In the early 1980s, rural Chinese workers saw their incomes surge amid the country’s economic liberalization. It was the beginning of one of the most remarkable feats in history as hundreds of millions of Chinese citizens rose out of poverty. But while many watched in awe, one high-ranking official in the Chinese Communist Party was worried by what he saw happening.
Deng Liqun (no relation to Deng Xiaoping, China’s leader at the time, who had initiated the economic reforms) noticed that many rural businesses had started to hire a large number of workers. Deng, citing Das Kapital by Karl Marx, began to sound the alarm about the greedy capitalists extracting surpluses from the Chinese proletariat. To him, large private businesses were inherently exploitative.
Deng’s warnings were ignored, but they turned out to be prescient: China’s workforce was about to get squeezed. According to official Chinese statistics, in the real economy—that is, agriculture, industry, and utilities—the share of labor compensation relative to the value of all economic inputs, such as raw materials, production components, and capital, fell from 21 percent in 1987 to 15 percent in 2023, the last year for which data are available. (The share of wages for service jobs, including in real estate, finance, and the government sector, is roughly on par with what it was in the 1980s.) In other words, the relative position of Chinese factory and farm workers today is worse than it was before China joined the World Trade Organization in 2001.
To be sure, this is about relative distribution of income, not about absolute income changes for the Chinese workforce. Incomes and living standards have risen dramatically since the 1980s, and the country achieved an impressive record of poverty reduction, all of which should be recognized and applauded. But the fact remains that Chinese workers have lagged far behind the owners of capital and the government when it comes to income gains. It may not be the abject labor extraction envisioned by Deng, but it is labor extraction nonetheless.
So much of China’s economy today can be attributed to low wages, including its strengths, such as incredibly competitive exports, and its weaknesses, such as lackluster consumption. It is the root cause of “involution,” the term the CCP uses to describe the relentless competition among firms that results in price wars and deflation. And wage compression is the biggest obstacle to creating a prosperous middle class. By getting rid of wage restraints and raising the minimum wage, China can put the welfare of its citizens first, stoke much-needed domestic consumption, and ease trade tensions with developed and developing countries alike.
OVERWORKED, UNDERPAID
As China became a factory to the world, workers’ piece of the pie shrank. In 1992 (when Chinese export manufacturing began to take off), wages for factory workers stood at 6.3 percent of total manufacturing output, according to official Chinese data. By 2024, that figure had fallen to 3.3 percent.
When it comes to paying workers, China trails behind many poorer countries. According to the data compiled by the United Nations Industrial Development Organization, Chinese manufacturing workers received four percent of total manufacturing output in the form of wages in 2016 (the most recent year for which the UNIDO data are available for China). Of the 87 countries the UNIDO collected data on that year, China ranked second to last, ahead of only Indonesia. India, far poorer than China, recorded a wage share of five percent; for the United States, a country not known for its strong pro-labor stance, the share was 12 percent.
It is not only meager pay that Chinese workers must contend with. They are sometimes treated so badly that it has even alarmed the governments of developing countries. In 2025, Brazilian authorities sued a Brazilian subsidiary of the Chinese electric‑vehicle manufacturer BYD for violations of labor law at its factory construction site, going so far as to describe the conditions as “analogous to slavery.” Brazil alleged that the company confiscated the passports of workers (who were mostly Chinese), withheld promised pay, and locked employees inside dingy dormitories at night.
The fact that China shortchanges its workers is not a side product of its manufacturing prowess. It’s a root cause of why China dominates the rest of the world in making things. By underpaying laborers, the state, firms, suppliers, and investors alike amass a capital surplus that can be spent on building factories, roads, assembly lines, and power stations. In 2016, China’s manufacturing output was equivalent to the combined output of the next nine biggest manufacturing economies. But because China pays out far less in wages, its manufacturing capital prowess is even more substantial: after wages are deducted, Chinese manufacturing output matched the combined manufacturing output of the next 12 largest manufacturing economies. Other countries complain that Chinese firms have an unfair advantage because of credits and grants from state-controlled banks. But the far bigger subsidy comes from Chinese workers who, having been underpaid, generate a massive capital surplus, which in turn reduces the cost of capital.
Many U.S. analysts wax on about China’s remarkable productivity. But when measured by the economic output per hour worked, the standard metric of labor productivity, Chinese workers are not particularly productive. According to estimates by the International Labor Organization, China’s output per hour worked in 2025 was $20 (in constant 2021 international dollars at purchasing power parity), putting China behind the world average of $23, and on par with Brazil and Mexico. China trailed far behind Japan, South Korea, Taiwan, and the United States. (The United States’ output per hour worked in 2025 was $82.) China achieves its production prowess not through efficiency but through scale. Firms boost output by expanding working hours—the kind of labor extraction that Deng Liqun warned about four decades ago.
A CEILING WITHOUT A FLOOR
There is one aspect of wage compression that Deng got wrong: its cause. He feared that Chinese workers would be exploited by free-market capitalism. But the real culprit has been the Chinese state. Every year since the mid-1990s, local governments have given guidelines to state-run and private enterprises that specify upper and lower bounds for permissible wage increases for workers. But bureaucrats had the foresight to exempt their own wages from these constraints. As a result, the wages of civil servants more than doubled as a share of China’s payroll between 1978 and 2024.
Although local governments rarely explain themselves, a directive issued by the Beijing municipal government in 1997 is particularly revealing. It stipulated that wage growth should stay below productivity growth. Firms that increased wages beyond state guidelines without authorization would face severe punishment, the directive noted. Wage increases near the upper bound were permitted only for firms with excellent performance. Poorly performing firms were allowed to freeze wages or even reduce them below the lower bound. The directive, issued by an agency tasked with taking care of Chinese workers, put a ceiling on wage growth without providing a floor.
Since 2010, local governments have relaxed these guidelines somewhat, but decades of wage compression during China’s economic boom are still felt today, especially as China’s economy slows down. With high youth unemployment, many firms already cutting wages, and widespread reports of firms not even paying wages owed, it’s not clear Chinese firms could undo wage restraint even if the government wanted them to.
Another way the Chinese state has compressed salaries is by setting a paltry minimum wage. Between 2000 and 2024, based on International Labor Organization data, the ratio of the minimum wage to per capita GDP in China fell from 0.37 to 0.27. In 2024, Vietnam’s monthly statutory minimum wage was $692, whereas China’s was $543. Vietnam is poorer than China, but it consistently raised minimum wage as it integrated into the global economy. China, on the other hand, did not. During the 2008 global financial crisis, the Chinese government even lowered the minimum wage. (It should be noted that Beijing did raise the minimum wage by 3.3 percent during the COVID-19 pandemic.)
WORKERS OF THE WORLD, UNITE?
Marx, along with Friedrich Engels, warned in The Communist Manifesto that capitalism could lead to an “epidemic of over-production,” in which exploited workers were too poor to consume. As China opened its economy, it avoided such a fate because of globalization: the rest of the world bought what China made too much of. Today, China accounts for 35 percent of global manufacturing capacity—according to the scholar Richard Baldwin—and 18 percent of the world’s population but only 11 percent of global consumption.
Wage compression enables China to amass the capital and labor to compete on both the high and low ends of the manufacturing spectrum. China can put up the capital to vie with U.S. firms in high-tech sectors, such as in solar panels and vehicles while its labor costs remain low enough for it to rival African countries as a viable producer of labor-intensive products such as textiles. China has gained immense leverage in trade and geopolitics by building up the most complete supply chain in the world, dominating electric vehicles, rare-earth elements, and medical supplies, as well as shoes, toys, and T‑shirts.
Although China’s overproduction has benefited consumers worldwide, it has caused problems for producers. Cheap Chinese imports led to the collapse of factories and the loss of manufacturing jobs in many other countries. Chinese wage compression, in other words, has hurt not only workers in China but also their counterparts elsewhere.
Chinese workers are not particularly productive.
Wage compression is also detrimental to China’s overall economy. Chinese people are not spending enough money to keep their economy thriving, in part because of low salaries. On the supply side, firms, investors, and the government overbuild because low wages reduce the cost of capital, leading to idle capacity—infrastructure and factories that are underutilized. On the demand side, the country is suffering from chronic deflation because China’s ability to produce has outpaced domestic demand by a huge margin. It is not a coincidence that, since 2022, China’s trade surpluses have surged—reaching $1.2 trillion in 2025—amid a collapse of consumer confidence in China. Such a surplus is a product of decades of suppressed wages.
Capitalist countries have avoided Marx’s epidemic of overproduction because they have come to recognize that workers are also consumers. These governments have let wages rise to drive up demand. Although both Marx and Deng zeroed in on greed as the cause for labor exploitation, greed, applied enlighteningly, can also be deployed to improve the welfare of workers. Henry Ford, for instance, famously increased his workers’ pay so they could afford to buy the cars they were assembling. “Unless the employee gets enough to live on, he cannot be a consumer,” Ford wrote.
China should learn from this example. It must enrich its own citizens by encouraging collective bargaining, providing social security, removing caps on wage growth, and raising the minimum wage. Doing so could allow China’s consumption to eventually match its production prowess. If Beijing does not adopt a more pro-worker stance, its economy will become more lopsided, trade tensions will rise, and Chinese citizens will not be able to reap the full benefits of the economic miracle that they have created and rightly deserve.
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