Direction (Qs.1 to 10): Read the following passage carefully and answer the questions given below it. Certain words are given in bold to help you locate them while answering some of the questions.

Cheap labor has long been considered the main factor behind the Chinese economic miracle, propelling the country to the status of the world’s factory, shifting global supply chains, and igniting debates in other countries about companies moving their plants to China, the consequences of job outsourcing for domestic industries and workers, and unfair competitive advantages associated with the poor labor conditions of Chinese factory workers. However, as is often the case in economics, the causes and effects can change their places. Cheap labor created the Chinese miracle, which, in turn, can finally eliminate the cheap labor phenomenon. Economic growth during the past 20 years has led to a rapid increase in wages. Thus the developments of the Chinese labor market have recently drawn increased attention from various economists and analysts trying to figure out what is happening with China’s most prominent global competitive advantage.

The official statistics in China indicates a tremendous increase in population incomes. But what matters for international competitiveness is cross-country comparison. Various analysts have proposed their estimates comparing the level of China’s wages and labor costs with other countries. For example, according to estimates from the Bank of America Merrill Lynch, hourly wages in Mexico in dollar terms in 2016 were 40 percent lower than in China. According to data from Euromonitor  International, hourly manufacturing wages in China in 2016 exceeded those in every major Latin American economy except Chile and were at around 70 percent of the level in weaker Eurozone countries, such as Portugal. All in all, those estimates taken together indicate that China’s competitive advantage is definitely shrinking if it has not completely gone already.

However, international comparisons of wages are hampered by inadequate data. To be eligible for comparison, statistical indicators should be calculated on the basis of the same methodology, following internationally accepted statistical standards. But in the sphere of labor market statistics, there is a remarkable heterogeneity among countries in terms of methods and sources of data for estimating national wages. This problem is especially pronounced for developing countries. Estimation of wages can differ by sources of data (administrative data, sample surveys, census), by coverage of various categories of enterprises and workers, periods of statistical observation, etc. For example, the official statistics in India do not cover all employed in industry, and in Mexico, the national data are available only since 2005. China’s labor market statistics also have drawbacks, which impose even more restrictions on international comparisons. The difficulties encountered by the Chinese official statistics in measuring population earnings (income and wages) can be illustrated by the fact that the National Bureau of Statistics (NBS) still estimates economy-wide indicators such as GDP using mainly a production approach.

Although it is extremely difficult to gauge with a high degree of certainty the actual level of wages in China, there are no doubts about the general trend. No matter which indicators are employed, they all point out that wages have more than doubled since the year 2009. Such a pace of growth obviously has serious implications for the Chinese labor market and its international competitiveness in terms of relative wages. The pool of cheap labor has definitely dried up. However, when talking about China in general one should not only look at average numbers but also take into consideration total figures. The average wages have risen significantly in recent years. But there are also signs that income inequality remains high and may be even increasing. According to the official NBS estimates, the value of the Gini coefficient – stood at 0.47 in 2016. The NBS resumed the publication of Gini coefficient in the early 2000s. Since the year 2010 official estimates have exhibited some degree of downward trend, meaning less inequality. At the same time, unofficial estimates derived from population surveys in recent years appear to be higher than official ones, which may indicate a further increase inequality among the population. The rise of income inequality can mean that the pool of cheap labor can actually be drying up more slowly, even with the rapid growth of the average wage level.