Does a Growing Worker Shortage Threaten China’s Low-cost Advantage?

Early this year, at a job fair held in Fuzhou, the capital of Fujian province in China, more than 50,000 positions designed to encourage farmers to move to urban areas went unfilled. In addition, of the more than 400 farmers who left their hometown of Qinghai last year to work in Fujian’s Quanzhou City, less than a third stayed. Usually, the two to three months following the country’s Spring Festival are the time when farmer-workers leave their families and start work in cities. But this year, many labor-intensive enterprises in China found themselves short of workers to start the engine.

Yet this is not the first time that China has experienced a labor shortage. An article published in The Economist in October 2004 pointed out that although there were 19 million farmer-turned-workers in the Pearl River Delta in Guangdong, the area still faced a shortage of two million workers. In 2005, the problem extended from the Pearl River Delta into the Yangtze River Delta and the coastal areas in the North. According to a 2005 survey conducted in Guangdong province, although a third of the manufacturers there have tried to solve the labor shortage by raising wages and benefits, overall demand still exceeds supply by more than one million positions.

This year, the labor shortage has spread to other cities, including Beijing and Tianjing, and beyond. It’s estimated that in 2006, Shenzhen will see about 400,000 manufacturing jobs remain unfilled. The labor shortage is expected to be just as severe in Guangzhou. Such a phenomenon has led to concerns that China may not be able to sustain its low-cost labor advantage. Against this backdrop, Knowledge at Wharton interviewed several experts for their opinions on China’s labor issues.

The City or the Farm?

According to Zhong Naiyi, a researcher at Shanghai Institute for International Studies, what has caused the labor shortage is the fact that although farmers’ income has risen in recent years, migrant workers haven’t seen much growth in their income. As a result, farmers feel less inclined to leave for a city job.

In January 2004, the first year of the labor shortage, the government issued new rules to extend the land contract time for farmers in order to improve productivity. Many migrant workers then left their jobs in cities and went back to their villages. Also that year, farmers received additional subsidies from the central government because of a short supply of grains. Over the past three years, the central government has stepped up its efforts to help farmers by lowering taxes and improving their incomes. All those measures have helped narrow the income gap between farmers and migrant workers. As a result, says Zhong, “it pays better to stay with” farming.

About 150 million farmers in China are currently idle. As productivity continues to improve — even with slower growth in the farmer population — that number is expected to stay between 120 million and 180 million over the next 15 years. In theory, those “unemployed” farmers would have to go to cities for jobs.

Yu Nanping, a researcher at East China Normal University, notes that it is because of the population structure — not the shortage of workers — that Chinese enterprises are having a hard time filling positions. In general, the supply of laborers still exceeds the demand due to the 150 million unemployed farmers. Part of this is caused by the fact that labor-intensive enterprises prefer to hire younger workers.

For example, says Yu, “Zhejiang Province has a very advanced textile industry and therefore is in need of many female workers between the ages of 18 and 25. The city of Shaoxing, for instance, has experienced a labor shortage this year. The preference for younger workers” only adds to the problem. In addition, thanks to the growing economy and technological advances, there is a growing demand from enterprises for technical expertise. This year, 30% to 40% of the 400,000 unfilled jobs in Shenzhen are technical positions. That figure is 20% to 30% in Guangzhou. “Most of China’s migrant workers today are involved in jobs that require no technical skills, and so [these workers] are easily replaceable,” Yu adds. “They must try to gain knowledge and technical expertise.”

Salaries: Rising or Falling?

A direct consequence of the labor shortage is rising wages, which then leads some people to question whether China will lose its advantage of being a low-cost manufacturing base. In recent years, that prediction has become more and more widespread. One scenario suggests that China will lose its low-cost advantage in the next five to eight years. Some researchers in Germany are even more pessimistic, saying China can only sustain the advantage for another three to five years.

For a long time, says Yu, “basic wages for migrant workers have remained at a very low level. And migrant workers also lack a basic safety net, which should be accounted for when you calculate labor cost.” Some studies indicate that in the last 12 years, migrant workers in the Pearl River Delta have seen their monthly salaries go up only 68 yuan. If inflation is taken into account, migrant workers’ income has actually declined.

In many places, enterprises pay only paltry wages to workers who engage in very labor-intensive work. As Zhong notes, “Despite some salary increases in certain regions, the income level in most of China remains the same. It’s fair to say that salary increases only pertain to a minority of migrant workers. A recent press report says that a migrant worker who started work 10 years after his father makes the same amount of money as his father. The reason is that the large working population in China has given companies huge employment choices.” If there are 10 million to 12 million new jobs every year, he adds, it still would take 15 to 20 years to absorb the excess labor supply. Of course, the precondition is that China’s GDP has to grow at least 7.5% every year.”

Hua Ming, a professor at Fudan University, brings up another factor contributing to migrant workers’ low wages. “Currently, it’s the market that decides how much they get paid. Because the urban and the rural markets are so distinctly separate and different, migrant workers earn far less than what average urban workers make.”

He points to a series of factors, including China’s residency policies and land policies, that have increased the costs for farmers to move to the cities. Migrant workers don’t have free job fairs, training opportunities or the same rights as city residents. Their children are denied free education. All things considered, their income is very low. “In such an economic structure, it’s impossible to expect equal earning opportunities,” Hua says.

With Challenges Come Opportunities

Yu suggests that it is only natural for wages to increase. In the end, any economic and social advancement is reflected through the growth in income and social welfare. Even though an excess supply of laborers is going to persist in China for a long time, wages are bound to increase due to factors such as the shift in industrial structures from a labor-intensive model to a capital- and technological-intensive one.