Sunday, February 19, 2012

"Chinese Labor, Cheap No More" (UPDATED)

Over the last year or so, I've frequently discussed how several economic and demographic factors in China are putting serious upward pressure on labor costs (and, thus, export prices) there.  Michelle Dammon Loyalka continues this discussion with a great new op-ed in yesterday's NYT.  The whole thing is worth reading, but the latest data deserve particular note:
China has experienced sporadic labor shortages, which in turn have driven up its once rock-bottom labor costs. This trend is particularly evident in the weeks following China's Spring Festival, or New Year, when more than 100 million rural migrants return to the countryside to spend the year's biggest holiday with family. Coaxing those same migrants back into the urban work force has proven increasingly difficult.

This year has been no exception. Although nearly two weeks have passed since the Lantern Festival that officially marks the end of the 15-day holiday, cities across China are still facing a serious labor shortfall. In order to lure new workers and retain the old, some companies give employees sizable bonuses just for coming back to work, while others offer cash for every new employee they bring along with them. And in many areas, wage increases ranging from 10 to 30 percent have become the norm.

Despite all this, cities like Beijing, Shenzhen and Guangzhou are still short hundreds of thousands of migrant workers. Shandong Province is missing a full third of its migrant work force, and Hubei Province reports a loss of more than 600,000 workers. Last week, the Chinese government released a report describing this year's post-Spring Festival labor shortage as not only more pronounced than in years past, but also longer-lasting and wider in scope.
The author goes on to document the numerous factors underlying "China's mounting labor woes."  First, there's a shortage in the sheer number of available workers that will only get worse over the next few years.  This shortage is caused by (i) the depletion of the "rural surplus labor pool" (i.e., farmers who could move to industrial jobs); and (ii) a rapidly aging population ("by 2020 the nation will have more than 200 million people over age 60"); and (iii) rising living costs in urban China coupled with improved rural conditions keeping would-be migrant workers closer to home.

Second, China's labor costs are being pushed by a shift in the quality and character of China's work force.  In short, the older generation - who experienced the horrible living and working conditions of the Communist Revolution, collectivization, the disastrous Great Leap Forward and the Cultural Revolution - were willing to put up with low wages, long hours and substandard conditions.  The younger generation ("a full 70 percent of rural migrants are now under 30"), however, never experienced the abject misery of collectivist China and thus is "no longer willing to endure hardship without clear expectations that it is a temporary means to a more comfortable end."  These expectations, of course, have demonstrable effects on many Chinese factories and their comparative advantage in the global market:
In the past, China's migrant workers were just thankful not to go hungry; today they are savvy and secure enough to start being choosy. Higher salaries, basic benefits, better working conditions and less physically taxing jobs are only the beginning of their demands, and for many factories, these are already too costly to be tenable.

For China, having spent the last three decades building the nation on the back of its cheap labor force without having to pay too much attention to its welfare, all this is uncharted territory. It is also a serious blow to the comparative advantage that has helped make its factories an international juggernaut.
In short, basic economics works.  China had a massive comparative advantage in cheap labor; it used that advantage, via low-end manufacturing and international trade, to sell cheap stuff to willing consumers across the globe and thus dramatically improve national living standards; and now those improvements, coupled with certain demographic shifts, are slowly eroding China's labor advantage and thus its dominant role as the World's Factory.

This change, of course, will also have an impact on manufacturing in other countries, including the United States. The only thing it probably won't affect, unfortunately, is US politicians' Sinophobic rhetoric.

(CNBC has more on China's rising labor costs here, if you're interested.)

UPDATE: Lee Miller points me to this fantastic interview with BCG's Hal Sirkin on changes in China and their effects on US manufacturing.

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