China’s labour movement and China’s future

Over the past several weeks there’s been a lot of press focused on working conditions at several of China’s big-name factories, notably, Foxconn and Honda.

A rash of suicides at Foxconn, maker of products for big names such as Apple, Sony, Nokia and Hewlett-Packard, has focused media attention on the company’s huge profits and, by our standards, grossly low wages. The Taiwanese company employs over 800,000 people across China with an average wage of under $200 month, just a touch over standard Chinese minimum wage rates.

(And while that may sound horrific, keep in mind that China’s poverty line, measured in purchasing power parity by the World Bank, is approximately $1.25 per day. To be more realistic given inflation and a more realistic basket of urban goods and services, that figure is likely closer to $5/day in urban centres, and some would argue even more.)

Over at Honda Motors, a strike by 1,900 workers at a Chinese transmission plant over low wages shut the plant down for two weeks. Wages at the plant ranged from $131 to $219 per month.

In both cases, management has responded with wage hikes – 30 per cent of basic wages at Foxconn, and a 24 per cent increase at Honda. Other companies are likely feeling the pressure to follow.

Great, right? Well, maybe not.

As famed Marxist author Geoffrey Kay wrote in relation to global underdevelopment in the 1970s, perhaps the problem isn’t that the poor are exploited, rather, it’s that they aren’t exploited enough.

If one follows this theory, economic and industrial development in now developed countries was spurred by the exploitation of labour by capital, and the subsequent re-investment of large profits by capitalists into more employment creating industry and the infrastructure, both economic and social, to facilitate it. In the long-run, skilled-labour demand causes wages to increase at all levels, facilitating long-term wage and consumption growth, and thus long-term economic growth and development. Sounds easy but it’s a very long process.

China has so far benefitted from exactly this scenario. Large levels of foreign capital have exploited large pools of labour, allowing China to lower its gross poverty level from over 60 per cent in the 1970s to under 10 per cent by 2004.

This theory of labour exploitation has one problem, though. It works off of the premise that a competitive advantage in labour is relatively unique. Hence wage increases are simply absorbed as a cost of business, and lead to consumption increases that benefit all.

However we know that labour surplus’ are not unique to China. Vietnam, Cambodia, Sri Lanka, Bangladesh and even some African countries have developed industry using this same model.

So when Chinese labour rates increase, especially for low-skilled labour, the assumption that this is a positive development for the country’s future (as argued here: http://www.reuters.com/article/idUSTRE6511TT20100602) isn’t necessarily true.

For at some point, it becomes cheaper to do business elsewhere, bringing jobs, direct and indirect with them. When that happens, Kay’s theory of exploitation holds true, i.e. when labour isn’t exploited enough, development fails.

So while wage increases will indeed boost domestic consumption, that alone isn’t the answer to China’s future growth. For what’s really important for a country with a labour force of nearly a billion peole, is its ability to balance domestic consumption growth with long-term job creation at both skilled and unskilled levels of the market. This means that the exploitation of labour remains a necessary evil to continue long-run economic development.

And while the wage increases announced recently will unlikely have any long-run effect on investment and job creation, if these moves are a sign of greater wage inflation then it might auger poorly for China’s ability to balance and manage its complex, dual-structure economy.

This is absolutely fascinating for several reasons – no one has ever tried to manage an economy with so many people, let alone moving parts. If they can succeed, then projections over China’s future power and place in the world will undoubtedly come true. But if growth falters, and if labour unrest is a precursor to social unrest, then anyone’s guess as to what China will look like in the future goes.

For more on China’s labour market unrest, check out this short-video from the Financial Times: http://video.ft.com/v/89280641001/June-1-Han-Dongfang-on-why-China-s-labour-system-is-broken

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3 Comments on “China’s labour movement and China’s future”

  1. christoph says:

    Good article Dan. Any thoughts on how this compares to the transition experiences of South Korea and Taiwan? Also, do you consider these wage increases to be for the type of labour and industries that may shift production locations easily? Bangladesh for instance is considered as a source a significant population available for low-skilled manufacturing activities so would they be able to lure these specific jobs away from the Chinese if wages increase at a rapid pace? I’m not sure it would happen too quickly, but only time will tell.

  2. danxherman says:

    The key difference is the scale of the workforce – SK, Taiwan, Singapore, and Japan have all experienced similar transitions but the smaller size of their labour forces allowed for a smoother migration to higher-value / higher-wage employment, i.e. they didn’t rely on the lower end so much as China will continue to for decades to come (given the size of their workforce).

    Conversely, one of the leading investors in other countries in the region is actually China. So in that sense, their ownership of capital, and the proceeds of capital, may allow for the replacement of earned income lost as manufacturing wages rise. The question is how will it take for the total of foreign earned income to compensate for lost domestically earned income?

  3. danxherman says:

    Here’s a very similar article from the NYT – I beat them by a week – http://www.nytimes.com/2010/06/08/business/global/08wages.html?hp


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