Wall Street Journal: China Watch: China labor shortage may help deal with slowdown

China Labour Bulletin is quoted in the following article. Copyright remains with the original publisher.

15 July 2012

By Tom Orlik

BEIJING--Despite the sharpest economic slowdown in China since the global financial crisis, wages are still climbing rapidly and many companies are having trouble filling jobs--evidence of a structural shortage in the labor market that may help China adjust to slower growth without threatening mass unemployment and political instability.

Reflecting the tight labor market, wage income for urban households rose 13% year-on-year in the first half, and average monthly income for migrant workers rose 14.9%, according to data from China's National Bureau of Statistics. A survey of 91 cities conducted in this year's first quarter by the labor ministry showed demand for workers outstripping supply by a record amount, pointing to low unemployment.

Jim Leininger, a Beijing manager at Towers Watson & Co., a human resources consultancy, said preliminary data from a recent survey of hundreds of large Chinese and foreign employers in China suggested that their wages this year would rise a still-strong average of 8% year-over-year, compared with 10% in 2011.

The tight job situation, which contrasts with worrisome levels of unemployment in the U.S. and Europe, helps explain why Beijing isn't rushing to match the massive stimulus plan it put in place in 2009.

Back then, a crash in global trade forced large-scale layoffs in factories along the coast, and as many as 20 million migrant workers streamed home to inland villages, raising fears of social unrest that spurred the government to spend lavishly on high speed rail, road and other projects to prop up growth and employment.

Thus far, the global slowdown isn't nearly as deep as it was in 2009 when the world economy skidded into recession. Sheng Laiyun, a spokesman for the National Bureau of Statistics, said that around 6 million new jobs were created in China's cities in the first half of the year, and employment numbers for migrant workers also crept up.

Rising wages also bring risks, though. In China, wages are starting from a very low base, but they are climbing fast. At current rates, China's private-sector manufacturing wages will double from their 2011 levels by 2015, and triple by 2017, eroding competitiveness and denting the exports that have played a key part in China's early growth. Indeed, Boston Consulting Group calculates that China's wages could rise above Mexico's this year when factoring in differences in productivity between the two nations.

The transition to a higher-wage economy, with a bigger role for service-sector output and domestic consumption, won't be straightforward. Tough policy decisions, including opening key parts of the service sector--like banking and telecoms--to greater competition, have yet to be taken. Some of those decisions require cutting against powerful interest groups like state-owned enterprises and local government. The process will play out in years, not months.

The results will have consequences for who wins and loses from China's rapidly changing economy. The same increases in wages that start to price China's products out of global markets should also lift China's demand for imports of consumer goods. The main beneficiaries of China's rapid growth so far have been commodity exporters like iron ore-rich Australia and manufacturers of advanced machinery like Germany. In the future, producers of high-end consumer goods in the U.S. and Europe could start to enjoy more of the benefits.

Domestic shifts are also working in China's favor. The size of the workforce has plateaued, demographers say, and will start to shrink in the middle of the decade, intensifying competition for workers.

China is committed to sharply raising minimum wages, which puts pressure on employers to raise salaries for higher skilled workers. Beijing also has increased requirements for severance payments, which discourages layoffs unless business drops severely.

In addition, China is eventually planning to retool its economy so it is less reliant on heavy industry like steel mills and cement kilns, which generate a lot of output with few workers. The government wants the service sector, which employs more workers per unit of output, to play a bigger part in driving growth in the years ahead.

In the past, breakneck growth, with increases in gross domestic product averaging around 10% a year for the past 30 years, was necessary to create jobs for the millions of young workers flooding into China's job market each year. Now that flood is drying up, just as China looks to focus more on job-intensive service-sector growth.

That dynamic helps explain why there have been few reports of layoffs, even though growth in China's GDP has almost halved from a peak of 14.8% in the second quarter of 2007, to 7.6% in the second quarter of 2012. It also explains why China's leaders appear more sanguine about slowing growth. "China's potential growth rate has fallen," said Chen Dongqi, a senior government researcher, adding that "7% to 8% is the new normal."

China's official unemployment rate was 4.1% at the end of the first quarter, though the data cover only urban workers and are widely regarded as unreliable. The U.S. unemployment rate was 8.2% in June, and wages rose just 1.7% in the first quarter of 2012 compared with a year earlier. In the euro area, unemployment hit a euro-era high of 11.1% in May.

Some of China's largest private employers report rising wages and hiring. Hon Hai Precision Industry Co., which produces Apple's iPad, added 82,000 to its mainland China work force in 2011, taking the total to 998,599. Base salaries for factory workers at the company's Shenzhen plant were 2,200 yuan ($345) a month as of February this year, up 10% from 2011, said the company.

Yum Brands' KFC and Pizza Hut restaurants employ 400,000 workers in China, and are adding around 40,000 a year, the company said. The company reported 17% year-over-year wage inflation in the first quarter of 2012.

Even small export companies, among the hardest hit by the downturn, are seeing wages continue to climb. Zhang Qikang, a senior manager at ceramics-maker Foshan Monalisa Industry Co. in the southern city of Foshan, says that average wages for workers at the company are now 2,800 yuan a month, having risen 20% in from 2011.

An April survey of 4,242 companies in China, conducted by human resources consultancy Manpower Group, found that the majority of companies intended to either hold their work force stable or recruit more workers in the third quarter. Only 3% of the companies surveyed were planning job cuts.

Chinese factories are being forced to invest more in labor-saving technology as wages rise, underlining the impact of the labor shortage. "The days of just adding people are over," said Dwight Nordstrom, president of Pacific Resources International in Beijing, which operates 10 factories in China. Rising wages are changing the type of worker Mr. Nordstrom looks to employ. "We're looking for more skilled workers who can handle machines," rather than adding unskilled labor, he said.

Underpinning resilience in China's labor markets are profound demographic changes. China's one-child policy, introduced in 1980, is starting to eat into labor supply. In 2005, there were 120.7 million Chinese people aged 15-19, according to estimates from the United Nations. By 2010, that had fallen to 105.3 million, and by 2015 it is expected to dip to 94.9 million.

The number of farm workers ready to head to city factories is no longer growing rapidly. A survey of migrant workers conducted by the National Bureau of Statistics showed the number relatively stable at 252.8 million in 2011, up 4.4% from 242.2 million in 2010, with the number working outside their home province growing even more slowly.

Jennifer Cheung, an editor at China Labour Bulletin, a Hong Kong organization that tracks labor disputes in China, says the economic slowdownwas unlikely to put downward pressure on wage growth. "We seldom hear strikes where workers protest against wage cuts," she said. "Strikes are more about workers' demand for wage increases."

Still, if export growth continues to fade, even high costs for layoffs and difficulties rehiring skilled workers might not prevent companies letting workers go.

Indeed, Chinese Premier Wen Jiabao warned that the country's economic rebound isn't yet stable and the hardship may continue for a period. During a tour of China's Sichuan province over the weekend, Mr. Wen called for greater efforts to strengthen the vitality and dynamism of economic growth, the state-run Xinhua news agency said Sunday. He added that the government needs to provide financial aid and tax breaks to companies suffering from slowing export growth.

Kersten Zhang contributed to this article.

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