The latest sharp rise in minimum wage rates in Shenzhen is more than a piece of good news for migrant workers who are trying hard to make a living in the coastal city. It is a clear signal that other cities in China's Pearl River Delta manufacturing heartland, along with policy-makers across the country, can no longer take an unlimited supply of cheap labor for granted.

Shenzhen decided last week to raise its mandatory minimum wage. The minimum monthly wage inside its special economic zone, which borders Hong Kong, will be increased by 17 percent to 810 yuan (US$101).

This minimum wage hike comes as the country is surprisingly short of rural labor, while unemployment pressures keep mounting, especially for new college graduate.

A plentiful supply of cheap labor mostly rural migrant workers has been one of the key forces driving China's fast economic growth over the past two decades. As the world's most populous country, China has enjoyed a comparative advantage in labor costs. In recent years, this has been huge enough to turn the nation into a global manufacturing center.

While according to official figures there remain some 150 million migrant workers waiting to make the move from rural to urban areas, it is hard to believe that the supply of cheap labor will dry up any time in the near future.

However, the recent rise in labor costs confirms that there is indeed a labor shortage, and the impact of this shortage is already starting to be felt by employers in thriving industrial cities.

The rapidly ageing of the population is an obvious long-term reason. Over the past 25 years, China's economy has maintained its robust growth thanks to adequate supplies of young and middle-aged labor. But today, the rate at which China's population is ageing has reached the global average and will only accelerate in the years to come.

Migrant workers can only be attracted to cities in greater numbers if measures are taken to address their low salaries and the lack of welfare currently afforded to them.

However, the more important policy implications of the rise in labor costs are about the country's growth model.

It is many labor-intensive investments that have boosted the national economy's extensive growth. The benefit of this growth pattern is obvious, as it has helped lift tens of millions rural households out of poverty. But the undesirable consequence also becomes increasingly evident as wages, especially for migrant workers, were kept too low for too long. The income gap between rural and urban areas further widens as migrant workers' wage increases generally fall far behind those of urban residents.

Latest statistics show the average monthly income of urban workers increased by 15 percent to 1,657 yuan (US$207) in the first quarter of this year. In view of this national income growth, the rise in Shenzhen's minimum wage rates, which is most meaningful to local migrant workers, seems to be only the beginning.

(China Daily June 5, 2006)