Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
I was originally going to write China “proposes” to hike the annual minimum wage 13% per year through 2015, but then I remembered this is China. Hence there is no Chinese GOP equivalent push back claiming raising the minimum hike will destroy tens of millions of jobs. So yesterday’s announcement is essentially the end of the political back and forth on the subject – nice & efficient, eh?
On a more serious note, this is an important development that got little press. We’ve been talking about the increase in Chinese wages and the potential impact on the U.S. for many years. The great outsourcing wave has created an era of mass deflation in cost for prices of imported goods. As China tries to steer itself to less export oriented and more of internal based demand model, wages have generally increased. It has also been a way to stave off social unrest due to high inflation, especially of the food kind. Of course, some of this will lead to global multinationals looking for lower cost centers – i.e. Vietnam, Indonesia, Bangladesh, etc. And even within China production has moved en masse from the more expensive eastern coastal cities, to the more remote western regions.
But bigger picture this is a cost for multinationals. While 13% off a very low base does not seem like much, an annual program over 4 years adds up thanks to the power of compounding. Thirteen percent over four years leads to a 63% gain in wages. For Chinese companies that often are in extreme competition and have razor thin margins, that matters. So the choice for U.S. companies is clear – they will need to take lower margins (a negative for their stock if they are public), or they will need to try to pass price hikes along (a negative for the U.S. consumer who has been offered ever lower prices in return for the offshoring of their jobs). Of course this is not a ‘fast money’ situation… this is something that is going to play out over years, and I imagine it will also lead to more automation in Chinese factories as labor eventually becomes “too expensive” for some operations. On the other hand, this is more money in the pocket of the Chinese worker, which has positive impacts as well.
We continue to live in a fascinating economic world, with many moving parts – it will be interesting to see how this all plays out.
- The annual average growth of China’s minimum wages should be at least 13 percent in the five years to 2015, according to a government job market plan for the period published on Wednesday. Raising pay is key to the jobs blueprint, part of Beijing’s 12th five-year economic plan, which aims to boost employment in the world’s No.2 economy.
- Minimum wages in China range from 1,500 yuan ($240) per month in Shenzhen to 870 yuan in Chongqing. The government wants minimum wages to be 40 percent of average local salaries by 2015, according to the plan posted on its website (www.gov.cn).
- Labor shortages are a problem in China’s main export manufacturing bases, requiring millions of migrant laborers to fill the gaps. But the government said it expected pressure from an overall labor oversupply to increase in coming years. “Every year there are 25 million urban residents needing jobs and there are still significant amounts of excess rural labor needing to find jobs,” the plan said.
- The Chinese government has always been sensitive to employment due to concerns about social unrest, and Beijing, which did not recognize the existence of unemployment until the late 1990s, does not publish a national jobless rate.
- Demographic data from China’s statistics agency shows that the Chinese population is ageing quickly and the rural labor pool shrinking, which many economists cite as the fundamental reason for the sharp wage rises in recent years.
- The average monthly wage of China’s 158 million migrant workers in 2011 surged 21.2 percent from 2010 to 2,049 yuan.
Perhaps some of these wage hikes over the past year are part of the reason we see corporate profit margins falling this quarter; it certainly is not due to U.S. wages jumping as none of the government or Federal Reserve data show significant wage increases.
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