Bloomberg’s Kevin Hamlin and Xin Zhou today bring readers to central China, where they chase down factories spreading to new locales as employers fight China’s labor squeeze. They find that even far away from the centers of industry, a limited pool of young workers has extracted higher wages from factory jobs–and is pushing for more gains. And that’s sending powerful ripples through the world economy.
Some context is useful here. U.S. research on Chinese manufacturing shows hourly wages going from the equivalent of 62 cents an hour in 2003 to $1.36 an hour in 2008. Today’s story cites more recent numbers from a Japanese survey that put the average base monthly wage in Guangzhou at $352 a month and $317 in Shenzen. That Guangzhou wage is the equivalent of $2.20 an hour for a 160-hour month.
There are many sources for numbers on China’s wages, not all of which agree precisely (China’s National Bureau of Statistics shows somewhat smaller increases). Even if all the numbers aren’t exactly comparable, the pattern is extraordinary. In less than a decade, wages have probably more than tripled. Hamlin and Zhou find that with factory workers expecting raises, workers’ pay is likely to rise still further.
Try to imagine something similar in a developed economy such as the United States, where factory wages have remained flat, and you start to see the level of social change involved. No, really: Try to visualize that. Some numbers will help. In January, 2003 the average U.S. manufacturing industry wage was $15.61 an hour. So imagine that instead of going up to $19.28 an hour (just short of keeping up with inflation; $15.61 would be $19.78 in current dollars) they had gone up to $46.23. How would the U.S. change if the typical factory worker was making close to fifty dollars an hour?
If you think about this mainly in terms of where to locate factories, this may strike you as a problem. Indeed, China’s cost advantage over the United States, Europe, or South Korea is dissipating, especially compared to Vietnam and Bangladesh. That potentially shifts the flow of trade and pushes up prices around the world.
That, however, is just one (albeit important) part of the macroeconomic story. The other part involves consumption and standards of living. From that point of view ultimately the increases in wages in China will be good for the world economy.
A lot of attention has already been paid in the media to the emergence of China’s small urban upper class, evident in all the stories about real estate bubbles and luxury consumption. The growth of China as a fully developed economy, however, depends on a much broader increase in salaries and living standards, not only for an elite but for factory workers. The bottom line here is that China is far too big to take the path of South Korea and Singapore and bring itself up to first world standards of living through exports. At some point the main driver of growth in China will have to be consumption in China itself. Rising wages are a big step in that direction.
An earlier version of this post appeared in the Market Now daily email. Click here to register and subscribe.