When sporadic labor shortages first appeared in late 2004, government leaders dismissed them as short-lived anomalies. But they now say the problem is likely to be a more persistent one. Experts say the shortages are arising primarily because China’s economy is sizzling hot, tax cuts have helped keep people working on farms, and factories are continuing to expand even as the number of young Chinese starts to level off. Prosperity is also moving inland, and workers who might have migrated are staying closer to home.
The inconceivable is beginning to happen to China. It is facing a labor crunch, which is pushing wages up. And the crunch is not temporary it has been deepening over the past two years.
The Chinese economy has been seen as being able to draw on an inexhaustible supply of cheap labor, but this picture is changing. This holds implications for China and the World. What experts are now saying about growing labor shortage may appear to contradict earlier reports about large-scale rural unemployment in China. But factory employment requires some level of skills, and everybody doesn’t necessarily make this grade. Nevertheless Chinese peasants have been drawn into the industrial workforce on a vast scale, helping to transform China into the world’s workplace. Moreover, the government has been moving to address the causes of rural unrest by phasing out hitherto onerous farm taxes, and loosening restrictions on moving to cities. Farm incomes have been rising since 2003, and urban workers can bargain for higher wages and better conditions. Not only is China beginning to look like mature economy, but Chinese-made products may become more expensive, fuelling inflation worldwide.
Is it a dead end for China and an opportunity for India and other Asian countries?
Persistent labor shortages at hundreds of Chinese factories have led experts to conclude that the economy is undergoing a profound change that will ripple through the global market for manufactured goods.
The shortage of workers is pushing up wages and swelling the ranks of the country’s middle class, and it could make Chinese-made product less of a bargain worldwide. International manufacturers are already talking about moving factories to lower-cost countries like Vietnam.
There are a couple of lessons here for India. The more obvious one is that if Chinese exports become less competitive, there is an opportunity here for India to exploit. The inference less likely to be drawn is how China has been able to use large-scale manufacturing for exports to generate jobs and improve living standards. The Indian growth story has been predicted on a boom in the services sector as well as, to some extent, in capital-and skill-intensive manufacturing. But there is an elitist bias here, as someone who lands a job in services or high-end manufacturing will typically be a college graduate, which leaves out the vast majority of Indians. Thirteen million young Indians will be entering the labor market every year, and we need to generate jobs on this scale. To be able to do so we have to focus also on the light industries the Chinese have excelled in and not just autos and pharmaceuticals, but labor-intensive sectors such as toys, garments, shoes, consumer goods. We should also be able to provide infrastructure, roads, power, and ensures that every one has at least a school education. Lastly, as the 2005-06 economic Survey pointed out, India needs more flexible labor laws to encourage labor-intensive production. With such measures in place, India can easily emulate the Chinese miracle.
Reverting back to Chinese HR crisis, at the Well Brain Factory in one of China’s special economic zones, the changes are clear. Over the last year, Well Brain, a midsize producer of small electric appliances like hair rollers, coffee makers and hot plates, has raised salaries, improved benefits and even dispatched a team of recruiters to find workers in the countryside.
For all the complaints of factory owners the situation has a silver lining for the members of the world’s largest labor force. Economists say the shortages are spurring companies to improve labor conditions and to more aggressively recruit workers with incentives and benefits.
The changes also suggest that China may already be moving up the economic ladder, as workers see opportunities beyond simply being unskilled assemblers of the world’s goods. Rising wages may also prompt Chinese consumers to start buying more products from other countries, helping to balance the nation’s huge trade surpluses
Though estimates are hard to come by, data from officials suggests that major export industries are looking for at least one million additional workers, and the real number could be much higher.
Because of these shortages, wage levels throughout China’s manufacturing ranks are rising threatening at some point to weaken its competitiveness on world markets. China is no longer the lowest-cost producer. There’s an evolution going on. Potential customers from developed and other countries are now going for sourcing of their requirements to Vietnam or India or Bangladesh.
Labor shortages and rising manufacturing costs in China were already forcing it to step up its diversification efforts and look for supplies from factories in other parts of Asia. The higher wages come at a time when costs are already rising sharply across the country for energy and land. On top of a strengthening Chinese currency, this is likely to mean that the cost of consumer goods shipped to the US and Europe will rise.
Government figures say, minimum wages –which averaged $58 to 74 a month (not including benefits) in 2004—have climbed about 25% over the last three years in big cities Shenzhen, Beijing and Shanghai, mostly by government mandate.
Government policy is also playing a role. Trying to close the yawning income gap between the urban rich and the rural poor, the government last year eliminated the agricultural tax, and also stepped up efforts to develop local economies in poor, inland and western provinces, which have mostly been left behind. Now, remote areas are starting to develop creating jobs and offering alternatives to young workers who once were forced to travel thousands of miles for jobs on the coast.
China’s one-child policy is also aggravating the shortages. With the first generation of young people born under the one-child policy now emerging from postsecondary education , many of them see varied opportunities not available to an earlier generation.
The waves of migrants who once came to the booming coastal provinces are diminishing. As a result, manufacturers are starting to look for other places to produce goods.