Wage hikes could benefit Chinese economy (News Feature)

By Andreas Landwehr Jun 17, 2010, 6:05 GMT

Beijing - Increasing wages in China's factories would not necessarily push up retail prices in the West, said experts who argued that paying workers more would even improve the country's economy overall.

Recent industrial action in China has secured salary increases for workers, raising concerns of price rises for overseas consumers of mobile phones, computers and other manufactured products.

But, according to estimates, labour costs account for only 5 to 10 per cent of the final price of most manufactured goods. Even a substantial wage increase would have a minimal impact on operational costs and be more than offset by improved productivity.

The wage increases, reports of labour shortages in the Pearl River Delta and expected demographic changes with fewer young people entering the labour force have led to concerns about the end of cheap labour in China and the growth associated with it.

'In our view, the concerns are overexaggerated,' a recent analysis by Swiss investment house UBS AG said.

Higher wages would not trigger an exodus of factories to other countries, Chinese experts said, with the possible exception of some of the most labour-intensive sectors.

Instead, production facilities are more likely to be moved to other, poorer regions in China where lower salaries are still accepted, they argued.

While the experts dismissed the fears associated with higher wages, they also said bigger paycheques would help China by raising domestic consumption and reducing its dependency on exports.

'The change should be welcomed,' said Ben Simpfendorfer, China economist with the Royal Bank of Scotland Group PLC.

'Labour is too cheap in China and the rest of Asia, making it difficult to shift to a consumption-led growth model,' he said.

The UBS report agreed. 'Wage increases will help to increase overall household income and boost consumption,' it said. Such developments would be in line with the official government objective of rebalancing the domestic economy, it added.

Workers across China are demanding higher wages, spurred on by the success of recent strikes at factories owned by the Japanese carmaker Honda Motor Co.

Electronics producer Foxconn Technology Group also substantially increased its wages after a spate of suicides at its factory town in the south-eastern city of Shenzhen.

Aware of the potential trouble from migrant workers leaving the countryside in search of work in big-city factories, Prime Minister Wen Jiabao expressed sympathy.

'Migrant workers should be taken care of, protected and respected, especially the younger generation,' he told workers at a subway construction site in Beijing last week.

About two dozen provinces and major cities have already increased their minimum wages by up to 28 per cent to as much as 1,200 yuan, or 175 dollars, per month.

The official workers' union, which has historically tended to side with employers and authorities, is coming under increasing pressure to look into workers' complaints.

'Trade unions though have done little to protect workers' interests,' the China Daily said in an openly critical commentary. 'They have been more concerned about placating employee grievances in order to 'harmonize' relations with the managements.'

Beijing is wary of a possible uprising and an independent labour movement, mindful of the role the Polish independent trade union Solidarity played in undermining the Soviet-backed regime there in the 1980s.

Today's Chinese strikers are well-organized, know their rights, communicate by mobile phone and text messages, and know exactly - thanks to the internet - how much fellow workers in Japan or elsewhere are earning.

Unconfirmed reports indicated that Beijing has reinforced security forces in the south, where the majority of the factories are based, and put them on a state of readiness. Previously, migrant workers were seen as a contributing factor to China's social stability.

During the global economic downturn brought on by the 2008-09 financial crisis, fears of a destabilizing mass unemployment were proven wrong as laid-off workers simply went home to their villages and families.

They rode out the economic storm in the shelter of their social networks, only to return to the factories once business began to pick up again.

The recent changes in China's wage structure are not a seismic shift, the UBS report said, but rather a natural consequence of the rising cost of living and cyclical changes in demand and supply in the labour market. Double-digit wage increases are not unusual in a fast-growing economy like China's, it said.

The report also welcomed 'the emergence of some wage pressure, especially at the lower end of the income ladder,' because it could help 'reduce income inequality and social tension.'