The silver lining of wage increase
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Notwithstanding all the hype over rising wages in China, it is entirely premature to declare an end to the global labor cost arbitrage that has long worked in China's favor. China remains highly competitive by international standards, and the recent round of sharp increase in wages is not likely to alter that key conclusion.
Actually, the current outbreak of increase in minimum wages is largely going according to the script of China's 2004 labor reform, which required local governments to raise minimum wages at least every other year. But circumstances changed relative to conditions prevailing at the time that reform was implemented, and the script had to be discarded - at least for a while.
In the depths of the global financial crisis in late 2008, when Chinese exports were under severe downward pressure, the government ordered a deferral of scheduled increases in minimum wages in an effort to combat mounting recessionary risks.
But now, in the face of a more stable global climate and impressive resilience in the Chinese economy, that emergency policy is being relaxed. In that important respect, recent increases in minimum wages should be seen as a catch-up from previously slated hikes that had been foregone during the crisis.
The data on international wage comparisons, too, do not point to dramatic deterioration in China's wage advantage. According to research published in the Monthly Labor Review of the US Bureau of Labor Statistics in April 2009, compensation of Chinese manufacturing workers was only $0.81 per hour in 2006 - just 2.7 percent of comparable costs in the US, 3.4 percent of that in Japan, and 2.2 percent of compensation rates in Europe.
While these figures are now out of date by nearly four years, they underscore the magnitude of the gap between China and the developed world - and how difficult it would be to close that gap even under the most excessive of Chinese wage inflation scenarios.
For example, if Chinese manufacturing wages had increased at an average annual rate of 25 percent during the 2007-10 period - which is highly unlikely for reasons noted below - the hourly compensation rate would be just $1.98 in 2010. That would boost Chinese compensation to only about 4 percent of US pay rates - barely making a dent in narrowing the arbitrage with major industrial economies. A similar comparison would be evident with other countries in the developing world. At $1.98 per hour in 2010, Chinese hourly compensation in manufacturing would still be less than 15 percent of that elsewhere in East Asia (ex Japan) and only about half the pay rate in Mexico.
