Rising Chinese Wages Impact Global Manufacturing

For years, the cheap labor in China kept the price of goods affordable around the world. However, the National People’s Congress has recently approved higher pay scales throughout the country because the government wants to boost the Chinese domestic economy. However, this will gradually drive up the cost of goods, decrease company margins and court inflation.

The Shanghai Human Resources and Social Security Bureau just announced a 13 percent increase in the minimum wage as part of a national effort to stimulate consumption. This is the 19th time Shanghai has adjusted wages since the minimum wage law was established in 1993.

The increase was in line with the job market plan established in Beijing’s 12th Five-Year Economic Plan, the purpose of which is to boost employment in China. According to the plan, the annual average growth of China’s minimum wages should be at least 13 percent up until 2015.

Minimum wages in China can vary according to region. For instance, minimum wages range from $240 per month in Shenzhen to $135 per month in Chongqing. The new Shanghai minimum wage is $230 per month, which is near the top of the range. The average monthly wage of China’s 158 million migrant workers in 2011 increased 21.2 percent from 2010.

Textile manufacturers and other employers with a large number of low-skilled workers will feel the impact of rising wages and labor shortages. However, the wage increases are designed to fulfill the government’s desire to transform China from a low-cost workforce to one that is modern and highly skilled.

China’s government wants to encourage workers to spend, easing pressure on families struggling to afford food in order to prevent social unrest. However, wages have been going up even without governmental edicts. The development of the west in China has resulted in the interior cities like Chongqing to become production centers competing for labor with coastal factories. The wages for migrant laborers who feed China’s export industry went up by 40 percent in 2010, and has continued to rise since then as Chinese leaders want to build domestic demand.

China’s wages are now approaching the upper range of labor costs in Asia. The average monthly pay for Shenzhen on the southern coast is currently $1,000. In contrast, monthly factory wages are much cheaper in Vietnam, Indonesia, and Bangladesh. The rising labor costs in China have already caused some manufacturers of clothes, shoes, and other low-margin goods to shift to Vietnam, Indonesia and other cheaper locations.

In conclusion, the end result of wage increases in China can only drive up the cost of goods, decrease company margins and encourage inflation. As salary increases continue to rise globally, real wage increases will average from 0.7 percent to 1.8 percent due to inflation.