The Yuan and the Chinese Labour Market Shortages

Something funny’s going on in China. There’s a labour market shortage.

David Baille of CamSemi noted in an email interview last month (before the Chinese New Year holiday) that the South Korean firm that manufactures part of his product in China was short on workers because, “so many skilled workers left the coastal manufacturing areas over Chinese New year last February and have not returned.” That trend was expected to repeat this year as well.

Workers, according to Geoffrey Crowthall at China Labour Bureau, must be paid more to endure hazardous working conditions because factory conditions and wages (taken together) currently do not exceed the value working on a farm.

Liu Shinan writes in China Daily that labour shortages are due:

“First, the Chinese government's policy to give top priority to the development of agriculture and annul the agriculture tax has paid off. Rural residents are earning more from farming.
Second, the government's strategy of boosting development in central and western regions has achieved initial success.
The rural surplus labor has more employment opportunities in the manufacturing industries in towns near their home.
Third, China's earlier recovery from the economic recession has significantly increased orders for coastal manufacturing plants, which are eager to retrieve the workers they laid off when the economic crisis struck.”

But he also writes, “The average wage level is 10 times lower than that in the United States. It will take a long time for Chinese labor costs to catch up with developed countries.” Of course, this isn’t the right comparison to make. Recently, companies manufacturing in China have begun opening factories in other developing countries. It’s not developed country wages Chinese have to worry about.

The ease of doing business in China (without looking) probably isn’t very much different from many other developing countries. Not to say that there aren’t other advantages to do with things like geography and finance-- but that these other advantages probably don’t outweigh labour costs too much.

If wages are increased and the price of other inputs is relatively stable, the cost of production has to be bourn somewhere-- either this is in higher final price or reduced profit margins. Let’s also assume that benefits aren’t cut to make up the price cost of wages because working conditions are a problem as well. Depending on the sector, it’s also possible that the number of workers will be cut and that higher production quotas will face workers. In reality, it’s probably a combination of all of the above.

And even if Liu is accurate that “According to authoritative investigations, the money paid to laborers make up only 10 percent of the total operational cost of an enterprise in China; but it is 50 percent in developed nations.” Any way you look at it, the price of China’s exports increase.

China is facing dual pressures related to worker wages: working conditions and a second, less direct external pressure to increase the value of the Renminbi. The usual argument goes that currency devaluation will hurt China’s workers because it will drive the cost of exports up, increase costs of inputs, which will result in decreased demand for Chinese exports, cuts in production and as a result job cuts, and lower wages for workers, higher production quotas for those remaining (and thus a general deterioration of working conditions).

This article says that in the past, when the price of manufacturing products (exported by China to other countries) increases, the cost is passed on to the buyers. It sites a study from the US Fed Bank that says when the Yuan appreciated slightly in the past, consumer and capital goods prices didn’t change much, but industrial products increased quite a bit. Enough of the increased price was passed on to the consumer.

What happens if China does both-- increases wages enough to make a short term difference and values-up the Yuan?

The results will depend largely upon the level and ratio increase in wages and currency value, but the outcome is inescapably the same: China’s rate of employment decreases (relative to previous periods, you understand, but not overall) and the price of its exports increases.

Both Yuan revaluation and increased wages will erode China’s comparative advantage in cheap labour. But Chinese companies are also moving up the value chain in manufacturing, and the lower value manufacturing inputs are moving to Vietnam, North Korea, and Egypt, for example. As China begins to manufacture green products, it will have established ties to cheaper labour markets.

Right now, China is also facing a (increasing in short-run?) skills displacement. There aren’t enough candidates to fill relatively more high skilled services positions in cities (university level skill set being insufficient) and also in unskilled manufacturing jobs that might require as much physical labour as a farming job (the wages and physical exertion being relatively the same, workers won’t bother to leave home).

While it’s clear that Chinese companies are beginning to break into the next value level of development as more and more innovate on their own, there will be more pressure on demand for skilled jobs. Government policy has properly driven higher levels of academic achievement and Chinese universities (though currently no match for Western ones) are catching up.

The question is-- will the government be able to hold annual GDP growth at 8%? Will China have a bumpy few years? Will this delay China’s rise?

And what economic principles have I left out in my inexperienced naiveté (feedback please)?




After thought: another strain of thought to consider, that might have an overall effect on employment levels is that the Chinese government has made agricultural policy that keeps small farms lucrative. Where developed countries are mostly dependent upon imported food (not that China isn’t but) and have driven small, private farming out of business, and where people like Colin Tudge argue that we have to demechanize farming and make it hard labour again so that we value food and time more, presents another interesting tangent to consider. A skill displacement won’t necessarily be fixed by, as the WSJ article suggests, lifting China’s one child policy. In future, where will China’s illegal, unskilled, migrant workers come from? And how long with this pro-small farmer policy continue?