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Global manufacturing seen moving back to developed world

Employee Mike Flynn installs air coolers on a stand in the subassembly area at the Ellicott Dredges LLC manufacturing facility in Baltimore, Maryland.
Andrew Harrer | Bloomberg | Getty Images
Employee Mike Flynn installs air coolers on a stand in the subassembly area at the Ellicott Dredges LLC manufacturing facility in Baltimore, Maryland.

The wage gap between developed and emerging economies is set to shrink significantly, according to new research, and could lead to a major shift in where companies base their manufacturing operations.

PricewaterhouseCoopers' (PwC) Global Wage report, published on Thursday, found that all emerging economies are expected to show significant convergence in wage levels relative to the U.S. and U.K. by 2030. The shift looks to be most marked in China, India, Mexico and the Philippines.

India's current average monthly wage, for example, is around 25 times smaller than that of the U.S., but PwC estimates that by 2030 it is likely to be just 7.5 times smaller. Similarly, average wages in the U.S. are now 7.5 times greater than in Mexico, but by 2030 are projected to be just 3.8 times more.

(Read more: Commander-in-cheap: US is a bargain manufacturer)

Higher labor productivity growth in these emerging economies will drive this boost to wages, PwC said, along with a long-term appreciation of local currencies. This contrasts with the developed world, where real wages tend to rise more slowly than productivity.

"The direction of change is clear," said John Hawksworth, PwC's chief economist. "The large wage advantages enjoyed today by many emerging economies will shrink as their productivity levels catch up with those in advanced economies and their real exchange rates rise as a consequence."

This shrinking wage gap will have "major implications" for global business, the report claimed, as labor costs rise in countries previously deemed low-cost production havens.

(Read more: An August US manufacturing revival)

Growing trend

There is already a growing trend of global businesses moving at least some of their manufacturing operations home, with companies including Apple, Caterpillar and General Electric all announcing plans to shift production back to the U.S. from overseas over the last year.

It comes amid increasing pressure, from both workers-rights groups and consumers, to provide at least some domestic jobs. There is also widespread concern about the labor conditions of workers in foreign factories, highlighted by a deadly fire at a garment production facility in Bangladesh earlier this year.

According to PwC, countries such as China, Poland and Mexico will be seen as less attractive places to base manufacturing facilities as a result of the change in relative wages, but could become more important as consumer markets.

(Read more: Has the rally in emerging markets already stalled?)

Whereas those countries with wages that remain relatively low compared to China – such as India and the Philippines – are likely to become more appealing production locations.

However, the report stressed that India would only benefit from the shift if it improved its infrastructure and cut its red tape.

PwC partner Michael Rendell added that it was crucial for businesses to prepare themselves for this shift in the wage landscape.

"Companies planning for this today will find themselves with significant advantages, particularly in terms of people costs," he said.

"It's inevitable that the manufacturing and services industries in countries will transform as the cost base evolves, and also that there will be winners and losers. Governments, regulators and business communities need to be ready for that shift."

By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop

Contact Europe: Economy

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