More Costly or More Productive? Measuring Changes in Competitiveness in Manufacturing Across Regions in China

Using a newly constructed industry‐by‐region dataset based on China's two censuses, this paper examines the trend of average labor compensation (ALC), labor productivity (ALP) and unit labor cost (ULC) in 28 manufacturing industries across 29 provinces in China for 1995 and 2004. Findings show that at the aggregate level, ALP growth was generally faster than that of ALC and hence resulted in a significant decline in ULC for all regions in China. Furthermore, less developed regions exhibited stronger productivity growth relative to labor cost increase than more developed regions, thus leading to a convergence in ULC levels across provinces and regions over this period. Comparing individual industries, we observe a substantial variation in growth rates and convergence trends across regions. Logit regression analysis confirms that labor‐intensive industries are more likely to converge in ALP, ALC and ULC, whereas capital/skill‐intensive industries tended to diverge. This finding is further confirmed by estimating a convergence regression, which suggests that misallocation of resources due to market imperfections or institutional barriers is likely to be the main factor behind the divergence of ULC.