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China’s labor productivity grew by a world-best 12 percent from 2000 to 2011. For comparison, productivity growth in the other three “BRIC” nations averaged 4 percent in the same period. There are two main reasons for China’s explosive productivity growth. The first is what economists call the “shift effect”: High-productivity industries account for an increasing share of the country’s economy compared to other, less-productive industries. This phenomenon—marked by workers moving from rural, agricultural regions to fast-growing urban centers—accounts for two of the 12 percentage points in China’s productivity growth from 2000 to 2011.
The second factor is even more significant: China is rapidly improving its labor productivity across every sector of its economy, as industries of all sorts adopt newer and better technologies, and as more productive firms replace less productive ones. Economists call this the “growth effect,” and it explains the other 10 out of 12 percentage points in China’s overall productivity growth in this period.