US-China Business Council
Costs are on everyone’s mind in China. United States Executives in China are seeing now more than ever that there is need for concern over rising costs in China, particularly the cost of labor, which has seen a huge increase over the past few years. While China was once thought to be the land of the cheap labor, new surveys show that the cost of labor is steeply rising; some businesses have experienced double-digit increases in the cost of labor.
The recent survey from the US-China Business Council stated that United States business executives in China claim the cost of human resources as their biggest challenge. The increases in the price of labor don’t stop there: according to the US-China Business Council, wages are expected to rise by about 5-10% next year alone.
Despite the rising cost of labor, a surprising 90% of survey responses indicated that they considered their business profitable, which is a record high.
If the assumption of rising cost of labor and the increased profitability holds, it will lead to economic expansion and as a result, the standard of living will improve.
The rising wage rates are a sign of Chinese economic development. Since wages are rising while profitability is at a record high, these two indicators are signaling that the average productivity of the Chinese laborer is improving. The marginal product of labor is increasing, benefiting both the firm and the average worker. Moreover, China is become less labor-intensive. As an input, labor is no longer as cheap, relatively speaking. Some analysts speculate that the continuation of this trend will result in other, less productive growth markets, benefiting from increased demand for their cheap labor. For example, Mexico is a country that many speculate will gain manufacturing production as China focuses less on exports and investment and more on a consumption-driven growth.
I agree with David that these statistics seem to indicate that the productivity of Chinese labor is improving. As wages continue to increase, profitability can only increase at the same time if the workers are becoming more productive to cover the margins. However, China should be weary of these statistics, because the profitability rates can only keep up with the increases in wages for so long. There will come a point in time where the cost of labor will continue to increase, and the profitability will begin to plateau because it simply cannot grow at as fast of a rate. When this happens, businesses will face the challenge of paying as much for labor while remaining to make a profit, so they will likely have to find other ways to cut costs.