China’s Labor Situation Is Changing, Not for the Worse

Next year will be the first year that China will have a larger urban population than a rural population. In comparison America’s urban population surpassed its rural population in 1920, by 1850 England’s urban population was already at 44%. Historically speaking China should be at the point where its labor surplus is at its peak – it should still have a young population for at least the next 20 years, and land holdings are still relatively small for efficient farming, giving plenty of energy to continue pushing China’s manufacturing boom.

On the ground though things look much different. Reports from Guangdong and Zhejiang — the two main manufacturing provinces — indicate that wage prices went up 60-100% during 2009. This is despite GDP growth dropping from 10.6% in the first quarter of 2008 to 6.1% in the first quarter of 2009. Is something changing in China’s demographic structure, or is this just an aftereffect of the gigantic stimulus package that China put in place to deal with the crisis? .

Long-term changes

Urbanization is still a major force in China’s economy, and will continue to be for quite some time, but two major things have changed in China’s macro-economic equation – China is becoming more educated, and Chinese businessmen are becoming rich.

The former is a more pressing concern. China’s official unemployment rate is largely considered to be an unambiguous lie (around 5%), but you can occasionally find much more reliable numbers on post-college employment rates – I came across one government initiative to bring unemployment among college-educated people in Henan province down to below 20%. The large increase in college education as well as the general increase in wealth over the past 30 years has led to a complete change in the makeup of employees in Guangdong and Zhejiang. One tech analyst I spoke to recently explained the spate of suicides at Foxconn as the management not realizing that they were no longer employing people from the countryside who were used to hard lives and abuse.

What this means for the macro situation though is far more positive. It means that technical workers are under paid compared to workers from other countries, and that there is plenty of room for growth in these markets.

The increasing wealth of Chinese businessmen will increase movement into these markets. It used to be that factory owners would have to start out in something that requires little capital input – cloths, toys, lighters, etc. Factory owners now have a generation of earning money behind them and can rise up to do something more capital intensive, or — as is happening in textiles — outsource their labor heavy jobs to southern Asia.

Short-term transformations

That said, China’s rural population is still larger than the entire population of the European Union, and thus they still have a large number of people needing low to no-skill jobs. So why have textile factories been hiking their wages?

One thing that the stimulus package did better than anything else was build infrastructure in internal provinces.  The effect on the labor market was two fold: first, migrant workers had jobs to go to much closer to their homes, and second inner provinces got closer to bridging the gap in transport costs against coastal provinces. This second one had been a trend for years, but the force of the stimulus push a number of entrepreneurs to take advantage of this fact and set up inland. Jobs were coming to the workers, not the workers to the jobs.

Upgrading the factory of the world

It’s hard to imagine a country that makes up around one-fifth of the world’s population not being the world’s main manufacturing force, and until the demographic decline from the one-child policy starts up in the 2030s China looks to continue not only being the center of the world’s low-cost manufacturing, but increasingly the center of the worlds middle- to high- cost manufacturing. The middling quality of the schools — and the country’s strict control over information — means that the country won’t be competing with knowledge workers for a while now, but technical work is firmly on their target list, with major activity in autos, electronics and pharmaceuticals.

Some of the low-cost work will be lost to other developing countries, which are learning how to develop their own competitive advantages against the Chinese manufacturing juggernaut. But the majority of China still is quite poor, and factories located in those areas still able to get away with wages that are competitive with any low-income country – with the added benefit of better infrastructure, and existing market ties.

Outside of China people will benefit in other ways though. China’s famous deflationary power will make cars, electronics, and medical equipment available to more and more of the bottom billion, and innovation from the west will be able to reach more and more markets. China’s manufacturing boom and the constant demand for commodities will demand both production solutions from low-income countries and efficiency solutions from high-income countries. There are enough opportunities to go around, just as there was from America after 1920 and England after 1850.

Originally published at Chinese Box and reproduced here with the author’s permission.