China No Longer Has Cheapest Labor

As wages in China rise with economic growth, some companies are beginning to look elsewhere for what was once China’s selling point: cheap labor. It just highlights the power that free trade provides—growing economies and raising living standards.

Consider that wages in China are five times greater than they were in 2000, measured in constant U.S. dollars. A small part of this growth has occurred because the Chinese government has allowed the Chinese yuan to appreciate against the U.S. dollar. The rest comes from real growth in the wages earned by Chinese laborers, which have risen 20 percent per year since 2005 and may well continue to grow rapidly.

For example, Foxconn, the largest private employer in China and one of Apple’s main manufacturers, has already raised wages four times in three years. A laborer starting today earns twice as much as that of a new employee in 2010.

A recent article in The Wall Street Journal details that companies are moving production to less-developed economies in Southeast Asia, such as Thailand and Vietnam, which are becoming more competitive with Chinese labor. Other manufacturers are beginning to “reshore” some of their operations back to the U.S., including a much-publicized move of some of General Electric’s appliance manufacturing to Louisville, Kentucky.

Beijing, which has long pursued aggressive growth in Chinese manufacturing capacity, has responded by refocusing its efforts toward industries with higher-value production. This mirrors a shift in the U.S. economy away from low-margin manufacturing jobs, which have fallen dramatically, to higher value-adding jobs with significantly higher wages and productivity.

The transition, however, has not been easy for the U.S. From a high of 19.6 million manufacturing jobs in 1979, our economy has lost 6 million manufacturing jobs over the course of the past three decades. Although manufacturing output almost doubled due to increasing productivity, the process has been difficult for many Americans.

It could be even worse in China, which is still a much poorer country than the U.S. was in 1979. Furthermore, China faces the challenge of millions of new entrants every year to the urban labor market, which supports manufacturing. Perhaps the worst indicator of all, it was ranked at only 51.9 out of 100 on Heritage’s 2013 Index of Economic Freedom.

Wages reflect the productivity of labor. As low wage jobs leave China, its economy will have to make the difficult transition to higher productivity, while still creating millions of new jobs. The question is: Can the Chinese handle it?

Brett Wierenga is currently a member of the Young Leaders Program at The Heritage Foundation.