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Asymmetric Technology Diffusion, Nominal Wage Rigidity, and the “New Normal” in China

Received: 14 May 2016    Accepted: 30 May 2016    Published: 23 June 2016
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Abstract

This paper is based on a growth model that is consistent with salient features of the recent “New Normal” growth experience in China: slowdown of growth rate, low level of inflation and unemployment, decreasing returns on capital investment, extensive reallocation among agriculture, manufacturing and modern service sectors, rising share of consumption, improvement of wealth distribution, and reduced foreign surplus. The building blocks of the theory are asymmetric technology diffusions from FDI firms among various sectors and nominal wage rigidity in the labor market. Due to the asymmetric technology diffusion among different sectors, manufacturing firms enjoy a more rapid productivity progress via the process of learning by doing in a processing on order economy. Thus manufacturing sectors serve as the engine in the past years’ economic growth in China. Through the competition in labor market, trends of wage equalization drive the migration of residents from agriculture to manufacturing and modern service sectors. Moreover, with a larger share of processing on order firms, China tends to further enlarge her foreign surplus in a faster pace. However, the result of this paper shows that since the exchange rate reform on July 21st 2005, RMB has appreciated accumulatively by 35%, combined with the wage rigidity in labor market, FDI firms in manufacturing sectors face an increasing level of cost in terms of increasing wage expenditure. Incumbent low profitable firms exit and potential entrants with new technology no more settle down. Thus, rapid productivity progress ceases in manufacturing sector. Not only the growth rate slows down, but also large number of unemployed population reallocates back to modern service and agriculture sectors. Dwindling share of manufacturing sectors reduced the foreign surplus by the drops of processing on order infra-firm trade of FDI firms.

DOI 10.11648/j.eco.20160503.11
Published in Economics (Volume 5, Issue 3, June 2016)
Page(s) 27-45
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This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

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Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Asymmetric Technology Diffusion, Nominal Wage Rigidity, Reallocation Among Sectors, “New Normal” in China

References
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Author Information
  • School of Economics, Fudan University, Shanghai, P. R. China

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  • APA Style

    Ge Song. (2016). Asymmetric Technology Diffusion, Nominal Wage Rigidity, and the “New Normal” in China. Economics, 5(3), 27-45. https://doi.org/10.11648/j.eco.20160503.11

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    ACS Style

    Ge Song. Asymmetric Technology Diffusion, Nominal Wage Rigidity, and the “New Normal” in China. Economics. 2016, 5(3), 27-45. doi: 10.11648/j.eco.20160503.11

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    AMA Style

    Ge Song. Asymmetric Technology Diffusion, Nominal Wage Rigidity, and the “New Normal” in China. Economics. 2016;5(3):27-45. doi: 10.11648/j.eco.20160503.11

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  • @article{10.11648/j.eco.20160503.11,
      author = {Ge Song},
      title = {Asymmetric Technology Diffusion, Nominal Wage Rigidity, and the “New Normal” in China},
      journal = {Economics},
      volume = {5},
      number = {3},
      pages = {27-45},
      doi = {10.11648/j.eco.20160503.11},
      url = {https://doi.org/10.11648/j.eco.20160503.11},
      eprint = {https://download.sciencepg.com/pdf/10.11648.j.eco.20160503.11},
      abstract = {This paper is based on a growth model that is consistent with salient features of the recent “New Normal” growth experience in China: slowdown of growth rate, low level of inflation and unemployment, decreasing returns on capital investment, extensive reallocation among agriculture, manufacturing and modern service sectors, rising share of consumption, improvement of wealth distribution, and reduced foreign surplus. The building blocks of the theory are asymmetric technology diffusions from FDI firms among various sectors and nominal wage rigidity in the labor market. Due to the asymmetric technology diffusion among different sectors, manufacturing firms enjoy a more rapid productivity progress via the process of learning by doing in a processing on order economy. Thus manufacturing sectors serve as the engine in the past years’ economic growth in China. Through the competition in labor market, trends of wage equalization drive the migration of residents from agriculture to manufacturing and modern service sectors. Moreover, with a larger share of processing on order firms, China tends to further enlarge her foreign surplus in a faster pace. However, the result of this paper shows that since the exchange rate reform on July 21st 2005, RMB has appreciated accumulatively by 35%, combined with the wage rigidity in labor market, FDI firms in manufacturing sectors face an increasing level of cost in terms of increasing wage expenditure. Incumbent low profitable firms exit and potential entrants with new technology no more settle down. Thus, rapid productivity progress ceases in manufacturing sector. Not only the growth rate slows down, but also large number of unemployed population reallocates back to modern service and agriculture sectors. Dwindling share of manufacturing sectors reduced the foreign surplus by the drops of processing on order infra-firm trade of FDI firms.},
     year = {2016}
    }
    

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    Y1  - 2016/06/23
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    AB  - This paper is based on a growth model that is consistent with salient features of the recent “New Normal” growth experience in China: slowdown of growth rate, low level of inflation and unemployment, decreasing returns on capital investment, extensive reallocation among agriculture, manufacturing and modern service sectors, rising share of consumption, improvement of wealth distribution, and reduced foreign surplus. The building blocks of the theory are asymmetric technology diffusions from FDI firms among various sectors and nominal wage rigidity in the labor market. Due to the asymmetric technology diffusion among different sectors, manufacturing firms enjoy a more rapid productivity progress via the process of learning by doing in a processing on order economy. Thus manufacturing sectors serve as the engine in the past years’ economic growth in China. Through the competition in labor market, trends of wage equalization drive the migration of residents from agriculture to manufacturing and modern service sectors. Moreover, with a larger share of processing on order firms, China tends to further enlarge her foreign surplus in a faster pace. However, the result of this paper shows that since the exchange rate reform on July 21st 2005, RMB has appreciated accumulatively by 35%, combined with the wage rigidity in labor market, FDI firms in manufacturing sectors face an increasing level of cost in terms of increasing wage expenditure. Incumbent low profitable firms exit and potential entrants with new technology no more settle down. Thus, rapid productivity progress ceases in manufacturing sector. Not only the growth rate slows down, but also large number of unemployed population reallocates back to modern service and agriculture sectors. Dwindling share of manufacturing sectors reduced the foreign surplus by the drops of processing on order infra-firm trade of FDI firms.
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