China's labour pains: rising wages

Some good news for Chinese workers. A labour shortage is driving up wages in China by about 10% a year, reports Business Week in a new article, How Rising Wages Are Changing The Game In China:

Wait a minute. Doesn't China have an inexhaustible supply of cheap labor? Not any longer. From the textile and toy factories of the south to the corporate headquarters and research labs in Beijing and Shanghai, the No. 1 challenge today is finding and keeping good workers. Turnover in some low-tech industries approaches 50%, according to the Institute of Contemporary Observation, a Shenzhen labor research group.

Guangdong Province says it has 2.5 million jobs that remain unfilled, while Jiangsu, Zhejiang, and Shandong provinces say they, too, face shortages of qualified workers. "Before, people talked about China's unlimited labor supply," says Zhang Juwei, deputy director of the Institute of Population & Labor Economics at the Chinese Academy of Social Sciences in Beijing. "We should revise that: China is facing a limited supply of labor."

Reports of labor shortages first cropped up in late 2004, but companies thought the phenomenon was temporary. Now a surge in both turnover and wage costs is convincing multinationals and their suppliers that the China game is changing permanently. With the gap between wages in China and those elsewhere gradually closing, the pressure to pass price increases on to consumers in the U.S. and other markets will start to build.

As Citigroup noted in a February report: "The continuous growth of labor costs in China, even at a moderate pace...is likely to have implications for inflation worldwide." These factors eventually will force the Chinese to upgrade their entire industrial base to make higher-margin goods. And those bigger paychecks are building a consumer class in China that multinationals want to target.

Yes, the laws of supply and demand operate even in China. Of course, this should not surprise anyone who has been keeping a watchful eye. And as Judith Banister reports in her informative August 2005 Monthly Labor Review article, Manufacturing earnings and compensation in China, real wage gains are nothing new:

Real living standards have been rising in China’s cities, and real earnings have been rising for urban staff and workers in manufacturing. ...Reported urban manufacturing earnings rose rapidly in the early 1990s, slowly in the mid-1990s, and very rapidly at the end of the 1990s and on into the early 21st century.

In part these real wage gains reflect rising labour productivity, in part compostional change - the shift from collectives to the private sector:

In 1990, the lowest-paid subgroup, urban collective manufacturing workers, was large (18 million) and held down average real earnings, while the highest-paid subgroup, private sector enterprises, was minuscule. By 2002, the highest-paid subgroup constituted more than half of urban manufacturing staff and workers. This trend toward the better paid private sector raised average earnings among urban staff and workers in manufacturing.

This is starting to effect China's manufacturing competitiveness. As Banister notes:

Labor compensation in China’s manufacturing sector is higher than it was a decade or two ago. This means that some other developing countries are now able to compete with China purely on the basis of earnings per manufacturing worker.

...Of course, China remains highly competitive globally because of its relatively low labor costs and many other favorable factors, but rising labor compensation in China has begun to erode the country’s manufacturing price advantage.

How long will it be before China starts outsourcing lower value-added manufacturing to countries with cheaper wages, like India or Vietnam? In some industries, that can't be far off. We have already seen buyers shift to other textile and clothing producers as a result of the recent EU import restrictions.

China appears to be following the industrial development path of the other 'Asian tigers' towards higher value-added production. No wonder the US auto industry is scared. But the rest of the world should be pleased to see both greater competitive challenge to the Chinese manufacturing colossus, and a narrowing of global income differentials from higher wages. That's what globalisation, at its best, is all about: cheaper goods and rising living standards.

UPDATE: Michael Mandel has a short blog post about this piece, along with some comments.

Comments

[Stormy]

What are the wonders of globalization? Perusing an article in Business Week, the New Economist blog offers some insights.


“Some good news for Chinese workers. A labor shortage is driving up wages in China by about 10% a year, reports Business Week in a new article,”

Based on this percentage yearly rise and using the highest median salary:


2006 $3,349.00
2007 $3,683.90
2008 $4,052.29
2009 $4,457.52
2010 $4,903.27
2011 $5,393.60
2012 $5,932.96
2013 $6,526.25
2014 $7,178.88
2015 $7,896.77
2016 $8,686.44
2017 $9,555.09
2018 $10,510.60
2019 $11,561.66
2020 $12,717.82
2021 $13,989.60
2022 $15,388.56
2023 $16,927.42

According to my calculations, even by 2020, the median salary will be below U.S. poverty line. Of course, we have not factored in inflation. And, the obvious question is: How are all these newly “rich” workers supposed to be able to become consumers of their own exports, even by 2020?

The New Economist continues:

“How long will it be before China starts outsourcing lower value-added manufacturing to countries with cheaper wages, like India or Vietnam? In some industries, that can't be far off.”

Looks like the domino effect I mentioned a year ago.

Then The New Economist cheerily continues:

“That's what globalisation, at its best, is all about: cheaper goods and rising living standards.”

Let’s see: Well before the wages in China hit poverty level U.S.A., China will be offshoring to Vietnam.

Now, before someone jumps on me for not seeing that poverty in China cannot be compared with poverty in the U.S.A., remember, I asked the following question: Will China be able to buy the goods it now exports? If you bother to read the article, you will see that because of wage increases in China, exporters are going to have to start charging more.

That’s what globalization is all about.

[New Economist]

Stormy,

I am not claiming that eventually the average Chinese worker will be earning as much as the average American. But in a decade or two, they will certainly be earning more than they are now. China and Vietnam both appear to be firmly on the 'Asian tiger' development path, just as we witnessed in Japan, Singapore, Hong Kong, Taiwan, South Korea, Thailand...

You may be unimpressed by hundreds of millions of people experiencing rapid improvements in their living standards, but I certanly am. If higher productivity and rising wages in places like China and Vietnam can be facilitated by freer trade and greater international competition, then I am all for it.

As for whether the Chinese can afford their own goods - well, an increasing number can. Like India, we have for example seen rapid growth in mobile phones ownership - something your theory would suggest was not possible.

When I visited Vietnam last year, I was impressed by how many people had motorbikes. A decade ago, they were on bicycles. The same applies to China. Not all can afford such items, to be sure - but a growing number can.

[Blissex]

Well, this is nothing special or unexpected: it is exactly what happened to Italy or Japan during the postwar boom, or as the post says to the ''tiger'' economies.

However «That's what globalisation, at its best, is all about: cheaper goods and rising living standards.» is ridiculously optimistic, because it omits the other very large impact of globalisation, on the redistributive effects.

Globalisation of trade means that the leverage and terms of trade for those who are proprietors of real or intangible assets (civil servants, government licensed professionals, ...) improve greatly, as their relative scarcity rises, and thus they capture most of the benefits of globalisation.

«cheaper goods» applies mostly as to wholesale prices: retail prices in the west have gone a bit down, but most of the enormous fall in wholesale prices in many industries has been pocketed by resellers, retailers and real estate owners.

Conversely the prices of many basic items in China (housing, health, food, ...) are going dramatically up, shattering the ''iron rice bowl'' and leading to extraordinary hardship for many.

Sure, the average effect is deflationary in the west and inflationary in China; but in the west the average is about a rich minority get much richer and the rest getting poorer, and in China the average is about a majority getting richer and a minority getting much poorer.

[Stormy]

New Economist:

Appreciate your response.

You are not addressing the points I am making--assuming the article is correct:

1) The average Chinese worker today cannot buy the very products China exports. And he certainly will not be able to buy them for quite a long time, if ever.

2) Even at these absurdly low salary levels, he may well start losing his job to the Vietnam poor as the pressures for offshoring rise in China.

3) Even this modest rise in salary is having an inflationary impact as companies raise prices to recoup the rising cost of labor, eroding the very salary advances the poor see.

In short, the article exposes the deep contradictions of globalization. Look at how Mexico’s cheap labor is now in a struggle with China’s as companies that once moved there (NAFTA) are now moving to China. I can give you the references if you wish.

Capital will move around the world, chasing cheap labor. The profits are going to a few at the expense of the many. There will be some that benefit, but the poor, no. It is very easy to turn the facts Business Week uses to expose the lie they celebrate.

Labor arbitrage is the name of the game.

Now, I could easily argue further that capital is using taxes levels and weak environmental regulations as additional leverages—and that these forms of arbitrage are equally corrosive, both for developing countries and developed countries.

The arguments I am presenting are not comfortable ones. And I am simply using the facts presented by those who think that the present form of globalization is raising all boats. I could offer an alternative, but that, for now, is beyond the scope of our discussion.

I am interested in seeing how you respond to the three points I made.

[Blissex]

Stormy, your three points to me seem ridiculous: they seem to be from the point of view of a rich spoilt westerner.

Sure, most Chinese workers cannot afford to buy iPods, and some of the jobs may be going to Vietnam, and there will be some inflationary impacts.

But the difference globalisation has made to the average chinese urban worker has been between wretchedly poor and famines and poor and surviving.

Same for the postwar German/Italian/Japanese booms and the more recent Korea/Taiwan/Singapore booms.

With the difference that the immense injections of virtually free foreign capital into China have had a much larger and faster effect on the standard of living of chinese urban workers than the Marshall plan ever had.

The downsides to globalisation are not that chinese urban workers are not benefit from it, because they are, but I think are in the redistributive effects:

* Most of the net benefits are captured by a tiny minority of the elites in China and in the west, those mostly with government links.

* Some of the net benefits go to vast masses of chinese urban workers.

* Many chinese (mostly non urban or non workers) see rising prices and falling incomes.

* Many western workers (non asset owning) see prices falling more slowly than their wages.

[Arthur Eckart]

Stormy, I agree with your three points. However, China doesn't export high-end products, although the vast majority of Chinese can't afford them. One of the reasons China's economy is expanding rapidly is Chinese firms hired the best workers first. However, China now faces diminishing marginal productivity. The less productive workers will be more expensive to Chinese firms and there's an inverse relationship between wages and profits. Also, bigger is not necessarily better (or optimal). Consequently, China will have decreasing returns to scale, which will slow growth. Globalization, e.g. free trade, open markets, and unrestricted capital flows typically increases the size of the economic pie, e.g. through the Law of Comparative Advantage. However, China receives a smaller share of the gain, because it's trading in a relatively weaker position than most of its trading partners. So, for example, the gains of Chinese producers are more than the losses of Chinese consumers, while the losses of American producers are less than the gains of American consumers. However, the U.S. receives a larger net gain than China from trade.

[New Economist]

Stormy

Thanks for your comments. I have responded to your first point in a separate post, Can Chinese workers afford Chinese goods?.

As to your second point on offshoring, given the growing shortage of labour in China I doubt the diversion of work to Vietnam will spell doom for the Chinese worker. For a start, Vietnam's workforce is much smaller than China's. Likewise the diversification of textile and clothing orders to non-Chinese producers last year does not seem to have caused undue damage to China's industry.

On your third point, about Chinese inflation "eroding" worker's pay: given wages are growing by around 10% a year and consumer prices by only 0.9% a year, I very much doubt it.

[Arthur Eckart]

New Economist, I couldn't find China's main exports. However, these are India's main exports:

"India's main exports to the US are precious stones, metals (worked diamonds and gold jewelry), woven and knitted apparel, other textile articles, fish and seafood (mainly frozen shrimp), textile floor coverings, iron and steel products, organic chemicals and machinery (including taps, valves, transmission shafts, gears and pistons)." From the site: http://www.atimes.com/atimes/China_Business/HC15Cb06.html

I agree, Vietnam will not take a large part of China's jobs. However, there are many poor countries where Chinese firms could outsource jobs (based on the economic theories and laws I stated above).

Also, "your only 0.9% a year" link states: "They forecast inflation this year will likely average 3.5 percent, up from 1.8 percent in 2005."

I generally agree with your facts. However, I think it's more important to understand how economic forces will shape an economy rather than stating the obvious that China is moving from the Agricultural Revolution into the Industrial Revolution.

[Blissex]

«consumer prices by only 0.9% a year» is a wholly misleading impression -- it is about measuring inflation on the same basis as suitable for advanced western economies.

In practice the reports I have seen have that chinese inflation is very, very high, with the cost of essentials like housing and health care having gone from essentially free to high prices and ever rising.

For example check this BusinessWeek article:

http://www.businessweek.com/globalbiz/content/mar2006/gb20060309_834667.htm

Sure, the urbanized workers whose salaries are rising 10% a year might manage to cope; but even in the west much better paid salaried workers have difficulty coping with house price and health care cost inflation (with a very large minority of USA workers being unable to afford health care).

[Arthur Eckart]

Blissex, I agree, there's much misleading information. Also, I question the statistics collected by a communist government to some extent. In the U.S., there are many high quality houses, autos, and other products most Chinese cannot afford. How can that be compared? The production side of economies can be measured. However, it's much more difficult to measure living standards.

[Boyd]

So may words from all of us, all that really needs to be said is that too many of us tolerate the exploitation of others for the sake of growth and our need to consume. Even worse we try to quantify and measure it, when we are just taking advantage of indentured labour to make "stuff" that we don't really need, and we call it a win/win.

[Movie Guy]

China has not run out of labor. Study its unemployment statistics. The problem may have more to do with labor that will not relocate or requires higher levels of initial training. China will resolve this problem.

NE -- "How long will it be before China starts outsourcing lower value-added manufacturing to countries with cheaper wages, like India or Vietnam?"

Do you have examples of this trend? And at what wage level considerations? Types of products or components?

I agree that foreign corporations are shifting some operations to Viet Nam and India, but I wasn't aware that China's domestic corporations were also doing this. Is that true?

EH -- "China appears to be following the industrial development path of the other 'Asian tigers' towards higher value-added production."

An understatement. And, yes, China is already manufacturing some high end goods, or components for such goods assembled elsewhere. Plenty automobile manufacturers beyond the two American corporations are establishing production plants in China. Mercedes Benz, of DaimlierChrysler, is a good example. Moreover, the U.S. automobile manufacturer suppliers are rolling operations and support contracts to China and Mexico at a growing pace. American wages in those support industries are being crushed.

EH -- "When I visited Vietnam last year, I was impressed by how many people had motorbikes. A decade ago, they were on bicycles. The same applies to China. Not all can afford such items, to be sure - but a growing number can."

Let us hope that kept those bicycles. They will need them if we have a few more crude oil supply interruptions. We may all need bicycles. I have two.

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[erotic shop]

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[ClubPenguinCheats]

I question the statistics collected by a communist government to some extent.