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Rising wages in China threaten prices in US

Rising wages in China threaten prices in US
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First Published: Thu, Aug 30 2007. 12 22 AM IST
Updated: Thu, Aug 30 2007. 12 22 AM IST
China: At the Dahon bicycle factory here, Zhang Jingming’s fingers move quickly and methodically—grabbing bicycle seats, wrapping them in cardboard and smoothly attaching them to frames.
Zhang makes the equivalent of $263 (Rs10,783) a month; as recently as February, he was making just $197. Some of his higher pay comes from working more efficiently. “When I first started, I wasn’t this fast,” he said. But a good portion reflects that Zhang got a raise: from 1.32 cents for each bicycle seat to 1.45 cents. It is a small difference that signifies major change.
Chinese wages are on the rise. No reliable figures for average wages exist; the government’s economic data are notably unreliable. But reporting across China, as well as experts who monitor the country’s labour market, say factory owners are having a hard time finding able-bodied workers and are having to pay the workers they can find more money. And higher wages in China are likely to lead to higher prices in the US—at the mall, at the grocery, even at the gas pump.
Chinese companies are already passing on some of their higher costs to overseas customers. Prices for Chinese imports, after years of gradual decline, leapt 1.2% since February, according to the labour department. July’s increase was the biggest yet: 0.4% from June. Chinese companies and contractors are also passing on the cost of the rise of their currency, up 8.8% against the dollar in the past two years.
For decades, many labour economists said China’s vast population would supply a nearly bottomless pool of workers. So many people would be seeking jobs at any given time that wages in this country would be stuck just a half-step above subsistence levels. As recently as four years ago, some experts estimated that the bulk of as many as 150 million workers in the countryside would be heading to cities. Instead, sporadic labour shortages started to appear at factories in the Pearl River delta region of south-eastern China in 2003. Now those shortages have spread to factories up and down China’s coast, experts and employers say.
This summer, Mary Gallagher, a Chinese labour specialist at the University of Michigan, visited five sportswear factories near Shanghai and Guangzhou. She found them all struggling to hire and retain workers. One factory had even shut down one of its two production lines because it had no one to sew shirts and other garments. “Basically half the factory was shut down and one dormitory was empty,” said Gallagher.
In interviews, factory executives across the country complained of being forced to give double-digit raises in order to find and keep young workers. Three or four years ago, said Zhong Yi, vice-general manager of a leather-jacket manufacturer in Hangzhou in east-central China, 800-1,100 yuan a month ($105-145) “was a good salary.”
“Now,” he said, “1,500 is the bottom” ($198). Chinese officials are quick to say there is no overall shortage of labour—rather, there is a shortage of young workers willing to accept the low wages that prevailed in the 1990s. Factories in cities such as Guangzhou advertise heavily for young workers, even while employment offices consider it a success if someone over 40 can find a job in less than a year.
“Now they’re taking workers into their early 30s, but anything older than that and they think they can’t take the conditions, the 11-hour days,” as well as work on weekends, and tedious life in factory-owned dormitories, said Jonathan Unger, the director of the Contemporary China Centre at Australia National University.
The dearth of desirable labourers has not turned China into a worker’s paradise. Factory wages remain extremely low by Western standards: roughly $1 an hour for better-paid workers near the coast, compared to early this decade when workers made as little as 50 cents. The pay looks especially low in dollar terms, partly because China has intervened massively in currency markets to hold down the value of its currency to keep exports competitive. The cost of living is low in dollar terms for the same reason; entrees at an air-conditioned restaurant three blocks from the bicycle factory here start at 50 cents for a large plate of fried rice.
Moreover, labour regulation is weak in China, as shown most vividly this year by the discovery that brick makers in the north of the country had kidnapped and enslaved hundreds of children and mentally disadvantaged adults, working them under brutal conditions with little or no pay. And wages are stagnating in the middle of the labour market—workers who consider themselves too educated for entry-level jobs in a garment factory, but lacking skills or experience to command a premium salary. “It’s easy to find a job with not a very high salary—it’s not easy if you want a higher wage,” said Chen Zheng, a 24-year-old auto worker and high school graduate in Ningbo in east-central China.
The hardest variable to judge in China’s changing labour market is the pace of productivity growth. Since China produces few reliable statist-ics, the best way to assess th-em is to look at individual fact-ories like the Dahon operation here, which produces bicycles that collapse for easy storage.
David T. Hon, chief executive of the privately held Dahon Group, said that while he has been raising wages by 10- 15% a year, the average labour cost for each bicycle has actually edged downward. This is possible, he said, because sales are growing by 30% a year and increasingly large-scale production has brought savings. The cost of engineering a new bicycle design, or handling the accounting and other back-office operations, is spread over more and more bicycles as production rises.
Price changes in China are unlikely to affect broad measures of inflation immediately in the US although longer-term effects are likely, Federal Reserve chairman, Ben S. Bernanke, said in a speech on 2 March, just as prices for imports from China were at their lowest point. Bernanke suggested that the price changes in China would have minimum effect in the US because the total of Chinese imports is small in relation to the American economy.
The bigger question, even harder to answer, is how much cheap Chinese imports have forced American manufacturers to keep their prices low. And will that price restraint persist if Chinese products become more expensive? American, European and Japanese auto makers, for instance, have been putting a lot of pressure on parts suppliers to cut prices by forcing them to compete for contracts with low-cost Chinese producers.
Rising overall incomes in China also affect American inflation indirectly. Higher income in this country contributes to soaring demand by Chinese for cars, air conditioners and other energy-consuming products.
China is now the world’s second largest oil importer after the US. More demand will help push up global oil prices and inflation.
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First Published: Thu, Aug 30 2007. 12 22 AM IST