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.
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Wage costs are a relatively minor factor for such companies – witness Foxconn’s readiness to raise salaries by 30 percent overnight – and “despite wage pressure, companies think holistically about the system and the business environment generally” when they are deciding whether to relocate, says Mr. Leininger.Skip to next paragraph
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“Low-end, labor-intensive stuff will move, but the more interesting things that the government talks about wanting will stay in China,” 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. “This is a zero-sum game between wages and profits,” he points out. “If wages rise faster, profits will rise more slowly or fall.”
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.
“The writing is on the wall for the model of using vast armies of workers paid $100 to $200 a month,” Kroeber says. “We are at the beginning of a very, very different stage of the growth process.”
“Higher wages are good for China’s economic structural changes,” says Professor Lai. “If 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.”
Turning to Chinese shoppers
Although average Chinese salaries have risen by about 8 percent a year over the past decade – a little short of GDP growth rates – industrial manufacturing wages have risen considerably more slowly.
In his annual work report to the National People’s Congress last March, Prime Minister Wen Jiabao pledged to rectify this, promising that poorer people would be given a greater share of the country’s rising prosperity.
“We will energetically expand consumer demand,” he pledged, while continuing “to increase … people purchasing power, especially low- and middle-income earners.”
This is essential if Chinese consumers are to buy the things that the government hopes they will buy, to keep the Chinese economy humming.
“For 30 years, we have relied on investment and exports as engines of the economy,” says Lai. “Investments have caused pollution and other social problems, and exports depend too much on the international economy.
“Now we need to increase salaries to increase consumption, which would boost the economy and thus create more jobs,” he argues. “It’s a virtuous circle.”
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.
“The rest of the world may pay more, but they will be paying more for a better product,” says Leininger. “As China works its way up the value chain, lots of my clients are making things better than they did three or four years ago.”
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