Labor Shortages Will Hasten China’s Inevitable Economic Change

For a long time there has been a striking difference between the way China and Japan expanded their economies through export-led growth. Japan made its goods cheaper by taking labour costs out through systems and automation. China did so by putting low-cost labour in. The low-cost labour model was always going to be unsustainable if China was to move up the development ladder towards higher-valued manufacturing. Labour shortages now showing up in the Pearl River delta and other coastal manufacturing heartlands — and noted by Prime Minister Wen Jiabao in his web chat on Saturday — may be the trigger for this and it could also be one of the unintended consequences of last year’s massive stimulus spending combining with Beijing’s moves to narrow the income gap between coast and country.

The money flowing to the inland has created jobs and opportunities closer to home for the 150 million migrant workers who before the global economic slowdown had flocked to the export factories of the coasts. They were dispatched home when exports slumped. Now exports are growing again, they have chosen not to come back, despite employers offering better pay and conditions and provinces raising minimum wages. We are now seeing signs of export manufacturers reorganizing to lower unit labour costs through more efficient production and to move up the value chain with their products as has been happening for a couple of years. The timing could not be better. A growing domestic market provides them with alternative customers. Rising wages will fuel that domestic consumption, so it is a virtuous circle as well as being part of the cycle of economic development that all economies follow.

Manufacturers would anyway have to do that because of underlying demographic changes. The population is aging in a way that will change the country from being inherently a surplus one into a deficit one. The fall in world trade, the slump in China’s exports and now the shortage of hands at the workbenches of the Pearl River delta is only hurrying forward the inevitable.