Op-Ed Contributors

Speed industry restructuring

By Shujie Yao (China Daily)
Updated: 2010-07-16 07:59

China must expand services sector and move manufacturing inland in order to combat labor shortages in coming years

Even though China's leaders prize stability, they may come to look back on recent labor strikes as a healthy and vital turning point on China's twisting path to development.

The era of low-cost production on a massive scale is drawing to a close. A severe labor shortage is set to become a huge challenge for China in the next 10 to 20 years, rendering explosive growth based on cheap and abundant labor impossible.

The government must be quick to embrace wage rises for Chinese workers as the catalyst to accelerating its industrial restructuring. Too sluggish a response will leave it struggling to maintain high economic growth and withstand public pressure, the inevitable accompaniment to mounting social inequality.

China faces two key tasks in the face of rising wages. It must move its industrial production quickly up the technology ladder, reducing its reliance on the manufacturing industries and expanding its service sector. And it must relocate its traditional manufacturing hubs from coastal areas to central and western regions.

Progress is clearly being made in the latter. Many cities have begun to raise their minimum wages by up to 48 percent. Wuhan increased its minimum wage from 700 yuan per month to more than 900 yuan per month. Shenzhen now has the highest minimum wage, upping it from 900 yuan per month to 1,250 yuan per month.

Following a slew of suicides, and a subsequent pay hike to 2,000 yuan per month, Foxconn has announced the opening of factories in the inland cities of Nanning, Chongqing and Wuhan to slash production costs.

Many more companies will follow, enabling China to begin rebalancing its regional economies. Some will also turn to Vietnam to take advantage of wage rates that are 50 percent lower than those in inland Chinese cities.

But a large-scale exodus from China is highly unlikely. Countries like Vietnam, Laos and Bangladesh simply can't compete with China in terms of infrastructure, logistics and scale of production. For the foreseeable future, Western buyers will be able to absorb rising Chinese labor costs by passing the difference on to Western consumers.

The threat of a labor shortage, however, makes the transition from manufacturing to service industries all the more urgent for the Chinese development model.

British economist Arthur Lewis proposed a dual economy model for a developing country in the 1950s, comprising a modern industrial sector and a traditional agricultural sector. As the model goes, surplus labor gradually shifts from the agricultural to the industrial sector, with the country becoming more productive and industrialized.

In the initial stages of rural-urban migration, industrial wages are relatively low as the economy has an abundant labor supply. As more labor is absorbed by the industrial sector, the labor surplus in the agricultural sector declines, which pushes up industrial wages. The industrial wages can increase rapidly before all the agricultural surplus labor is totally absorbed by industry.

China has reached the beginning of the "Lewis turning point", where industrial wages are rising even though a significant amount of labor remains in the countryside.

Several factors are pushing up wages in the cities. Living standards and agricultural productivity in rural China have increased markedly over the last 30 years, raising the income expectations of new rural migrants.

Second, the rising cost of living in cities, particularly in housing, medical care and education, mean that higher wages are required simply to survive. Third, non-farming activities in rural areas have become very important sources of income, resulting in many rural workers having no need to move to cities in search of higher salaries.

And then there is the issue of China's ageing population that has been looming large for the last decade. The number of people aged between 15 and 24 entering the labor market in the next 10 years is set to decline by 30 percent.

It may seem hard to believe now, as Chinese graduates compete furiously for limited job opportunities for little financial reward, but there will also be signs of a labor shortage among China's young college-educated workers.

This year, 9.46 million students competed for places at Chinese universities, down 740,000 from the previous year - the second successive year of decline. If this trend continues, the population of college students will decline rapidly in the near future.

In the short-term though, Chinese graduates will still find themselves having to accept employment that is lowly paid in comparison to their educational qualifications.

But the quicker China moves towards a more hi-tech output, the more jobs will become available to young skilled workers. A more balanced regional development will also help reduce employment pressure for graduates chasing jobs in the major cities.

The recent spate of workers' strikes and the resulting wage rises will bring necessary, long-term benefits to both China's blue-collar and white-collar workforces.

It is also the responsibility of municipal governments to provide basic education, healthcare and housing for migrant workers to mitigate wage hike pressures and raise happiness levels among low and middle-income households.

Crucially for the Chinese leadership, higher incomes will add legitimacy to its pledges to narrow the gross inequality gap and compel it to act with urgency in its pursuit of a sustainable and developed economy.

The author is head of the School of Contemporary Chinese Studies at the University of Nottingham.

(China Daily 07/16/2010 page8)