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Fast Wage Catch-up in China

One of the hottest topics now in China is the fast rising wage of migrant workers. The recent news came that wage in China’s manufacturing sector nearly on par with Mexico.

Figures of International Labour Organization (ILO) show that manufacturing wages rose particularly fast in China, Romania and Russia during 2003–2008. In the same period, manufacturing wage growth in Indonesia and Mexico was quite low. The average monthly wage for a manufacturing worker in 2008 was €75 in Indonesia, €230 in China, €320 in Romania, €400 in Russia and €700 in Poland.

China’s manufacturing wages nearly doubled during 2003–2008, while wages went up just 25 % in Mexico. The average wage of a Chinese manufacturing worker in 2002 was less than half the average wage paid to his or her Mexican counterpart. That difference narrowed to just 20 % by 2008. Singapore-based electronics-maker Flextronics re-ports that China’s current wage levels already match Mexican levels. This is due in part to the fact that Mexican wage growth has stalled since 2007.

Chinese manufacturing sector wages have risen 24–30 % this year, partly in response to strikes. Despite higher wage costs, China still offers substantially cheaper production opportunities than the US or Europe, and has a huge and burgeoning domestic market. If Chinese real wages continue to rise sharply, it is likely companies will continue to move production inland from coastal southern China to take advantage of lower production costs. International companies could also seek production opportunities in countries that offer a superior cost advantage to China.

However, the significance of China’s domestic market for foreign companies operating in China is important. A survey by the American Chamber of Commerce in China found that over half of US firms in China operate solely to serve China’s domestic market. Only a fifth of firms reported they were in China primarily for export reasons.

I have dealt with the same issue a few times in the past, such as post here, and here.  In my view, the rising wage is not to be afraid of – most people are worrying about China losing its competitive edge to other developing countries.  However, the development experience of most East Asian countries proves that the rising wage is a great force to incentivize firms to upgrade their technology and pushes the country out of its current low-value-added industries, into the industries with more technological component.  This is good news for both Chinese workers and China's long term growth.

Fan Gang, professor of economics at Beijing University holds the similar view. He even doubts the supply of cheap labor has been drained out. There were many factors in the past few years that have had impacts on the supply of Chinese migrant workers.  Here I list a few, 1) agricultural subsidies; 2) sharply increasing investment in western provinces; 3) the effect of one-child policy started to play; 4) a positive income shock from selling land to governments and real estate developers and coincides with Chinese housing bubble.

Economist Magazine also runs a similar analysis. Here I include a couple of interesting charts.


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