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Global Wage Report 2012/2013

Is it the end of a low-wage production model in China?

China’s long-held position as a country of cheap goods based on low-wage labour looks set to change, with wages rising sharply across the board, according to the latest ILO Global Wage Report.

News | 14 December 2012
GENEVA (ILO News) – Wages (*) in China more than tripled between 2000 and 2010, leading to speculation about whether the era of cheap Chinese labour is over.

The figures relate mainly to state-owned enterprises, known as urban units, but separate surveys show that wages in small and medium private enterprises are also rising sharply, although pay levels are lower than in the public sector.

Wages in urban units increased on average at double digit annual rates over the full decade."
“Wages in urban units increased on average at double digit annual rates over the full decade,” said Sangheon Lee, one of the co-authors of the ILO Global Wage Report 2012/2013.

“The wage rises are across the board, from people working in restaurants to office workers. The highest wages are in the financial sectors and in state owned sectors, where employees receive very high wages.”

Economic transformation

The rapid wage growth signals a shift in government policy towards creating a more balanced, sustainable economy that is less reliant on exports.

“The crisis in Europe seems to be biting in China too and there are some serious concerns. It’s about finding the right balance between exports and domestic consumption. If you base everything on exports, there is a risk,” explained Lee.

It’s about finding the right balance between exports and domestic consumption. If you base everything on exports, there is a risk."
The government’s five-year plan to 2015 aimed to double wage income as part of the strategy to rebalance the economy. Since 2003 there have also been regular increases of minimum wages across China.

Other factors have also been at play, including the huge demand for skilled and unskilled workers as well as demographic changes: China’s One-Child Policy will result in a shrinking labour force by 2015, which in turn should increase demand, competition and pay for workers.

Government stimulus measures targeting rural areas and the abolition of agricultural tax have also led to rises in rural workers’ income, although the pay gap between rural and urban workers, while narrowing, still persists.

Wage lag

While wages are growing rapidly in China, they started from a low base and workers’ incomes still lag way behind those in developed countries.

For example, in 2010, monthly average wages in the United States were around US$ 3,300. In China they ranged from about US$ 250 in the private sector, to US$ 440 in state enterprises. If those figures are adjusted to take into account the cheaper cost of living in China, they amount to the equivalent of between about US$ 400 and US$ 710 a month.

Before the reform, wages were equally low. With economic growth, some have benefited more than others."
Higher wages are likely to mean more expensive products but, with Chinese consumers becoming more affluent, foreign investors have started viewing China as potentially the largest market in the world.

The wider region is also likely to feel the impact of China’s new emphasis on higher cost goods and higher wages, said ILO Senior Policy Analyst, Chang-Hee Lee.

“If some enterprises seeking low cost production move out of China , it would be an opportunity for less developed countries in the region. We would hope that the relocation of factories to less expensive countries will push workers’ wages up in those countries but it may not happen if effective labour market institutions are not in place,” he said.

At the same time, some high-end processing brands have started setting up factories in China, indicating the importance of a range of factors in determining investment attractiveness.

While the economic transformation has left many Chinese people better off, there are concerns about the widening income gap between different economic sectors; between the state sector and the private sector; within industries and between migrant and urban communities.

“Before the reform, wages were equally low,” said Lee. “With economic growth, some have benefited more than others.”

(*) Wages adjusted for inflation, otherwise known as real average wages.