EARLY today, Matt Yglesias quoted a New York Timespiece on an interesting new trend—lost textile jobs in China, to neighbouring Bangladesh where wage rates are lower.
As costs have risen in China, long the world’s shop floor, it is slowly losing work to countries like Bangladesh, Vietnam and Cambodia — at least for cheaper, labor-intensive goods like casual clothes, toys and simple electronics that do not necessarily require literate workers and can tolerate unreliable transportation systems and electrical grids.
Li & Fung, a Hong Kong company that handles sourcing and apparel manufacturing for companies like Wal-Mart and Liz Claiborne, reported that its production in Bangladesh jumped 20 percent last year, while China, its biggest supplier, slid 5 percent.
This is an example of an historically common phenomenon—an economy built on low-wage manufacturing moves its way up the skill and wage ladder, progressing from cheap emerging market to rich developed nation. The unusual aspect of this transition, however, is that the rising wage country is China, which is home to over 1.3 billion people, hundreds of millions of which remain poor and rural. Could China really be losing its cheap labour edge, and if it were, what would that mean for the rest of the world economy?
That's one of the questions we've posed to our economic experts at Economics by invitation this week. The answers have been revealing. I'll quote just two of them, to provide a bit more perspective on the issue. Here's Yang Yao:
Some surveys show that migrant wages increased by 20% in the first half of 2010. Some people (such as Cai Fang of the Chinese Academy of Social Sciences and Ross Garnaut of the Australian National University) thus conclude that the Lewisian turning point has arrived in China—that is, China has depleted its surplus labour and the period of cheap labour has ended. However, this conclusion may be too hasty because it does not fit into the large picture of demography in China.
First, it cannot be made congruent with the fact that the countryside still has 45% of China’s labour force, but agriculture only contributes to 11% of China’s national GDP. Based on provincial data, Ke Zhang and I have estimated the demand and supply functions of migrant labour in a structural framework that explicitly allows the supply function to have a portion of an infinite elasticity. We find that China has never passed the Lewisian turning point. Indeed, we find that China is moving away from the turning point, primarily because agriculture has become more mechanised and squeezed out labour.
Knight, Deng, and Li’s study confirm our results. It finds that in 2007 there were 80 million rural people who were potential migrant workers. The Chinese economy was at its recent highest point in 2007; during the crisis, about 20 million migrant workers went back home. Therefore, the number of potential migrants can only increase today.
[R]ecent increases in minimum wages are a catch-up from previously slated hikes that had been foregone in the crisis.
Nor do the data on international wage comparisons point to dramatic deterioration in China’s wage advantage. According to research published in the Monthly Labour Review of the US Bureau of Labour Statistics in April 2009, compensation of Chinese manufacturing workers was only $0.81 per hour in 2006—just 2.7% of comparable costs in the US, 3.4% of those in Japan, and 2.2% of compensation rates in Europe. While these figures are now out of date by nearly four years, they underscore the magnitude of the gap between China and the developed world—and how difficult it would be to close that gap even under the most excessive of Chinese wage inflation scenarios.
For example, even if Chinese manufacturing wages increased at an average annual rate of 25% over the 2007-10 period—highly unlikely for reasons noted below—the hourly compensation rate would be just $1.98 in 2010. That would boost Chinese compensation to only about 4% of US pay rates—barely making a dent in narrowing the arbitrage with major industrial economies. A similar, albeit unsurprisingly less dramatic, comparison would be evident with the developing world. At $1.98 per hour in 2010, Chinese hourly compensation in manufacturing would still be less than 15% of that elsewhere in East Asia (ex Japan) and only about half the pay rate in Mexico.
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