What’s the Significance of the Recent Labor Strife in China?

A strike at a Honda plant, a series of suicides at Foxconn and labor shortages at the main processing centers, which led to an increase in the minimum wage in some provinces, have driven the perception that labor unrest is increasing in China. Additionally, a number of factors have contributed to the apparent unrest bubbling up in Chinese society, including an early 2010 public questioning of the household registration system, which puts migrant workers at a disadvantage, rapidly increasing housing costs that have pushed homeownership out of reach for a large segment of the population and several attacks on schoolchildren.

Given that this is now front-page news in the New York Times, it’s worth looking into the significance of this trend.

In some ways this is a return to normal for China, as labor shortages were becoming acute before the global financial crisis, but the government is now on alert that labor concerns could boil over. The next Five-Year Plan for the economy, due to be presented at the end of the year, will likely put reducing inequalities and boosting labor’s share of GDP at the center, though the previous plan, which called for a harmonious society, largely failed to make progress on these issues.

The China Labour Bulletin put out an excellent overview of the labor strife that was bubbling over in 2007-08, before the drop in external demand alleviated the situation. “[W]hereas in the past workers’ protests were largely in response to specific violations of rights, such as non-payment of wages or compensation for injury or employment termination, workers are now demanding higher wages, better working conditions and in some cases, the right to form their own union,” the report argued.

While “the year of two halves,” as RGE has been calling it, will weaken external demand for Chinese goods in H2 2010, the labor shortage problem seems to now be ingrained into China’s economy. The labor force is peaking, and we’re probably looking at a Lewis turning point, in which the economy shifts from excess labor to labor shortages. This will require moving up the value-added ladder for Chinese exports, which should also help to absorb the segment of the population that is still facing excess supply problems—college graduates.

Dropping or seriously weakening China’s household registration system would alleviate some of the problems that this transition will spark by increasing the flexibility of the labor market. But there are certainly complications that would have to be addressed in order to pull this off. The biggest problem, at least from the perspective of local government balance sheets, is what would happen to land values if rural residents were able to sell their plots into the market. Land sales contribute somewhere between 25% and 50% of local government revenues, and a mass selloff by migrants would seriously threaten the solvency of some rural governments. Reform would also expose the extent to which China’s social safety net is underfunded, as migrants would gain access to urban health insurance and pension schemes.

Despite these problems, China now faces the irreversible problem of rising labor costs. This will be extremely painful for many in the short term, modestly inflationary in the medium term, but will help to rebalance China’s economy in the long term.

For more, clients can check out this Critical Issue on the RGE site.

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