from Follow the Money

A shortage of labor in coastal China is a good thing

April 10, 2006

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Unless, I suspect, if you are a Hong Kond textile magnate. 

I don't entirely agree with Stephen Roach's argument that the US should thank China for its cheap financing so long as the US doesn't save. I think China's cheap financing is one reason why the US doesn't save.   But I do tend to agree with Roach more often than naught.  And I fully endorse Roach's effort to put the sudden discovery of a Chinese labor shortage in China into context.  Wages in (Coastal) China should be rising. Productivity is rising.      

Yes, Chinese wages do appear to be rising at a rapid clip right now.  But the increase is coming off such a low level that the cost relatives are still skewed dramatically in favor of China.  Moreover, this upsurge of Chinese wage inflation appears to have been accompanied by exceptionally vigorous gains in worker productivity — suggesting that unit labor cost pressures remain under good control.  That means China's competitive advantage remains very much intact ... Productivity growth in China's industrial sector — manufacturing, mining, and construction — surged at an average annual rate of nearly 20% over the 2000 to 2004 interval.  That's well in excess of the cost pressures implied by 12% gains in hourly compensation.

12% gains in compensation would barely keep up with nominal GDP growth. 

Admittedly, higher productivity doesn't always translate into higher wages. See the US.  The FT leader on the Hamilton project noted that:

Between 1998 and 2004, the median income of American households fell by 3.8 per cent. This coincided with annual productivity growth in excess of 3 per cent in most of those years. You do not need to take a definitive stance on why America's high productivity growth has been so disproportionately captured by a small percentage of Americans to agree that it makes for a potentially volatile political scenario.

Memo to Adam Posen: that fact, plus data suggesting that income volatility is rising, might explain why lots of workers in the US worry about a bit more than the ennui that comes with macroeconomic stability, even if they don't worry obsessively about the risk an unbalanced world might give rise to more macroeconomic volatility than we have observed recently. 

At least in big economies, some small economies haven't been as lucky.

It is not entirely surprising that China's own version of undocumented workers -- rural to urban immigrants who generally lack the rights of urban residents -- would want to capture a bit more of the bounty from China's success.  Philip Bowring observes in the IHT:

The shortage [of labor] seems real in Guangdong Province, judging by the complaints of the entrepreneurs based in Hong Kong and Taiwan who have made it the source of one third of China's exports. But the reported shortage of unskilled workers must be seen in the context of the reliance of these industries on the import of millions of mostly young migrant workers from poorer rural areas elsewhere in China. They live in dormitories and are paid less than the average local worker and - just as important - can make few claims on local social and educational services.

If there is a shortage of this kind of labor, it is because wages and conditions have failed to rise significantly and the fruits of this toil have been captured by factory owners or the Western importing chains and brand names.  ....

Migrant workers would be more inclined to stay in Guangdong - and other fast-growing coastal regions - if Beijing removed the impediments to permanent settlement that its residency system imposes. But as with the American attitude to seasonal Mexican migrants, the local economy benefits from the workers' impermanence and their low social costs.

Bowring notes that improving the working conditions -- and wages -- of rural migrants might spur additional migration to coastal cities.  That is something the government doesn't want. Or prompt companies to move inland.  Which is something the national government does want.   Both are part of the normal adjustment process.  If Guangdong's success making autos prices it out of the textile market,  higher wages in Guangdong should lead textile production  to move inland (See Sun-bin) - or to Vietnam.  

Bowring implictly raises another point: for all the complaints of a labor shortage (presuambly more complaints about a shortage of low-cost labor), China's development strategy remains far too-capital intensive.

China's development has become far too focused on capital-intensive development paid for by holding down unskilled wages and thus depriving the domestic economy of consumer buying power.

The puzzle of course, is why a country where labor remains relatively cheap would end up following a capital-intensive development strategy.   The answer, I suspect, is that capital -- not just labor -- is cheap in China. 

The low cost of capital in China reflects high savings, of course.  But not just that.   One consequence of China's undervalued exchange rate is that it forces China to keep domestic interest rates low, and that makes capital cheap -- at least for those who can get a loan from the banking system.  Who wouldn't want to borrow at 6% in an economy that is expanding in nominal terms at rate closer to 15%?    

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