Mass Immigration And The Lewis Turning Point

Ambrose Evans-Pritchard ponders the wealth of nations :

For China, the cheap labour era is over. It faces the "Lewis Point" where the limitless supply of migrants from the countryside dries up and urban wages surge.

Pay has already been rising at 16pc to 18pc annually in the Eastern cities for several years, and this is now happening in Chengdu and Chongqing in the heartland.

I'd heard vaguely before of the economist Arthur Lewis, the first black person to win an academic Nobel, and his famous model :

In his story a "capitalist" sector develops by taking labour from a non-capitalist backward "subsistence" sector.

At an early stage of development, there would be available an "unlimited" supply of labour from the subsistence economy which means that the capitalist sector can expand without the need to raise wages. This results in higher returns to capital which are then reinvested in further capital accumulation. In turn, the increase in the capital stock leads the "capitalists" to expand employment by drawing further labor from the subsistence sector. Given the assumptions of the model (for example, that the profits are reinvested and that capital accumulation does not substitute for skilled labor in production), the process becomes self-sustaining and leads to modernization and economic development.

The point at which the excess labor in the subsistence sector is fully absorbed into the modern sector, and where further capital accumulation begins to increase wages, is sometimes called the "Lewisian turning point" (or "Lewis turning point") and has recently gained wide circulation in the context of economic development in China.

So as long as there's a plentiful supply of new labour, our capitalist doesn't need to raise wages. In its original development context, we're talking early-to-mid nineteenth century - the stuff that people like Dickens and later Zola railed against (in Zola's case after it was well on the way out).

By the latter half of the nineteenth century the country had moved to town, working class living standards were rising - and they didn't stop until the 1970s.

Lewis was writing in a 1950s Britain where "Globalisation In One Country" was undreamt of. It didn't occur to him that a wealthy country might start to put in train the reverse process, bringing in millions of poor from all over the world (a process which a change of government shows no sign or intention of stopping) and stopping wage growth in its tracks, before reversing it. Inflation's been over 5% for three years now, wage rises around 1% a year. That's a hefty cut. Asset price inflation - especially housing - has been high for 25 years.

And, as Adam Posen will tell you, it's a lot easier to let inflation lower real wages than "crush" nominal ones.

But unlike China, where the Communist capitalists, having a concept of a nation and a national interest, won't start importing millions of foreigners the moment wages go up, Britain seems likely to see this "un-development model" continue indefinitely. There are only a finite number of peasants in China, and it's a big country. Eventually, if the Communist Party continue their impressive capitalist stewardship, the average Chinese may be comfortably off.

The UK is a very small country, and there are a lot more poor people in the rest of the world. It could be a very long time before the "limitless supply of migrants" dries up and the UK becomes the first world economy to experience a second Lewis point.

Maybe when I mooted the prospect of UK real wages reaching Chinese levels I was being over-optimistic.