Commentary: Is China Running Out Of Workers?

As farmers stay home, factories scramble for employees. It's all putting pressure on wages

Back in 1989, Taiwanese businessman Hayes Lou moved his bicycle and motorcycle helmet factory from Superior, Mont., to the city of Dongguan, in Guangdong province, China. Over the past 15 years he and his partners have added another helmet factory in Jiangmen, and opened a second facility in Dongguan to make plastic packaging materials. The rapid growth of Lou's business has been made possible largely by one factor: plentiful, dirt-cheap labor, fed by the constant influx into Guangdong of millions of migrant workers from the countryside. Now, much to the surprise of Lou and tens of thousands of other factory owners across China, the endless supply of new workers can no longer be taken for granted. Lou's packaging factory, for instance, is running well below capacity because he has only been able to find 170 of the 300 workers he needs. And even though he has jacked up wages some 30% since the beginning of the year, to an average of $85 a month, turnover is getting worse. "Even when you get an order, you can't produce and ship it," says Lou, who is deputy director of the Dongguan Taiwan Business Assn. "Everyone in every kind of factory is short of workers."

It's not just Dongguan that's experiencing a labor shortage. A recent survey by the Labor & Social Security Ministry found that the Pearl River Delta of which the city is a part needs 2 million more laborers. Other major export manufacturing regions, including parts of Fujian province, across from Taiwan, and Zhejiang, bordering Shanghai, are also facing shortages. "It's a serious situation if you're a manufacturer, because now you have got to compete on wages," says Jonathan Anderson, Chief Asia Economist at UBS Securities (UBS ) in Hong Kong. "You can't just put up a sign and expect workers to come knocking. That game is over."

The implication of the labor shortage: sharply rising wages that could push up an inflation rate that already tops 5% on the mainland. That could translate into higher prices for Chinese exports that would push up inflation around the world. Lou says that with the cost of raw materials also rising, he needs to raise prices 30% for his plastic packaging to make a profit. But buyers have balked, and he has only been able to raise prices 10% so far. Yet the upward pressure will remain. "Very gradually manufacturing prices of goods from China will go up," says Anderson. "They have been falling the last five or six years. That won't happen anymore."


Driven partly by a surge of foreign investment that is expected to top $60 billion this year, China is building more factories than it can easily find workers for. At the same time, factories are also springing up in the Chinese hinterlands, partly because of Beijing's Develop the West program, but also as manufacturers seek cheaper land and labor and new markets open up in the regions away from the coast. That too is making for a tighter overall labor market.

There are also structural changes at work. A key factor is a paucity of the young women who are the mainstay of the manufacturing workforce. According to the Labor & Social Security Ministry survey, 80% of Fujian textile plants report they only hire young women workers. But after 25 years of China's one-child policy, there are fewer young people able to leave the farm and staff the factories. The one-child policy also had the effect of favoring the birth of boys over girls, resulting in a population skewed more toward males. "The surplus labor in rural China may be as high as 100 million to 200 million people," says Zhang Juwei, deputy director of the Institute of Population & Labor Economics at the Chinese Academy of Social Sciences. "But women are well under half of that." Meanwhile, companies shun the vast majority of laid-off workers, who are often older people with poor skills.

Another factor reducing labor supply is better conditions in rural areas. A major component of China's 5.3% inflation rate is higher food prices for grain, meat, and eggs. That means higher incomes for farmers. Indeed, rural incomes were up 16% in the first half of this year, compared with an average of less than 2% the previous two years. "Most young people in my village don't want to leave because they can make money from the land," says Shen Zhiyun, a 27-year-old native of Chengnan in northern Guangdong who now works in a Zhuhai cosmetics factory.

Also, farmers are benefiting from the populist policies of President Hu Jintao and Premier Wen Jiabao, who are building on their predecessor's drive to boost rural incomes. Since the beginning of this year, China's State Council has slashed agricultural taxes by an estimated $3.5 billion and provided subsidies worth $1.4 billion to grain growers in 29 provinces. Total government expenditures on subsidies and rural development are expected to top $18 billion this year, setting a record.


As workers grow scarce, wages are going up. Indeed, over the last two years real salaries for manufacturing workers have risen faster than gross domestic product. That could have profound effects on China's economic infrastructure, since higher wages are running headlong into intense price competition. Fang Haifeng, 27, invested $100,000 to set up a small textile factory with his parents and sisters in Hangzhou, Zhejiang province, in early 2003. In May of this year the operation closed down -- a victim of rising wages among textile workers. "This kind of factory was successful a couple of years ago," says Fang. "Not anymore."

So will China lose its status as the world's workshop? Not anytime soon. China's hourly manufacturing wages are still just one-third of those in Malaysia. And its developed infrastructure and massive domestic market will remain attractive. Also, most of the salary hikes for now are hitting smaller Taiwanese and Hong Kong-owned export manufacturers rather than big American companies. The Motorolas of China have been paying higher-than-average wages all along and don't have a high turnover problem. "American companies are widely considered to be highly attractive employers," says Patrick J. Powers, director of China operations at the U.S.-China Business Council in Beijing. But the rest of the manufacturing sector relies on low margins and dirt-cheap labor -- labor that's suddenly not so cheap. The China model is changing fast.

By Dexter Roberts in Beijing, with Frederik Balfour in Hong Kong

— With assistance by Frederik Balfour

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