achieved 34166 dollars. Then there was a gradual increase in mid 2000s. And by 2010, the average wage of China is only about 6% of the minimum wage standard of US. All these data clearly prove the fact that the wage gap between China and US have increased for several years. Workers remittances and compensation of employees, paid ($ millions) | |2000 |2001 |2002 |2003 |2004 |2005 | |United States |26. 2% |30. 5% |8. 2% |0. 7% |17. 0% |8. 9% | As shown in Figure5. , China is relatively abundant in less-skilled and medium-skilled labor, and it is relatively scarce in physical capital, forest land, highly skilled labor, and arable land. But not all of China’s international trade is consistent with the Heckscher-Olin theory. The theory predicts that China will be a net importer of skilled-labor-intensive manufactured products like industrial machinery, electronic microcircuits and scientific equipment. Secondly, the theory predicts that China will be a net exporter of less-skilled-labor-intensive products like clothing, footwear, and toys. Global specialization has led to a so-called â€Å"skill-biased† trade pattern, thus there is a preference for skilled labor, which result in enlarge the wage gap between China and US. From the perspective of developed countries open up to trade with developing countries, the Heckscher-Ohlin model makes a sharp prediction. When considering about the relationship between trade and wages, we suppose that the two factors of production are skilled and unskilled labor, which Instead of capital and labor. For simplificity: Two countries: China and US Two factors: skilled and unskilled labor. China possesses a relative abundance of unskilled labor. Two goods: Skilled and unskilled labor intensive goods. H-O diagram: C. Chinese labor is undervalued One of the reasons for America and some other countries denied Chinese’ complete market economic system is that the price of labor is decided by the company rather than the market. As we known, generally, the price of labor is determined by the supply and demand in the labor market. Some economist believe that since China is abundant in labor, especially when the millions of country labor inburst into the city, the supply of labor is obviously greater than demand, keeping wage in a low level. As a result, most of the workers are in the disadvantage situation. The competition for labors is so fierce that they have to suffer the low salary in order to get the job. What’s more, since a great number of Chinese workers hold few knowledge and skill and they don’t know how to grasp their benefit and protect themselves in the labor market. As a result they have to submit to the company for living. And they have to live in a very miserable condition. One reason should be highlight is the Chinese labor union’s limited power in fighting for the labors’ benefit. Since it is less developed, we are rarely seeing what the labor union take measures today. While before it took more responsibility to deliver the Party’s policy to labors. In another aspect, all of the companies are aimed at the maximium profit, trying their best to cut costs and reduce wages. The companies are more powerful in the labor market, so the wage is decided mainly by them. In conclusion, because of the relationship in demand and supply in Chinese market, the labors’ competency, the labor union’s situation and the purpose for the company, Chinese labor has been undervalued. And this is a reason for the generation of Chinese and American wage gap. D. Technological Progress Also as we get the conclusion from the case in our book, technological progress plays an important role in increasing the wage gap between Chinese labors and American labors. The first aspect is that with the development of technology the cost and prices of some skill-intensive products decline, and the quality of these products is improved, demand for the products increases. As demand shifts toward skill-intensive products and their production increases, the demand for skilled labor expands, increasing the relative wage of skilled labor. The second aspect is the technological progress that has occurred within individual industries appears to be biased in favor of using more skilled labor. Referring to the two perspectives mentioned above, although China has been experiencing technology progress, the growth rate of it still can’t match to that of America. So the rising speed of wages in China is lower than in US, thus enlarge the gap between Chinese labors and American labors. Secondly, it is obvious that the application of technology is more widely used in US than China, so the demand of skill-intensive products of Americans is much more than Chinese. In that way, the market needs more skilled workers, resulting the salary of them increases more rapidly than that of China. E. The Deterioration of China’s Terms of Trade China ha carried out the strategy of comparative advantage in foreign trades all long, and has had great achievement on that, but bad effects also appeared such as the exacerbation of terms of trade. Another reason may be that China is an important exporter of many goods, who can influence the world price. Since China keep putting more emphasis on export and producing more and more goods for the whole world, so that the world price will fall. With a lower price and less profit, the workers’ wage may not increase or even decrease. Summary Theoretically, factor endowments theory did not consider product differences and the assumptions of the SS theorem didn’t realize. The difference of the wage levels between china and us is still huge, but china’s wage growth rate are also increase obviously. We hope that China can gradually reduce the wage gap. Although the factor price equalize theorem didn’t complete in the wage gap between China and US. However, the direction of the long run effect is likely to hold in the rest of the world. An real-world example of the tendency toward equalization is the rise in real wage in the industrializing countries of Asia( such as Singapore and South Korea) as these countries have strongly integrated themselves into world trade. Group members: Relative Factor –price Equalization: H-O-S Theorem