Why labour unrest is good for China and the world

Pay rises boost domestic buying, help rectify global trade imbalances

Reuters
03 June 2010

A burst of labour unrest in China has been resolved with hefty pay increases, illustrating how the balance of power in the country’s vast factories is slowly tilting towards workers.

Rising wages in the workshop of the world might seem to pose unsettling implications for the global economy in the form of thinning profits for companies and cost inflation for consumers.

But such suggestions disregard more important, positive developments.

By spreading the fruits of China’s stunning growth more evenly, higher incomes will help to boost domestic consumption and rectify imbalances that have dogged the global economy.

‘If China wants to build up a new growth model driven by consumption, you have to find a channel to redistribute GDP more to labour, especially to the low-income class,’ said Mr. Ting Lu, an economist with Bank of America-Merrill Lynch.

‘Now this is being driven not just by politics, but also by a natural changing balance in the demand and supply of labour.’

Honda Motor this week gave a 24 per cent pay raise to striking workers at a key car parts factory in Foshan city, in southern China’s Guangdong province. The plant resumed full production yesterday, after workers ended more than two weeks of strike.

Foxconn yesterday said its workers in boomtown Shenzhen, also in Guangdong province, would get 30 per cent pay hikes after a spate of suicides raised concerns over conditions at its factory which churns out top-tier electronic products, including Apple’s iPhone.

In his first public comments on the problem, Apple chief executive Steve Jobs said on Tuesday that the suicides are ‘very troubling’. But ‘Foxconn is not a sweatshop’, he said at the prestigious All Things Digital conference in California.

Foxconn yesterday confirmed the death of another employee, but denied he died of exhaustion, following a spate of at least 13 suicides and suicide attempts in its Shenzhen plant so far this year. Mr. Yan Li, 27, died last Friday after working the night shift for more than a month.

The owner of Foxconn, Taiwan contract electronics maker Hon Hai Precision Industry, said yesterday the wage increase reflected rising prices in China, and it hoped to earn workers’ respect.

The Honda and Foxconn stories have been sensational in a country that stamps out strikes and suppresses unflattering news, but they are just a small part of a much broader wave of wage increases in the Chinese manufacturing sector.

Pay for China’s 150 million or so migrant workers increased 19 per cent in 2008 and 16 per cent last year, even though exporters were hit hard by the global financial crisis, said Mr. Cai Fang, head of the Institute of Population and Labour Economics with the Chinese Academy of Social Sciences.

‘Overall Chinese income levels, especially for blue-collar workers, are expected to grow faster than before because fewer new workers will enter the labour force every year,’ said Ms. Maggie Li, an analyst at Mercer, a human resource consultancy.

This trend will accelerate from about 2012, she said.

In economic terms, China has arrived at its Lewis turning point, a period in development when the economy shifts from a labour surplus to a labour shortage and wages start to increase more rapidly, especially for the unskilled.

Chinese workers have made big strides in recent years in absolute terms as their wages rose about 8 per cent a year, but these increases have not kept up with the broader economy, which has boomed at a double-digit pace.

‘China’s wage level has stayed very low for a long time despite some increases in recent years and this has depressed domestic demand,’ said Mr. Yang Yiyong, a research director of a think-tank under the National Development and Reform Commission, China’s powerful economic planning agency.

Beijing has declared the promotion of private consumption to be a priority as it seeks to re-orient the economy away from a model that has relied too heavily on investment and exports.

‘A 100 per cent increase in wages of lower-income earners will generate about a 70 per cent to 90 per cent increase in consumption,’ said Mr. Wang Han, an economist with research firm CEBM.

However, economist Huang Yiping at Beijing University cautioned that the government cannot sit back and wait for higher incomes alone to boost consumption. It will have to craft policies that promote the service and skilled-labour sectors to ensure the continued creation of jobs as wages increase.

In the world economy, rising Chinese wages point to an inexorable, if gradual, reduction of China’s large trade surplus. Prices of manufactured goods may increase a touch globally, but other countries will step into the breach.

‘Low-income countries should be able to grow more rapidly in labour-intensive industries. Almost all other countries should experience improvement in their current accounts,’ Dr Huang wrote in a recent research paper.

As the cost of labour increases, China’s potential growth rate will slow to about 9 per cent a year from 11 per cent, said Bank of America-Merrill Lynch’s Mr. Lu. But that is still fast and nothing to fear, he added.

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