For a generation, cheap labor has been a centerpiece of China’s economic growth. But China’s labor is no longer cheap. And that means a lot of things are changing – for China and for the rest of Asia.
Companies want to make their products in countries where labor costs are lower so that their costs are lower. Most of the stuff the rich world wants – from toys to clothes to electronics – was made in the U.S. and Europe in the 1950’s and 1960’s. That shifted to Japan, and then increasingly to South Korea, Taiwan, and Hong Kong in following decades. As labor costs rose in these countries, China made more and more of the things everyone else wanted to buy.
Thanks in part to its role as the world’s production hub, China’s economy has grown an average of almost 10% every year since 1990. It’s now the world’s second largest economy, due in part to low labor costs.
But China’s labor costs have gradually caught up with the rest of the world. The graph below shows labor costs per hour in different countries. The important thing here is that the numbers are adjusted for productivity. So in terms of take-home pay, workers in (for example) Brazil don’t actually earn more than workers in the U.S. But in terms of what they’re paid for what they actually produce, workers in Brazil produce less – because they get a lot less done per hour.
What this means is that workers in China (the data here is for the Yangtze River Delta area, which is around Shanghai) are paid about two-thirds of what workers in the U.S. make, when wages are adjusted for productivity. The difference between having to pay your workers $15 an hour in China and $23 an hour in the U.S. might sound like a lot. But after you take into account the cost of transporting the final product from China, the difficulties of managing people in China and the hassle of working with people on the other side of the world, China is no longer so cheap.
And China is now one of the more expensive places in Asia to make anything. Adjusted for productivity, a worker in Thailand earns 40 cents for every dollar a worker in China makes (and 25 cents compared to an American worker). Making things in Indonesia is even cheaper, where workers make just eight cents compared to the dollar earned by a worker in China.
Manufacturing companies have to look at a lot of factors besides the cost of labor. And it’s not easy to move your manufacturing plant just because it’s a bit cheaper somewhere else. The cost difference has to be big. And for the past few years, it has been. And the difference is only getting bigger.
That’s a big opportunity for other countries in the region with more competitive labor costs, like Vietnam, Indonesia, Bangladesh and Thailand. But these other Asian countries have to make themselves attractive based on more than just low labor costs.
And one of the big challenges for China is to find a way to replace manufacturing as a central driver of its economy. Whether they find a way or not will be an important factor in how China’s economy performs in 2016.