Pros and cons of rising labor costs

Rising wages and slowing productivity, coupled with declining demographic dividends, have stirred concerns that China's competitiveness in manufacturing is eroding. Structural changes are certainly taking place, notably in the cheap labor segment, shifting dynamics along the value chain and across provinces. These changes, however, are positive in terms of the strived-for shift in China's economic growth model.

China's working-age population (based on the Chinese definition of people between the ages of 15 and 59) fell by almost 3.5 million in 2012. This striking demographic development threw into sharp relief the limits of China's growth model of the past three decades.

Structural changes in the labor market actually started a few years ago. Wages in the manufacturing sector increased significantly while labor productivity started slowing. Some observers and investors interpret these developments as a serious erosion of China's cost competitiveness.