Labor costs soar in China

Since around 2008, factories in south China are finding that many workers never come back after the Spring Festival. This year was no different, even though employers have sweetened the pot.

Migrant workers turn screw on bosses

"They are the king," said Pauline Ngan Po-ling, deputy chairwoman of Mainland Headwear Holdings. "They want this and that. If their wishes are not granted, you could be in great trouble."

About 30 migrant workers climbed on to the roof of the group's factory in Shenzhen last month and threatened to jump off collectively if they were not allowed to go home five days early for the holiday.

A frustrated Ngan gave in to their demand but withheld their pay cheques until the end of this month so they would return to work.

"I had no choice but to let them go. What if they had jumped? We will know if they will come back or not today or tomorrow."

Mainland Headwear - which saw three out of four migrant workers at its Shenzhen factory heading home for the holidays - offered to raise the monthly pay of its labourers by up to 8 per cent this month after an average pay rise of 34 per cent last year.

Even with such increases, the factory is short of 1,000 workers.

Even without inflation, Chinese labor costs would be rising due to a declining supply of entry-level workers. Inflation adds volatility to the mix and can unleash massive inflation in only a short period of time, expect Chinese wages to become a major topic in the coming months. It will probably be explained as Chinese workers demanding higher wages for rising food and housing costs, but housing costs have been out of control for years and did not lead to rapid wage inflation. Similarly, food costs are up, but they've spiked before. What we're seeing is a drop in labor supply that is real and this gives workers far more powerful bargaining positions.

On a broader level, the policy goal of property tax reform and minimum wage increases are linked. These are not separate policies, but a combined effort to bend the income distribution. Property taxes are hitting the wealthiest Chinese, bending their incomes down, while minimum wages are bending the poorest up. Another goal of the property tax is to generate revenue and allow the government to reform the tax structure. The aim is to create a large middle class that can power the domestic economy and in the end, demographics will help achieve this goal. Those focused on the aging of China and the dependency ratio are looking in the wrong place. Although it is difficult for only children to bear the responsibility for their parents, China is not a welfare state and the elderly don't vote. The big change is in labor supply; wage inflation will be the big trend this decade.