TALKING POINTS
TALKINGPOINTS Paradise reconsidered
ALSO IN THIS SECTION
ROBERT ABBANAT, PRIVATE EQUITY INVESTOR TURNED ENTREPRENEUR, P26
The aspiring China entrepreneur should seek out both Western and local talent
FRANK YU, FOUNDER OF TECH STARTUPS KWESTR AND DRAGONMOSS, P28
weibo’s ability to re-define infor- mation sharing and new media in China hinges on appeasing regulators with- out alienating users
The cost of labor will continue to increase in China, but exporters and foreign outsourcers should not rush to relocate
Chinese annual wage increased from RMB5,348 (US$819) to RMB28,898 (US$4426), an aver- age growth rate of 14.2%. Manu- facturing labor costs are keeping pace. In the last two decades, man- ufacturing firms have seen their labor costs increasing annually at 14.8%. Even if the high inflation- ary period of the early 1990s is excluded, labor costs still grew at about 13% per year. At the same time, labor short-
L
abor costs in China are ris- ing fast. Between 1995 and 2008, the average
BAIZHU CHEN
one billion. But after almost 40 years of family planning, China’s demographic dividend is close to depleted. On the economic front, even
Chen Baizhu is a professor of clinical finance and business economics at the Marshall School of Business, university of Southern California. He is also the academic director of the Global EMBa program in Shang- hai, a joint venture with Shanghai jiao Tong university
ages have become regular phenom- ena in China’s coastal regions. Tat labor shortages exist in a labor-abundant coun- try indicates further upward pressure on wages. While every sector is impacted by higher sala- ries, the effect on the export-oriented firms is especially strong given the export sector’s par- ticular dependence on labor. Te trend is likely to con-
tinue and even accelerate. For Beijing, helping labor represents an opportunity to correct a vari- ety of social and economic im- balances. For China’s exporters, and for foreign firms outsourc- ing production in China, it ne- cessitates a strategic re-think.
Macro and demo
Te reasons for the increase in wages are myriad. At the demo- graphic level, China is running low on workers. From 1950 to 1980, the country’s population exploded from 500 million to
22 China Economic Review • May 2011
as salaries have ballooned, workers’ share of GDP has declined steadily. In 1997, labor compensation ac- counted for 53% of GDP. By the end of 2010, it was less than 40%. In this self-proclaimed “workers’ paradise,” laborers’ share of the in- come pie has shrunk even as the Chinese economy charges ahead. Capitalists’ share of GDP grew from 20% in 1997 to 31% in 2007. Tis decline of labor income’s share of GDP has coincided with the
decline of consumption relative to investment. Private consumption made up more than half of GDP during the early reform years. By 2009, it was only 36%. Te central government recognizes this
In this self- proclaimed ‘workers’ paradise,’ laborers’ share of the income pie has shrank even as the Chinese economy charges ahead
fundamental imbalance. Making growth more sustainable is a key focus of the current five-year plan. Te emphasis is now on domestic demand to drive the economy, with private consumption play- ing a more significant role in increasing that demand. For the government, this means imple- menting reforms to increase household income, and by ex- tension increasing labor’s share of GDP. To this end, Beijing is in-
creasing the minimum wage, increasing enforcement of the minimum wage law and widening implementation
“In most cases, the entrepreneurs are the only real asset – investments are made in the man rather than the machine”
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