The reaction in the Western media to the doubling of entry-level salaries at the Foxconn factories in Shenzhen was as if it was a change in the world order. Chinese workers treated as if they have bargaining power! Honda increasing wages 24%! Beijing increasing municipal pay 20%!
Increases like this do not come out of nowhere. We had pointed out, even by the notoriously poor quality of Chinese statistics, inflation is particularly difficult to guesstimate, and there was good reason to think it was running at a faster pace than most believed.
Chinese labor markets have been intermittently reported to be tight, but that factoid did not seem to penetrate the consciousness of many observers (and in fairness, it could, like the GDP figures, have been exaggerated for political purposes). The Sydney Morning Herald (hat tip reader Crocodile Chuck) provides some context:
The story of China’s rapidly rising wages and diminishing pool of surplus agricultural workers is well known among a small group of Chinese scholars centred on Professor Cai Fang, director of population and labour economics at the Chinese Academy of Social Sciences.
His colleagues, Du Yang and Wang Meiyan, have previewed the latest data in a coming paper. The paper cites results from three surveys, two of which have not yet been published.
The methodology and timing of each survey is opaque, the results vary widely, but the trend is abundantly clear.
A survey of 22,000 rural households by the Agriculture Ministry’s Research Centre for Rural Economy shows migrant wages surged about 15 per cent last year, after adjusting for consumer price deflation. A smaller survey of 4000 people by the People’s Bank of China – also yet to be released – shows real migrant wages increased about 10 per cent last year.
And a survey of 60,000 rural households by the National Bureau of Statistics showed real migrant wages in 2009 rose 7 per cent, with the lower number apparently reflecting an earlier survey date.
Separately, quarterly figures from the National Bureau of Statistics show nominal per head rural household wage income – which reflects job and wages growth – jumped 16 per cent in the March quarter of this year from a year earlier.
This series, watched closely by the World Bank, has risen 100 per cent in six years. Rural per head income grew faster still – 118 per cent – when non-wage income such as subsidies and tax cuts are included.
Whatever the credibility of each survey, the point is that most of China’s 150 million rural migrant workers in urban centres received big wage rises despite the global financial crisis delivering a negative shock to China’s export economy at the end of 2008 and start of 2009. And this year’s wage rises are likely to outstrip last year’s. The fact that China’s demand for labour is rising much faster than supply changes everything. Rich world consumers will have to start paying a little more for iPhones and iPads.
Yves here. This creates an interesting conundrum. China’s business model has long been based on its labor cost advantage. Manufacturers had already started moving production to Bangladesh and Vietnam, and that trend will accelerate (provided the deflationary suck of eurozone austerity does not put the world economy on hold, or worse).
Rising labor costs make a revaluation of the renminbi seem less likely; indeed, it raises the odds of what Marshall Auerback and I said was an outlier possibility, that of a devaluation. But if China can manage the transition, higher wages are an essential piece of a change from an export/investment led economy to one which has consumption as a strong driver, which in turn is essential for global rebalancing. The future may have arrived sooner than the Chinese officialdom wanted.
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The future will may not be smooth for the Chinese economy with rising wages just one of the concerns.There are being hit with a veritable storm of negative external and internal forces http://bit.ly/dnpa7I . The falling commodity prices ( copper at a 8 month low),falling real estate prices may increase the chances of a hard Chinese landing.
Yves: “Rising labor costs make a revaluation of the renminbi seem less likely”
Of course if the cost of Chinese goods shipped to the US is rising, then it serves the same purpose as a renminbi revaluation. But I’m skeptical. The data addresses Chinese labor prices, but is there any data on the cost of Chinese goods imported to the US?
Two things. First, labor costs are but a part of manufacturing costs. Second, I’m skeptical of how the “Chinese labor costs are rising” meme seems to get trotted out at convenient times.
Yves: “it raises the odds of what Marshall Auerback and I said was an outlier possibility, that of a devaluation.”
I believe another way to spell that is “trade war”. It’s bad enough that the US has been so ineffectual in the face of Chinese currency manipulation, but to actually devalue it would be a clear unilateral declaration of a trade war. Not that we haven’t been in a unilateral trade war for years, but that would be the sort of major offensive that I would hope even our erstwhile “free traders” would notice.
You never know though. Following our “free traders” philosophy, the appropriate response to the Pearl Harbor attack would have been a diplomatic complaint.
Well, it takes to make a trade war, and though Germany and China may be engaging in one, the U.S. elites are complete pacifists on this one (as opposed to their belligerence whent it comes to dropping bombs in Iraq, Afhanistant, Pakistan, Somalia, etc., not so much). However the source of their pacifism on trade is related to their belligerence on war. The elite is not exposed to competition from currency advantaged markets as America’s working and middling classes in manufacturing and many services and they no longer fight in America’s wars nor bear the cost of those wars, either in directly risking their lives or in taxes. Instead, the crisis provides an opportunity to cut social security and medicare to pay for those wars. The elites whose assets are price in dollars and who consume European luxury goods and foreign travel benefit immensely from a a rise in in the dollar versus the Euro. China itself has just seen its dollar holdings of appreciate by 30% versus the Euro, as well as experiencing steady appreciation of the Yen. Yep, is benefiting but the average American and European who will experience deflation in income and benefits and increased economic insecurity. This anxiety and insecurity will increase the drift of popular politics to the authoritarian, tribalistic, right, as minority groups and elements that are politically and economically weak will be blamed as the cause for the delcine.
On a more sophisticated level, I don’t know why any business would invest in U.S. manufacturing or service industries exposed to world compensation given the price disadvantage they face with the dollar being the world’s reserve currency.
“I don’t know why any business would invest in U.S. manufacturing or service industries exposed to world compensation given the price disadvantage they face with the dollar being the world’s reserve currency.”
You’re right. I think that being the world’s reserve currency is a golden noose. Permanent Dutch disease.
To balance our trade will require not just a temporary exchange rate (or price) adjustment, but a widespread belief that there’s a commitment to keeping the dollar low enough to balance our trade.
I was Just there last month, they (the Chinese Gov run Media ) were saying they expected 5% inflation to occur in May.
Now if you have been there recently you know they have one heck of a housing bubble going, Trust me if the USA could figure a way to create 5% inflation in a month, they would as it would ease the debt issues.
Bottom line when the Chinese gov announce they expect inflation or even deflation next month, believe them, they do have the ability to do that.
I like the idea of rising Chinese wages. I especially like it when the rate of increase in the level of Chinese wages is substantially higher than the rate of increase in US wages.
I would like it very much if wages in China were at parity with US wages. In that we might be able to resurrect US manufacturing. Comparable global wages and a product that physically and functionally endures could be the basis our walk away from financial folldorall.
Agreed.
A rising tide lifts all boats….in a global context.
wouldn’t it be awesome if that Foxconn moved here to Michigan? It would totally turn the whole country around, economically.
Also there is one other fallacy in this article,
The Chinese labor market is not tight, there are so many make work projects going on everywhere just to keep people busy, and they force retire you a lot of times at 45 or 50 just so they can give your job to someone else who wants or needs it, it would blow your mind.
The Free Condo, the Chinese economic plan. And trust me they have been buying all the steel, copper and concrete they can get their hands on, this is an ongoing experiment that has no end for the foreseeable future.
We’ve pointed out elsewhere, repeatedly, that China is in unknown and probably unworkable terrain, with an investment share of GDP that is unheard of, and a very high export share too. We’ve also pointed out that the debt required to generate incremental GDP has risen dramatically since 2001, again pointing to an economic model that is unsustainable.
Having said that, the pervasiveness of wage increases says the labor market IS tight. Even if that is due to in part to government infrastructure building (and China has had years of bridges to nowhere), the fact that the government has not turned off the tap and private sector demand has improved has led to the same result. And I’ve seen no mention of any plan by the officialdom to cut back on investment projects.
China dumped $1 trillion of liquidity into an economy much smaller than that of the US last year. That is likely the real driver of the inflation and the improvement in labor markets.
We’re probably seeing the beginning of the demographic shifts in China beginning to take hold. Also, Hu and Wen have done a lot to develop the countryside, making it less necessary to go o the coasts for work.
Incidentally, labor militancy in India is also increasing. There have been a whole series of strikes in auto production sectors not dissimilar to what happened recently with Honda. This speaks to increasing self confidence and tight labor markets. However, the result in at least one strike in India was a shift in production to Turkey. Even Indian workers are just getting ‘too greedy’, apparently.
I agree that there is a global rebalancing needed if we are to have a global economy…the workers of the advanced economies cannot compete with the workers of emerging economies……but the questions remain…at what standard of living as we all know water seeks it’s own level…and so will the standard of living seek it’s own level across all countries ……but is this the best way….what about buying local given the cost of transporation and the oil issues at this point….hum…..????
Here is a more appropriate analysis by Abdy Xie:
http://english.caing.com/2010-05-13/100143676.html
Powerful interest groups have paralyzed China’s macro policy, with ominous long-term consequences. Local governments consider high land prices their lifeline. State-owned enterprises don’t want interest rates to rise. Exporters are vehemently against currency appreciation. China’s macro policies have been reduced to psychotherapy, relying on sound bites and small technical moves to scare speculators. In the meantime, inflation continues to pick up momentum. Unless the central government bites the bullet and makes choices, the economy might experience a disruptive adjustment in the foreseeable future.
Andy Xie has another article that is a direct comment on the wage rise issue:
http://english.caing.com/2010-06-07/100150460.html
It’s called “Dismantling factories in a dreamweaver nation”. It’s very interesting. AX explains that the new generation unlike their elders is less willing to “eat bitterness” and wants a more exciting urban way of life. He predicts that in the future factories will be built closer to cities and workers will abandon dormitories for integration in the urban society.
AX also offer a historical survey of labor management in East Asia:
“Labor management as a core competitive advantage in East Asia began in Japan. After the Meiji Reforms, Japan wanted to industrialize quickly but faced the challenge of turning agricultural labor into industrial labor. It looked to the military for a role model. The military faced a similar challenge: It had to turn farm boys into soldiers. The answer was maximum pressure and total regimentation. Factory uniforms, morning exercises, company loyalty indoctrination, etc., thus became unique characteristics of Japanese factories.
This model becomes less relevant as the transition from rural to urban labor force winds down and labor costs rise. Nowadays, Japanese factories have few workers and lots of robots on factory floors.
The Japanese military factory management system spread to other parts of East Asia, especially Taiwan. It was a Japanese colony for a half-century and receptive to Japanese management skills. When the yen’s value rose in the 1970s, Taiwan got its first opportunity to take away Japanese market share by adopting the Japanese factory management system.
And when the Taiwanese took their businesses to the mainland, they found a place for applying their skill with 50 times as many people. Because they combine the Japanese system and knowledge of China’s labor force, they are better than Japanese in managing factories in China.
The magnitude of scaling up by Taiwanese businesses is beyond what the Japanese could have imagined. Indeed, no other businesses have done what Taiwanese businessmen have with hundreds of thousands of workers in labor intensive operations.”
That’s something I didn’t know. All in all that was a very informative article from AX.
“Eat bitterness”?
Their economy may the smaller, but one wonders who has the larger poetic imagination.
I travel to Shanghai every 4 months. On every visit, it is astounding how much the infrastructure and housing has expanded over such a short time period.
Speaking for the Shanghai area only, it is quite obvious that the infrastructure is being vastly overbuilt. This massive investment misallocation is exerting pressure on wages and commodities such as steel (up 17% and 45%). The costs of maintaining these public works is going to be huge.
I think it is going to be hard for China to put the brakes on public works projects as the policy makers are also financial beneficiaries of these projects. It is like asking Wall Street to regulate itself, and we all know how well that worked.
Like many others, we outsource to China because of lower costs. As these cost differentials narrow, I foresee a diminished Chinese export economy. The export economy provided the hard currency to finance growth, what will be the fallout from a diminished inflow of funds?
Great comments and insights as to how China will handle the inevitable transition. Keep them coming.
I’ll be honest I don’t know what to make of this. 6 months ago it seemed like China was claiming 20 million unemployed migrant laborers. Most people figured it was more like 50 million or higher. So now China has a tight labor market. I could see some local or regional tightening, but I guess my question is do electrical and other commodities usage track with this. I know China has been blowing bubbles and is engaged in a massive capacity overbuild but is it so large to soak up all of the excess labor? Something doesn’t feel right about this.
Are migrants to the cities discovering that its not all they hoped it would be? In addition we are at the point in the demographic history of China where the adult labor force is at the maximium percentage it will be. The population is going to age, and as a result labor will get tigher, plus older folks are more reluctant in general to migrate.
In the day, Soviet statistics were famous
for only presenting %age growth. Never the
baseline.
Let us not fall into that trap. For Honda
“The strike, which began last week,(in
Foshan) has also closed Honda’s car plants
in nearby Guangzhou, the
provincial capital, and Wuhan in central
China. Honda’s offer would raise average
monthly salaries at the factory to
Rmb1,900 ($280). Workers had been pressing
for up to Rmb2,500.”(FT)
While this level of raise might influence
location decisions in textiles it hardly
would affect the price of transmissions.
Also Guangzhou and Wuhan are already urban
areas- with higher rents etc.
More important are the changes from the
traditional Chinese “passivity” to a much
more (actually Westernish) egotism. Caused
I believe in large part by the one child
policy (actually, and here I am skating on
thinner ice). The traditional privilege of
the oldest son (or one filling that
role)is matched by the passivity of younger
siblings.The one child policy removed these
others passive siblings leaving as the
Chinese say, a nation of little emperors,of the privileged first born “sons”
In rural non-mechanized farms where a son is
needed for the heavy manual work
In the day, Soviet statistics were famous
for only presenting %age growth. Never the
baseline.
Let us not fall into that trap. For Honda
“The strike, which began last week,(in
Foshan) has also closed Honda’s car plants
in nearby Guangzhou, the
provincial capital, and Wuhan in central
China. Honda’s offer would raise average
monthly salaries at the factory to
Rmb1,900 ($280). Workers had been pressing
for up to Rmb2,500.”(FT)
While this level of raise might influence
location decisions in textiles it hardly
would affect the price of transmissions.
Also Guangzhou and Wuhan are already urban
areas- with higher rents etc.
More important are the changes from the
traditional Chinese “passivity” to a much
more (actually Westernish) egotism. Caused
I believe in large part by the one child
policy (actually, and here I am skating on
thinner ice). The traditional privilege of
the oldest son (or one filling that
role)is matched by the passivity of younger
siblings.The one child policy removed these
others passive siblings leaving as the
Chinese say, a nation of little emperors,of the privileged first born “sons”
In rural non-mechanized farms where a son is
needed for the heavy manual work some allow
-ance was made for multiple children. And
exception was made with good political
connections.
Sorry for duplicate. New Computer not yet
housebroken.
China’s population dynamics are well known, as Lyle points out, and it’s also long been known that tightening appears when the second derivative turns down sharply, somwehat before the actual peak, 2015 in this case.
This is the opening shot in a propaganda war aimed at increasing corporate profits. The key sentence was the last one: “Rich world consumers will have to start paying a little more for iPhones and iPads.”
Manufacturing labor costs are a tiny percentage of retail price. I doubt that “a little more” will translate to two percent, though–I expect once the propaganda machine is done, we’ll be paying 30% and 50% more.
Chinese manufacturing is in decline for a lot of reasons, including cost of factory space, regulations that are a constantly moving target, regulations being interpreted differently in every region of China, local corruption, less than stellar power infrastructure, variable shipping costs, a less skilled labor pool that produces a lot of bad product. Some Chinese companies are already building factories in the US. The Carolinas seem popular. A Chinese company is building a pipe factory in Corpus Christi. One thing that these companies all have in common is that they own mining and raw materials manufacturing production in China so they have lots of control over their input costs and where profits are booked. The cost of building a factory in the US is about 25% of what it would be in a major metropolitan area of China, like Shanghai. If your plant costs more than 100 million, the Chinese government will even chip in money. There is no government demanding that you hire more people than you need or you can’t run your factory. There is no back dating of regulations. Very little corruption. Local government is very accomidating to those wanting to build a plant and usual financial incentives are pretty good.
It hasn’t been all roses from the Chinese as there are some big business cultural differences. The biggest being that you can’t berate Amercian workers in front of their co-workers and constant threats to fire you aren’t allowed. The other being that in China managers generally recieve kickbacks/gifts from suppliers and sometimes from their employees to maintain good relations. Most found that they had to hire local managers or major cultural problems ensued.
Costs for staple goods in China like food, medicine, and electricity have been increasing by double digits for many years while wages went up very little. This has resulted in a large portion of the migrant labor force decamping the urban areas and returning to their rural roots where at least they can eat. 12 years ago a bowel of soup from a small shop in Shanghai was around 50 cents. Now it is around $2.50 and many of the smal shops have been replaced by development. Most of the cheap markets are being torn down so they can build Western like supermarkets that are 3-4 times the cost for food. You can’t sustain low wage growth in that environment.
Hey cheers for the last cool post. It was very heart felt.