Friday, March 14, 2008

China and more on global labor arbitrage

Over at Demography Matters, Edward Hugh has put up a very thought-provoking piece titled
China's Inflation and Labour Shortage Problem, It's The Fertility Stupid!

I think a key point Edward makes is that "there is a shortage of young workers willing to accept the low wages that prevailed in the 1990s." I am fairly certain China's young workers can see that the type of work being done at today's wages isn't rocket science, and that they are aware of what currently employed workers are making. One might say, with tongue in cheek, that the "young workers of China have united" to reject labor arbitrage. Now, workers in other countries such as Vietnam don't have the same leverage regarding wages, which would help explain why electronics production is moving from China to Vietnam, as I mention in a previous piece here at Wasatch Economics.

It seems that now that China has raised the standard of living for a sizable chunk of its workers, the rest of the work force isn't willing to accept the difficult working conditions that gave China its manufacturing cost advantage. This puts China in the same stage of workforce condition as Western countries. By that I mean that holders of capital can't find workers willing to take jobs at the wage on offer, so the country must either import workers willing to work at that wage as the US has done with agricultural workers, or outsource the work to foreign labor. Since bringing foreigners in is politically and practically nonsensical for China, the work goes overseas.

Given the trend in the size of the 15-19 cohort through 2022, the size of the potential highly educated workforce that China will be able to generate to move its manufacturing sector up the value stack is limited.

Finally, I believe that China's infrastructure outside of the coastal regions is fairly weak, so that even if the low value add manufacturing is moved to the hinterlands where workers might be found, the cost of transporting raw materials to the factories and then the finished product back out to ports for export might eat significantly into labor cost savings.

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