2012-02-09

Demographics and Chinese labor costs: China's pain is Mexico's gain

Exactly one year ago today, I posted Labor costs soar in China. In it, I showed how the one-child policy was causing wages to rise because the entry-level workforce was in decline. Wages are a pyramid with the lowest wages on bottom. If employers bid up wages for entry level workers, they may attract marginal workers higher up the ladder. Therefore, a small marginal impact to entry level workers can have effects farther up the labor supply and this is why many Chinese factories are now moving inland to cheaper parts of the country, if not to Bangladesh.

Many articles talk about 2015 as the year when the labor force stops growing, but this is the wrong place to look. The entry-level workforce is a small slice of workers aged 18-19; these are the replacement workers for this year's entry level workers. Higher wages could attract more workers, but as China's economy grows there's also a growing demand for labor. Hence the immediate shortage.

Now, the story has reached the pages of the Wall Street Journal. China's Export Pain May Be Mexico's Gain
The pool of Chinese workers is getting shallower. China's one-child policy and cultural preference for boys have led to a shrinking population of young people, particularly the women who work the floors of the apparel and electronics firms. The United Nations projects the number of women aged 15 to 24 in China will fall from 106 million in 2010 to 92 million in 2015. Add rising affluence, and labor costs are going up faster than productivity increases at Chinese firms can offset them.
This isn't the only cost problem for Chinese firms, as the article lays out.

Looking ahead, the biggest impact rising wages will have is on disposable income. The Chinese consumer has not yet begun to spend. There's a credit fueled real estate bubble today, but on the other side of the transition is a very rapidly growing consumer economy. It's just a question of whether it arrives quickly after a crisis, or very late in the decade after financial repression eases the bad debts in the financial system.

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