End Looms For Era of Cheap Chinese Labor

It feels like the end of an era. The spate of strikes and suicidesthat have rocked China’s southern manufacturing belt over the last fortnight could well go down as the moment that China stopped being a place of endless cheap labor. And for the economy, it could be a thoroughly good thing.


The manufacturing hub in Guangdong province has been buzzing with two different but related stories—the spate of suicides at Foxconn, the company that makes the iPad and other hi-tech gadgets, and a high-profile strike at a Honda components plant.

Both events have also resulted in eye-catching wage increases—30 percent in the case of the Foxconn workersand a 24 percent offer at the Honda factory(they want 50 percent).

They are part of a pattern of rising wages across the economy. Dai Qinlan, director of the Careers Information Center in Wenzhou, another export hub on the east coast, said that wages are up around 20 percent in most of the region’s factories this year.

“Companies in China can still get young workers for their factories, but they are going to have to pay significantly more for them,” says Arthur Kroeber, managing director of Dragonomics in Beijing.

To be sure, this is not a new phenomenon—there have been reports of staff shortages in parts of Guangdong for several years and wages were heading higher before the crisis hit the export sector in late 2008. And Chinese wages are still equivalent to around a third of Mexican salaries and one-quarter of Brazilian.

Instead, the salary hikes in Guangdong this week symbolize a broader shift in favor of labor that has accelerated in recent months and is likely to carry on for a number of years. They reflect powerful demographic shifts resulting from the three-decade old one child policy, with the numbers of new potential workers entering the economy dropping quickly. Economists say China has passed or is close to hitting the “Lewis turning point”, when the pool of surplus agricultural labor tapers off, sparking big rises in industrial wages.

Cai Fang, a researcher at the Chinese Academy of Social Sciences who has written widely about the phenomenon, says that wages for migrant workers increased by 2 to 5 percent in the early part of the last decade, and by around 7 percent in 2004-2007. Yet last year, they jumped by 16 percent.

Wage inflation does bring plenty of macro-economic headaches. China was able to achieve double-digit growth over the last decade with minimal inflation, in part because wages grew more slowly than productivity. But if salaries continue to rise, the normal rate of inflation is likely to be higher—and that in an economy which some fear is already overheating.

Rising inflation would likely lead to higher interest rates, which could cause a lot of stress among the local governments that borrowed heavily last year to finance infrastructure stimulus projects.

Yet wage inflation is a pre-condition for the government’s main long-term economic goal, boosting consumption and reducing the dependence on exports and investment. Raising the incomes of ordinary Chinese is the best way of encouraging them to save less and spend more—and for some observers that is already happening. “Right now in China we are seeing the opposite of what many people believe in their minds,” says Li Daokui, an economist at Tsinghua University and a member of the central bank’s monetary policy committee. “Chinese consumers are beginning to consume.”

Booming consumption will, in turn, lead to smaller external surplus, as China imports more goods from the rest of the world and helps encourage a rebalancing of the global economy. As long as potential spikes in inflation can be controlled without too much cost, China has a lot to gain from higher wages.