Is China Running Short of Cheap Labor?

There was a fascinating article on China’s work force in a recent edition of “The Economist.” The theme of the article was that the work force in china is changing and the country and its economy will have to change also.



China’s economy has been based on cheap labor and low-cost manufacturing.

“China has the world’s largest manufacturing workforce: more than 112m people at the end of 2006, according to Erin Lett, formerly of America’s Bureau of Labour Statistics, and Judith Banister of the Conference Board, who include enterprises in China’s towns and villages, where 70% of its metal-bashers work. This workforce is still cheap, costing $0.81 an hour, by the authors’ estimates, or just 2.7% of the cost of their American counterparts.”

One thinks of the Chinese economy as having successfully pulled hundreds of millions of people out of poverty. That is true, but China’s workers have seen their share of national income fall over the past few decades. This increasing income inequality is causing unrest among the workers.

“Labour unrest in China is more common than you may think. The country’s courts handled more than 280,000 labour disputes in 2008, according to Outlook Weekly, an official magazine. It is difficult to know if unrest is growing, but the government at least seems to think so. The same source reports that disputes in the first half of 2009 were 30% higher than a year earlier. Guangdong, a favourite province for foreign companies, suffered at least 36 strikes between May 25th and July 12th, according to China Daily, a government newspaper.”

This article proposes that the pressure for higher wages, coupled with changing demographics, will force China’s economy to provide more focus on internal consumption. In the long term, such a change would benefit both China and the world.

“Workers’ compensation rose by more than 9% a year in dollar terms from 2002 to 2006, according to Ms Lett and Ms Banister, and by over 11% in the cities. A new study by Dennis Tao Yang of the Chinese University of Hong Kong, Vivian Chen of the Conference Board and Ryan Monarch of the University of Michigan suggests that Chinese workers, in the cities at least, are now as expensive as their Thai or Filipino peers.”

Not only is labor becoming more expensive, even China does not have an inexhaustible supply.

“A number of economists believe China has reached a turning-point in its development, having exhausted its supply of surplus labour. Others think this conclusion premature. Calculations by Mr Knight, Deng Quheng of the Chinese Academy of Social Sciences and Li Shi of Beijing Normal University imply there are still 70m people in China’s villages who might be expected to leave in search of work, given their age, family obligations and so forth.”

The dynamics of the Chinese population indicate fewer young workers in the near future. Young people are the ones who are willing to move to wherever the jobs might be.

“Policy aside, people over 30 are much less likely to shoulder their bindle stick and seek their fortunes. Having risen for the past decade, the number of Chinese aged 15 to 29 will fall quite sharply after 2011, according to the United States Census Bureau.... The drop is already evident in university applications, which have declined for two years in a row, notes Stephen Green of Standard Chartered.”

University applications are declining? That is stunning! One has to wonder if there is not something else contributing, such as graduates having difficulty finding jobs.


Increased costs and a diminished supply of workers are forcing manufacturers to move inland where the costs are less and the potential workforce is larger. This trend has benefits as well as drawbacks. The article lists Chongqing as an example of a fast growing interior city.

“But Chongqing remains more attractive as a gateway to inland China than as a workshop to the world. According to Bo Zhiyue and Chen Gang of the East Asian Institute, 90% of its industrial output is sold domestically. In the interior, cheaper labour is soon overshadowed by costly logistics, argue Zeyan Zhang of the University of Sydney and Miguel Andres Figliozzi of Portland State University. China’s seaboard ports are impressive. But it still lacks a national trucking service, leaving companies at the mercy of a patchwork of provincial and local operators.”

The article identifies the benefit as a natural rebalancing of the Chinese economy. A booming economy in the interior produces people with money to spend. Companies that move inland in search of customers have different motivations in terms of controlling workers’ salaries than those selling product abroad. The Chinese worker is likely to benefit from being a consumer also.

“Just over half of the 270 companies surveyed last year by the American Chamber of Commerce in China have a presence outside the country’s established hubs (the Bohai region, including Beijing; the Pearl river delta, which encompasses Shenzhen; and the Yangzi river delta around Shanghai), but only 17 did so to take advantage of lower costs. HP sees its Chongqing plant as a way to get closer to its inland customers.”

This is the scenario envisaged by the author.

“Higher consumer spending will increase demand for services, such as housing, retailing and haircuts, which consumers favour, and which cannot be traded across borders. The rise in their price will have much the same effect as a stronger exchange rate, making Chinese goods pricier relative to internationally traded commodities. As a result, China’s trade surplus will shrink along with its saving rate. Arthur Kroeber of GaveKal Dragonomics calls it natural rebalancing.”

“This rebalancing will benefit China, which relies too much on heavy investment for its growth. It should also benefit the world economy in its present predicament. Private spending in the rich world is weak; government spending is out of fashion; and interest rates are as low as they can go. Extra demand is welcome.”

One can hope that such a benign transformation does in fact occur, with all its worldwide advantages. China has many issues that are ignored in this article: social unrest, environmental horrors, diminishing water supplies, potential conflicts with neighbors, a construction bubble..... Let us hope for the best.