New World Invesment Research

China’s average wages in the secondary sector have risen steadily since the mid-2000s. However, wage growth must be evaluated relative to capital deepening and labor market conditions to understand its implications for household consumption.

Using National Bureau of Statistics data, average wages are compared with capital intensity, measured as fixed-asset investment per worker in the secondary industry. The wage-to-capital ratio captures labor’s relative position in production rather than nominal income growth. The data show that while wages increased in absolute terms, capital deepening accelerated more rapidly from the mid-2010s onward, causing the wage-to-capital ratio to flatten and later decline. At the same time, employment in the secondary sector stagnated or contracted, indicating that growth relied increasingly on productivity gains from capital rather than labor expansion.

Recent labor market indicators reinforce this structural interpretation. Goldman Sachs Research finds that a weighted average of employment sub-indexes across purchasing managers’ surveys points to hiring conditions at their weakest level in the past decade, excluding periods of Covid lockdowns. In parallel, Goldman’s wage tracker indicates that year-over-year growth in urban nominal wages slowed to approximately 3.8% in the third quarter of 2025. These trends are consistent with subdued labor demand despite ongoing investment and automation.

Goldman Sachs expects targeted government measures in 2026 aimed at easing labor market pressures and supporting income growth. Proposed tools include subsidies for labor-intensive services and offline businesses, increases in minimum wages, reductions in social security contributions for low-income and flexible workers, and expanded unemployment insurance coverage. These policies may provide partial cyclical relief.

However, structural constraints limit the effectiveness of such measures. High-tech manufacturing, a central component of China’s growth strategy, is capital- and technology-intensive rather than labor-intensive. At the same time, technological adoption continues to displace routine labor. Cyclical headwinds, particularly the prolonged property sector downturn, further suppress labor demand and hiring intentions.

Looking ahead, Goldman Sachs Research expects year-over-year growth in household real consumption to moderate in 2026, while government consumption is forecast to accelerate. These opposing dynamics imply a broadly flat contribution of total consumption to headline GDP growth.