Monday, September 23, 2013

Why China Labor Costs Can Stay Competitively-Low

In this new blog article, we will explain in details why PRC (People's Republic of China) labor costs can stay competitively-low as compared to international level in near future.

From recent statistics, PRC manufacturing sector job market is still growing rapidly and not yet declining. Currently in PRC, manufacturing industry is still the biggest employment sector and remains highly competitive.

Some economists point out that if a sector can grow globally, then it should generally be advantageous for every related country. However, some US politicians fear that PRC manufacturing sector continues to grow and the same case does not seem to happen for manufacturers located in the U.S. Those US politicians have started to point their fingers to mainland China, although many Chinese workers are actually employed either directly or indirectly by US companies.

Actually, this manufacturing boom has begun long time ago before year 2001. Firstly it was primarily private companies or investors who started-up this boom, but nowadays it is importers, businesses or even governments all over the world trying to get rewards from the low-cost Chinese manufacturing sector.

How Can China Labor Costs Stay Competitively-Low?

Although global export demands are huge, PRC labor costs can still remain competitive for so many years. There are some key reasons why PRC labor costs can stay low:

(i) Large Unemployed Population.

You must hear about a startling fact that PRC has a huge population accumulating over 1.3 billion. From this 1.3 billion people, over 200 million of them are still unemployed. Under the basic supply-and-demand principle, PRC labor costs will remain competitively-low for quite some time in near future as long as PRC has such a large reserve of unemployed labor force and cheap labors. What we refer as 'low' here is, of course, by comparing with international labor cost level. An interesting fact is that Chinese central government is still worrying if it cannot maintain a relatively strong annual GDP (Gross Domestic Product) growth rate above 7%, PRC unemployment condition will be even worse.

(ii) Relaxed Government Rules.

Another reason is relating to Chinese rules and regulations. Factories, depend on their locations, are overseen by different Chinese governmental bodies or agencies. While China Ministry of Labor (MoL) is monitoring factories located at urban areas, Ministry of Agriculture (MoA) is monitoring factories located at rural areas. Generally, government rules, regulations, policies or guidelines are tighter for Ministry of Labor (MoL). Therefore, on some occasions China Ministry of Agriculture (MoA) can offer more relaxed government rules for factories located at rural areas. It is usually more cost effective for factories in rural areas since employers there do not have obligation to pay their employee benefits in par with national standard.

(iii) Under-paid Migrant Workers.

The next major reason is about migrant workers in PRC. According to official analysts, PRC holds more than 100 million workers in its manufacturing sector. However, this official statistic of 100 million workers does not take the number of migrant workers into account. In fact, there are over millions of PRC migrant workers who are currently under-paid (i.e.: paid below market prices). These migrant workers can continue to be cheap labors because they only have relatively-low bargaining power in job market and they are willing to accept low-paid job offers.

(iv) Renminbi Currency Exchange Rate.

For some U.S. politicians, Chinese currency (called RMB, CNY, Yuan etc) is also one of the factors, although some other economists would believe this statement is still controversial. Continual increase trend of RMB forex rate will increase burdens that most Chinese exporters have, along with the recent increases in national minimum wage level. Currently many Chinese exporters are indeed suffering from the rising overall operational costs, thus limiting further rise in labor wage level for better cost savings.

Now if you look at all the above reasons, you should also agree that PRC labor costs can stay competitively-low as compared to international level for quite a long time. It is nothing close to a mystery or a hidden secret, PRC still has a large pool of unemployed or unpaid labor force waiting for low-paid job offers. China is definitely a nation rich in human capital resources and cheap labors for driving continuous growth of its manufacturing sector.


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