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Sunday, March 19, 2006Rising Wages in China
A labour shortage is driving up wages in China by about 10% a year, reports Business Week in a new article, How Rising Wages Are Changing The Game In China:
Wait a minute. Doesn't China have an inexhaustible supply of cheap labor? Not any longer. From the textile and toy factories of the south to the corporate headquarters and research labs in Beijing and Shanghai, the No. 1 challenge today is finding and keeping good workers. Turnover in some low-tech industries approaches 50%, according to the Institute of Contemporary Observation, a Shenzhen labor research group.
Guangdong Province says it has 2.5 million jobs that remain unfilled, while Jiangsu, Zhejiang, and Shandong provinces say they, too, face shortages of qualified workers. "Before, people talked about China's unlimited labor supply," says Zhang Juwei, deputy director of the Institute of Population & Labor Economics at the Chinese Academy of Social Sciences in Beijing. "We should revise that: China is facing a limited supply of labor."
Reports of labor shortages first cropped up in late 2004, but companies thought the phenomenon was temporary. Now a surge in both turnover and wage costs is convincing multinationals and their suppliers that the China game is changing permanently. With the gap between wages in China and those elsewhere gradually closing, the pressure to pass price increases on to consumers in the U.S. and other markets will start to build.
As Citigroup noted in a February report: "The continuous growth of labor costs in China, even at a moderate pace...is likely to have implications for inflation worldwide." These factors eventually will force the Chinese to upgrade their entire industrial base to make higher-margin goods. And those bigger paychecks are building a consumer class in China that multinationals want to target.
Apparently, the laws of supply and demand operate even in China.
This is good news for American as well as Chinese workers. Rising wages in China, coupled with China's new found enthusiasm for a more market-based exchange rate mechanism, will reduce competitive pressures American companies feel from Chinese imports.
I expect India, with it's highly segmented knowledge industry, to experience even more tightening of the domestic labor market.