The Beginning of the End of Cheap Labor in China

Stephen DeAngelis

August 29, 2007

There have been several articles over the past few months noting that China’s economy has progressed so rapidly that it is running out of skilled labor despite the millions of people in its work force. This development seems to have shifted power from employers to employees and, as a result, working conditions in China should improve and wages should increase. The latest article to address this subject is by Keith Bradsher [“Wages Rise in China as Businesses Court the Young,” Washington Post, 29 August 2007].

“Chinese wages are on the rise. No reliable figures for average wages exist; the government’s economic data are notably unreliable. But factory owners and experts who monitor the nation’s labor market say that businesses are having a hard time finding able-bodied workers and are having to pay the workers they can find more money.”

This trend represents both good news and bad for the U.S. On the up side, higher wages and better working conditions means that workers in developed countries will eventually be able to compete on a more level playing field with Chinese workers. That good news must be tempered by the fact that when Chinese wages rise high enough manufacturing will move to some other low cost country not back to the United States. The news won’t really be good until a majority of the world’s workers can compete on a level playing field — and that is beyond the current forecast horizon. The bad news is that higher wages means higher prices.

“[H]igher wages in China are likely to lead to higher prices in the United States — at the mall, at the grocery, even at the gas pump. Chinese companies are already passing along some of their higher costs to overseas customers. Prices for goods from China, after years of gradual decline, have risen 1.2 percent since February, according to the Labor Department. July’s increase was the biggest yet: 0.4 percent compared with June. Chinese companies and contractors are also passing on the cost of the rising value of their currency, the yuan, up 8.8 percent against the dollar in the last two years.”

The most interesting aspect of the article is that it points out that past assumptions about a bottomless pool of cheap labor in China and elsewhere must now be reexamined.

“For decades, many labor economists said that China’s vast population would supply a nearly bottomless pool of workers. So many people would be seeking jobs at any given time, this reasoning went, that wages in this country would be stuck just above subsistence levels. As recently as four years ago, some experts estimated that most of the perhaps 150 million underemployed workers in the countryside would be heading to cities. Instead, sporadic labor shortages started to appear in 2003 at factories in the Pearl River delta of southeastern China. Now those shortages have spread to factories up and down the Chinese coast, specialists say. This summer, Mary Gallagher, a Chinese labor specialist at the University of Michigan, visited five sportswear factories near Shanghai and Guangzhou. She found them all struggling to hire and retain workers. One had shut one of its two main production lines because it had nobody to sew shirts and other garments.”

That the labor pool is now seen as a resource that can be drained should slowly help workers improve their lot around the world. It is a trend we should all be able to applaud. The power shift from employers to workers is underscored by the statement of Chinese officials that indicate that openings are not a result of a lack of people, but a lack of people willing to work for poor wages.

“Chinese officials are quick to say that there is no overall shortage of labor — rather, there is a shortage of young workers willing to accept the low wages that prevailed in the 1990s. Factories in cities like Guangzhou advertise heavily for young workers, even while employment offices consider it a success if someone over 40 can find any job in less than a year.”

China, like so many other countries, is “graying,” which makes age discrimination in hiring a bit of a puzzle. Bradsher goes on to note that even for young people who are highly sought after, China is not yet a workers’ paradise.

“Factory wages remain extremely low by Western standards: roughly $1 an hour for better-paid workers near the coast, compared with as little as 50 cents early this decade. The pay looks especially low in dollar terms, partly because China has intervened in the currency markets to hold down the value of the yuan and keep exports competitive. The cost of living is low in dollar terms for the same reason; entrees at an air-conditioned restaurant three blocks from the bicycle factory here start at 50 cents for a large plate of fried rice. Moreover, labor regulation is weak in China, as shown most vividly this year by the discovery that brick kilns in the north of the country had kidnapped and enslaved hundreds of children and mentally disadvantaged adults, working them under brutal conditions with little or no pay. And wages are stagnating in the middle of the labor market — workers who consider themselves too educated for entry-level jobs in a garment factory, but lacking the skills or experience to command a premium salary elsewhere.”

China has passed some labor laws and the Economist reports that many companies are going to be caught by surprise by them when they start hiring new workers [“Red flag,” 28 July 2007]. The new laws are specifically aimed at limiting firms hiring temporary workers.

“For the 2008 Olympics in Beijing, big foreign companies are planning to add swarms of temporary employees. They had better think again. A sweeping new labour law passed on June 29th intended to enhance workers’ rights makes this and many other common practices illegal. The change has received little notice so far, possibly because it does not go into effect until January 1st 2008.”

According to the article, the new laws are aimed at improving labor conditions and give greater power to Chinese labor unions.

“The new law replaces one put into place in 1995, when early efforts at economic reform in southern China were bearing fruit and the country was eager to attract foreign companies. Since then China has emerged as an attractive manufacturing base, but concerns have grown over poor labour conditions. Hence the new law that, on its face at least, dramatically changes the balance of power between workers and employers, says Lesli Ligorner, a lawyer in Beijing with Paul Hastings, a big law firm. Companies will need written contracts with all full-time employees, and anyone who works for more than four hours a day is likely to be considered a full-time employee. Once they are full-time, employees who are laid off must be bought out at a multiple of their average monthly salary. Making more than 20 employees or 10% of the workforce redundant is allowed, but must be done on the basis of seniority not merit. China’s trade unions could be transformed by the law. Previously they focused on social welfare; now they will be able to act more like Western trade unions, weighing in on discipline, safety, remuneration and working hours. The new law also grants them the right to litigate.”

The Economist notes that Chinese labor law remains a tangle, with some of the new laws conflicting with older laws, but it also notes that some real good should come from these new laws, if — and it is a big if — they are enforced honestly.

“Perhaps the best aspect of the new law is that it provides protection for people on the bottom rung of the ladder. That is good news not only for workers, but also for firms with high (or at least modest) standards which put them at a competitive disadvantage to more ruthless operators. But the law also imposes burdens on companies, and so increases the incentive to bribe corrupt officials to look the other way.”

Chinese political, business, and labor leaders still have to learn the lesson that Chinese goods will be viewed with suspicion until they have built a tradition of trust. It means adhering to internationally recognized standards and best practices. It means treating workers fairly. And it means governing with integrity and decreasing corruption through properly enforced regulation. Unfortunately, China is learning most of these lessons the hard way — which generally means losing trust rather than gaining it. They need to become proactive rather than reactive (and that means doing more than trying to point fingers elsewhere). It will happen, however slowly.