Rising costs of labour in China

Description

China's traditional strengths as an investment or outsourcing destination have been its low labour costs and the government's willingness to facilitate foreign investment. However, as the economy grows, workers are demanding higher wage increases -- partly to compensate for rising inflation that is eroding their purchasing power. Additionally, the Chinese government's introduction of minimum wage legislation in January 2008 means that firms are now legally responsible for increasing wages, even if this is not enforced in practice.[1]

Before 2006, labour costs were rising at about 5% per year. However, between 2006 & 2007, costs rose nearly 16% in a couple of months -- a rate by which China's labour costs will soon reach parity with Malaysia and Thailand.[2]

The Chinese National Bureau of Statistics revealed a rocketing increase in the Chinese people's annual average income from 615 yuan (US$74.37) in 1978 to 14,040 yuan (US$1,698) in 2003. This poises economic problems through increased production costs of manufacturers, increased market prices of commodities, and weakened export-oriented business.[3]

Employee turnover in some low-tech industries is approaching 50% -- although, thus far, improved productivity has offset higher wages. But economists say those productivity gains are getting harder to find, and manufacturers are beginning to see their margins get hit. That means managers can no longer simply provide eight-to-a-room dorms and expect laborers to toil 12 hours a day, seven days a week; a major change in paradigm for running a factory in China. McKinsey & Company estimates that only about 10% of Chinese candidates for jobs in key areas such as finance, accounting, and engineering are qualified to work for a foreign company; while China today has fewer than 5,000 managers with the skills needed by multinationals, 75,000 jobs for such managers are expected to be created over the next five years.[4]

Enablers

• Shortage of highly skilled labour
  • Knock on effect to lower wage levels
• Minimum wage legislation
  • Employers are also reguired to sign long-ter contracts and pay social benefits
• Already high non-wage labour costs
  • Includes retirement funds, sickness, materiny, health insurance, workplace injury, family allowance, payroll taxes, etc.
• Inflation and inflationary pressures
  • Eroding worker purchasing power
• Increase in foreign direct investment

Inhibitors

• Recession
• Decrease in national GDP/ GDP growth rate

Paradigms

• Decrease in attractiveness of China as a location for large-scale manufacturing investment
  • Shift to cheaper sites within Asia Pacific such as Thailand, the Philippines or India
• Increasing importance of Total Cost of Ownership
  • More difficult for companies to successfully determine sourcing costs
• The world's largest economy feeling the pains of inflation
• Western countries such as the US will no longer be able to count on cheap Chinese imports to help control inflation

Timing

1979	Opening of Chinese economy to foreign investment
2004	First reported labour shortages
2008	Government enacts minimum wage legislation

Web Resources

1. "Special Report: China's rising labour costs", Media Eghbal
2. "China labor prices are rising - what it means for outsourcing", Bill Roberts
3. "Experts differ on China's rising labor costs", People's Daily Online
4. "How Rising Wages Are Changing The Game In China", Business Week
5. "China's labour pains: rising wages", New Economist
6. "Costs rising, China to export inflation", New York Times

Revision History

September

2009

Created by Gerrit Ledderhof