Labor shortages and rising labor costs in China have caused growing hostility between capital and labor. Building a collective negotiation mechanism is nothing but a makeshift measure to ease the tensions. The permanent cure lies in a mature institutional design of the labor market.

The rising cost of labor in China is an inevitable result of supply and demand and not the growing awareness of workers in sweatshops. China, which once had an abundance of low-cost workers, is reaching the Lewis turning point which pushes up wages, consumption and inflation when there is no more surplus labor.

Inheriting a dual employment system, urban and rural, from the planned economy, China had long seen an over-supply of labor in both urban and rural areas. However, the dramatic social and economic transitions of China brought about unprecedented population mobility. Rural surplus labor started migrating to cities on a large scale in the late 1990s.

The radical urbanization of China absorbed nearly 145 million rural workers and boosted the development of the labor market, as well as employment system reform in cities.

However, human resources are increasingly allocated in light of China's turning point and the decline in the number of people entering the labor market.

This turning point in the supply of labor is the primary cause for labor clashes.

Compared with the early flow of migrant workers, many migrant workers can now secure fixed jobs. And, after working and living in cities for almost a decade, migrant workers are demanding the same rights as permanent citizens.

That's why merely squeezing out more and more jobs is no longer effective in mitigating labor conflicts. Granting migrant workers medical care, education and endowment pensions is more advisable than encouraging collective negotiation, because negotiation cannot change the basic fact that there is now a labor shortage.

As long as the rising cost of labor is caused by a labor shortage accompanying the Lewis turning point this tendency will continue without eroding the strength of the Chinese economy. The Japanese experience of the Lewis turning point around 1960 is a case in point.

The transformation of industry entails improving labor efficiency, so that the rising cost of labor does not result in the loss of China's comparative advantage in the global economy.

Correspondingly, employers should attach more importance to providing decent pay for a quality labor force.

Cases of wage arrears dropped significantly in China after peaking in 2004. Afterwards, migrant workers chose more proactive ways - strikes and negotiation - to demand higher wages.