Minimum Wage and Labor Costs Rise in China

Sources:
BBC: China Minimum Wage Up by 21.7% Despite Economic Cooling
Bloomberg Businessweek: China Had Best Third-Quarter Urban Job Creation in Years
FT: China Labour Costs Soar as Wages Rise 22%
People’s Daily: 21 Regions Across In China Raise Minimum Wage

The minimum wage in twenty-one of China’s thirty-one provinces has increased by an average of 22% in 2011, according to a recent government report. This increase comes on the heels of similar minimum wage increases over the past two years.

The rising minimum wage has been primarily driven by government policy. At the provincial level, twenty-five of China’s thirty-one provinces aim to increase the minimum wage by 14% annually. Nationally, the government’s Five-Year Plan (2011-2015) targets a minimum wage increase of 13% annually. Both policies aim to decrease inequality while increasing domestic demand for Chinese goods.

China’s economic growth over the past three decades has been heavily dependent on exporting manufactured goods to Western countries. The global recession, however, has decreased demand for China’s exports and has slowed China’s overall economic growth rate. Although the Chinese economy grew by 9.1% during the third quarter of 2011, this was the lowest growth rate in over two years. Chinese officials hope that an increased minimum wage will boost domestic spending which will help to offset lower exports across the globe by expanding the market for those products at home.

Another objective of China’s minimum wage policy is to push manufacturers toward producing higher-end goods (e.g., cars and computers), which will enable China to better compete with global economic leaders. The theory is that manufacturers will not be able to earn enough money selling lower-end items (e.g., clothes and toys) to cover the increased wages, which will encourage them to produce higher-end (and higher profit) products to cover the additional costs. With a larger profit margin, the manufacturers could pay higher wages while still retaining a profit similar to that which they made while manufacturing low-end goods and paying lower wages.

Market forces have also played a role in increasing China’s wages. An increasing number of China’s young adults are college graduates and are either reluctant or unwilling to work in the country’s manufacturing industry. This has led to a labor shortage that forces manufacturers to offer higher wages to attract workers because of supply and demand principles. Still, increased wages in the manufacturing industry have not attracted the 6 million annual university graduates, who are struggling to find skill-appropriate jobs.

Although many Chinese workers have benefited from higher wages, some Chinese are skeptical of the country’s policies. Already, many smaller companies have felt the pressures of increasing labor costs and have sought financial support from banks and government to avoid bankruptcy. Furthermore, the higher cost of labor has contributed to the decline of China’s export industries while other countries with lower minimum wages—in particular Bangladesh, Vietnam, and Indonesia—have cut into China’s market share. Some experts also worry that rising minimum wages have contributed to a three-year high inflation rate. Higher wages can cause inflation if manufacturers pass their increased production cost (in this case, higher labor costs) onto consumers in the form of higher prices. Likewise, increased wages create more consumers to buy the same amount of goods, which pushes prices up—again due to supply and demand principles.

The wisdom of China’s decision to rapidly increase its minimum wage is debatable, but with minimum wage increases of at least 13% planned for the next 4 years, the Chinese people will soon be able to evaluate the results.