Why a pay raise for workers signals key shift for China's economy
Workers at Foxconn and Honda won hefty pay raises this week. Higher wages will help Beijing move China's economy away from relying on masses of unskilled workers and toward higher-value manufacturing.
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 “the workshop of the world” is feeding global consumers.Skip to next paragraph
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Rising salaries, say economists and labor experts here, are sounding the death knell for the production system that has fueled much of China’s 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’s 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’s 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’s 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’s 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 “the new generation of workers is less prepared to put up with a low-paid job and a boring life,” 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, “the trend towards higher quality and production efficiency requires more experienced and skilled workers … who can command higher wages.”
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 – a network that cannot be moved elsewhere wholesale.