The End of China's Cheap Labor Era

The End of China's Cheap Labor Era

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After a series of suicides, Foxconn Technology in Shenzhen, China announced June 6 the company would increase the salary of all process workers and group leaders to 2,000 Chinese yuan renminbi (approximately $300 USD) after they passed a test. Following a 30 percent pay raise for average workers starting on June 1, it was the second wage increase announcement within a week, for a combined pay raise of 66 percent.

Moreover, just 48 hours before the Foxconn announcement, another well-known international auto company, Japan’s Honda, whose workers were striking in Nanhai in Guangdong Province, agreed to increase workers’ salary by 34 percent.

Foxconn is the world's largest electronics manufacturer. Honda is one of the fastest growing companies in China. These two, formerly unrelated companies have become closely linked today because of the labor intensive nature of their manufacturing process and the upward pressure they feel on wages. More importantly, they have become a window for the outside world to observe China’s manufacturing industry, and her economic future.

Through Foxconn and Honda, problems hidden in the past have come to the surface and important questions have arisen: Is China’s cheap labor era coming to an end? Will the economy in China continue to grow rapidly in the future as if in the past, when cheap labor and low-cost product were the driving forces? Can industrial transformation happen in China while labor conflicts break out frequently? Does China remain attractive to global investment? 

China’s biggest economic problem today is the widening income gap that resulted in unequal distribution of wealth, leaving wealth accumulated among a small minority, while the majority still live in poverty. Because of that, not only were consumer and social needs hindered, limiting further economic development, but there was also an imbalance in the social fabric, which led to more conflict. Therefore, the main concern with China’s economy is not about increased labor costs, but the heightened tensions between employers and employees. 

We need a specific analysis of the role labor costs play in China’s economy.

First of all, a majority of industries in China, such as manufacturing, mining, construction and agriculture continue to have very low wages. But in some industries, such as electronics, telecommunications, finance, insurance, and tobacco, wages are far higher than average. According to statistics from the Chinese Ministry of Human Resources and Social Security, on average, the wages in these higher paid areas are two to three times more than the wages in other industries. If extra revenues, housing and employee benefits are also included, the actual income gap between high wage and low wage trades is approximately five to 10 times. Therefore, labor-cost adjustment also involves a structural problem.

Secondly, labor costs in China remain low because wages are not increasing along with economic growth. In fact, the share of labor income in the national income is moving in a downward trend. Jia Kang, director of the Institute of Fiscal Science in China, found that from 1992 to 2006, China’s government revenue increased by 2.02 percent, while enterprise income increased by 5.01 percent. At the same time, residents’ income dropped by 7.08 percent. If you look at the issue from this angle, rather than giving those workers a raise, companies like Foxconn and Honda are simply paying back wages their workers lost in the last few years, increasing the wage to a normal level.

The next question is whether raising wages reduces profits and thus, results in driving away investors. The answer is clearly no. Although enterprises in China have been paying low wages to workers, management costs, as well as other government fees and expenses have been quite high. So if the government is pushing the enterprises to pay higher wages, the government should also reduce its fees at the same time.

China’s economic success is based on her millions of hardworking and low-paid workers. It is time for China to say goodbye to this era. There is no fear in this goodbye. The fear is that the Chinese government fail to see the longterm benefits that come with it. If a reasonable and healthy relationship is built between the enterprises and the workers, China can be more productive and enjoy a greater economic development, and social conflicts could also be resolved.