July 25, 2013
Yet another which way is up problem in the NYT. A NYT article on a killing in China turned to the country’s one-child country, concluding by telling readers:
“The policy has also begun to shrink the number of young workers in the labor force, putting sharp upward pressure on factory wages while raising concerns about how to accommodate and financially support the steady growth in the number of elderly dependents.”
Sorry, but that one makes no sense. Suppose it said that:
“investment bankers are getting very rich raising questions about how they will be able to support their parents.”
This is effectively what the piece is saying. If wages are rising rapidly then workers will be able to easily absorb whatever tax increases are needed to pay for a growing population of retirees. The impact of rising wages in China is at least an order of magnitude greater than the impact of demographics in reducing them.
Arithmetic fans will quickly recognize this fact. According to the International Labor Organization real wages in China tripled over the last decade. Even if this overstates the actual wage gain by a factor of two, this still swamps any possible impact of a falling ratio of workers to retirees.
For example, suppose the ratio of workers to retirees drops from 5 to 1 to just 2 to 1 over a period where wages triple (a far faster decline than China is actually seeing), and the benefits paid to retirees is 70 percent of the average worker’s wage (a high benefit). In this case, the necessary tax rate on wages would have to increase from 0.12 to 0.26. If before-tax wages triple, even in this extreme scenario the after-tax wage would rise by 150 percent.
It seems that the primary concern in this piece is that hundreds of millions of workers in China are likely to see higher wages as their labor becomes in short supply and the people who want to hire them, either for profit or as personal servants, will have to pay more for their work. That might be a problem for wealthier people in China, but that is not a concern that the vast majority of people in the world are likely to share.
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