In China, wages are rising and the cost of labor is increasing. The consequences of this trend are affecting different economic groups in ways that spell significant changes for China’s economy.
The rising wages are forcing some companies to relocate to Vietnam or India, according to a recent article in BusinessWeek. In fact, labor only accounted for about 2 percent of a company’s total costs in 2000. Today, that figure is closer to 12 percent. Profit margins have fallen from 15 percent to 8 percent over the same time period, and to compensate, companies are moving production.
Over the past two years, millions of jobs have moved to China's interior or elsewhere in Asia as factory owners try to cut costs. In Guangdong, the mainland's top exporting province, wages have almost doubled in the past three years, and more than half the factories can't find enough workers. The number of migrants who traveled to coastal provinces for work fell by 9 percent last year, to 91 million.
By contrast, a recent article in The Wall Street Journal suggests that rising wages will help China’s economy by increasing the standard of living and the purchasing power of the working class.
Many economists see the upward pressure on wages as a good thing. Higher incomes for households could help their consumption take a greater share of the economy, reducing the need to rely on investment and net exports. If companies respond by moving their manufacturing bases inland — as they have already started to do — this could help reduce regional disparities in economic development.
So why are wages rising? According to BusinessWeek, government tax breaks and subsidies have encouraged farming and industry in China’s interior, causing people who would normally fill jobs in coastal factories to stay in their home provinces. And Chinese youth are seeking jobs in the service sector, not in manufacturing.
The Christian Science Monitor reports that the government "is keen on moving up the value chain" — meaning that rising wages will shift the focus of China's economy toward more skilled manufacturing as unskilled positions move abroad.
The pool of factory workers is already 22 percent smaller than it was ten years ago, according to figures by Merrill Lynch. And the labor shortage will likely continue as the population ages and wages continue to rise. China's days of being the go-to place for cheap labor may soon be numbered.