Why a pay raise for workers signals key shift for China's economy
| Beijing
When two giant employers in southern China offered their workers big wage increases this week, their goal was to dampen labor unrest. But the hikes do more than soothe factory floor anger; they signal huge changes in the way 鈥渢he workshop of the world鈥� is feeding global consumers.
Rising salaries, say economists and labor experts here, are sounding the death knell for the production system that has fueled much of China鈥檚 phenomenal economic growth for the past three decades. Instead of relying on huge numbers of workers making miserable wages at unskilled jobs, and churning out cheap exports, the government is keen on moving up the value chain.
At the same time, rising incomes are laying the foundation for another seismic shift in China鈥檚 development model, as the government seeks to base economic growth more on domestic consumption and less on exports.
Foxconn, which makes the iPhone and other famous electronic items, announced an immediate 30 percent pay hike on Wednesday, more than originally planned, in a bid to raise morale and efficiency after a spate of employee suicides. Honda offered a 24 percent pay raise to striking workers at a parts factory on Monday, tempting them back to work.
The moves followed a decree from the regional government of Guangdong, the hub of China鈥檚 manufacturing industry, that boosted the minimum wage by 20 percent a month ago.
Workers gain bargaining power
The pay raises reflect a shortage of workers that employers on China鈥檚 east coast have been complaining about for several months. In February, the state-owned news agency Xinhua reported a shortfall of two million workers in the Pearl River Delta area.
Fewer migrants are seeking jobs on the coast partly because China鈥檚 population is rising more slowly than before, partly because more factories are opening in the interior and offering people work closer to home, and partly because 鈥渢he new generation of workers is less prepared to put up with a low-paid job and a boring life,鈥� says Lai Desheng, a professor of labor economics at Beijing Normal University.
At the same time, adds Jim Leininger, who works for Towers Watson, a human-resources consulting company, 鈥渢he trend towards higher quality and production efficiency requires more experienced and skilled workers 鈥� who can command higher wages.鈥�
Factory shakeout
Rising wages pose a serious threat to small, low-end manufacturers making shoes, clothes, or toys, whose profit margins can be as slim as 2 percent. Such companies, often owned by Taiwanese or Hong Kong investors, are already beginning to move their factories to lower-cost countries such as Vietnam, Cambodia, and Indonesia. Others are moving inland, taking advantage of lower wages and taxes there.
More sophisticated manufacturers, however, are likely to stay put in southern China. Some, like Honda, are producing mainly for the Chinese market, so moving abroad would make no sense. Others, like Foxconn, rely on a close network of local suppliers who can react quickly to design changes 鈥� a network that cannot be moved elsewhere wholesale.
Wage costs are a relatively minor factor for such companies 鈥� witness Foxconn鈥檚 readiness to raise salaries by 30 percent overnight 鈥� and 鈥渄espite wage pressure, companies think holistically about the system and the business environment generally鈥� when they are deciding whether to relocate, says Mr. Leininger.
鈥淟ow-end, labor-intensive stuff will move, but the more interesting things that the government talks about wanting will stay in China,鈥� predicts Arthur Kroeber, head of the Dragonomics economic consulting firm.
Companies making those things, however, will not be able to operate in traditional ways, Mr. Kroeber warns. 鈥淭his is a zero-sum game between wages and profits,鈥� he points out. 鈥淚f wages rise faster, profits will rise more slowly or fall.鈥�
That, he says, means that Chinese factories will be forced to follow the path that American and Japanese factories have taken before them: increased automation.
鈥淭he writing is on the wall for the model of using vast armies of workers paid $100 to $200 a month,鈥� Kroeber says. 鈥淲e are at the beginning of a very, very different stage of the growth process.鈥�
That is what the Chinese government hopes, as Beijing seeks to move the nation鈥檚 industry away from sweatshops and up the value chain.
鈥淗igher wages are good for China鈥檚 economic structural changes,鈥� says Professor Lai. 鈥淚f wages rise, it will discourage foreign and domestic companies from investing in low-value production and separate them out from the ones interested in higher value-added production.鈥�
Turning to Chinese shoppers
Although average Chinese salaries have risen by about 8 percent a year over the past decade 鈥� a little short of GDP growth rates 鈥� industrial manufacturing wages have risen considerably more slowly.
In his annual work report to the National People鈥檚 Congress last March, Prime Minister Wen Jiabao pledged to rectify this, promising that poorer people would be given a greater share of the country鈥檚 rising prosperity.
鈥淲e will energetically expand consumer demand,鈥� he pledged, while continuing 鈥渢o increase 鈥� people purchasing power, especially low- and middle-income earners.鈥�
This is essential if Chinese consumers are to buy the things that the government hopes they will buy, to keep the Chinese economy humming.
鈥淔or 30 years, we have relied on investment and exports as engines of the economy,鈥� says Lai. 鈥淚nvestments have caused pollution and other social problems, and exports depend too much on the international economy.
鈥淣ow we need to increase salaries to increase consumption, which would boost the economy and thus create more jobs,鈥� he argues. 鈥淚t鈥檚 a virtuous circle.鈥�
It would not necessarily be so virtuous for consumers worldwide, however; rising wages will mean rising prices for the goods produced if manufacturers pass on their higher costs to customers.
鈥淭he rest of the world may pay more, but they will be paying more for a better product,鈥� says Leininger. 鈥淎s China works its way up the value chain, lots of my clients are making things better than they did three or four years ago.鈥�
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