China's tricky wage dynamics

By R.A. | WASHINGTON

FT BEYONDBRICS has a nice discussion of recent increases in Chinese wages, which includes this chart:

It's worth reading the analysis at the link, but I'll just add a few thoughts here. First, the chart provides some important context for debates over the speed of appreciation of China's currency. If you're a country competing with Chinese exporters, you don't much care whether Chinese manufacturing wages are rising or the currency is appreciating; both make production in your country look more attractive.

The urban-rural disparity is worth noting, particularly against the backdrop of Chinese inflation-fighting. A rural worker whose wages haven't increased much in recent years will find rising food and energy prices to be extremely painful. If China acts somewhat more aggressively toward inflation than expected, this could be one reason why—the government does not want to deal with hundreds of millions of angry rural workers.

The disparity between rural and urban workers will also continue to induce migration toward cities—a necessary process that China is nonetheless trying to manage carefully. That migration alone should increase the average worker's output and earnings, but other factors are also likely to boost wages in the near term. Valentina Romei at the FT writes:

[T]he rise in Chinese wages becomes marginal when the increase in labour productivity is taken into account. Chinese labour productivity has been rising sharply at about 10 per cent a year since the early 1990s and even more quickly in the past decade, due to technological progress, increased capital investment and rising human capital. Chinese factories may have higher labour costs but they need fewer workers to produce the same or larger amounts of goods, largely offsetting the increase in compensation.

The question is, how long can owners of capital continue to capture so much of the gain from higher productivity? If Chinese workers are producing much more than they used to, they will ultimately demand pay rises more in keeping with their soaring productivity. Rural migration could tamp this down somewhat, but not so much for those workers who have substantially increased their human capital levels. I would guess that Chinese wage growth, at least in the urban manufacturing setting, will accelerate for a few more years.

That, ultimately, will be a good thing. But growth won't come without challenges. Rising wages should facilitate a shift toward a more consumption-driven economy, which is new territory for the Chinese economy. Income disparities may prove difficult for the government to negotiate, particularly as rising consumption demand boosts domestic inflation. But it's worth remembering that less than ten years ago most Chinese workers were making less than $1 an hour, and now they're earning more than twice that.