China Surging Wages Threaten Economy’s Competitiveness, ADB Says

China’s surging wages and other costs are showing signs of undermining the competitiveness of the nation’s economy, threatening its growth potential, the Asian Development Bank said.

Average inflation-adjusted wages have more than tripled in a decade and non-wage costs for procedures such as hiring and firing have risen since the introduction of a 2008 labor law, the ADB said in a report published today.

The labor market is being squeezed across the nation as the pool of working-age people shrank last year. At stake is China’s position as the world’s biggest producer of low-cost goods, while competitors from Vietnam to Mexico stand to gain as investors seek to relocate to countries that have cheaper labor or are closer to big markets in the U.S. and Europe.

“Rapid aging of the population is taking its toll on the labor market,” Hamid L. Sharif, the ADB’s country director for China, said at a press briefing in Beijing. “Unless compensated by rising labor productivity, high wages would erode the economy’s competitiveness and growth potential, hampering government development plans.”

The discussion of wages was part of a broader report on the outlook for economies across Asia. The ADB projected economic growth of 8.2 percent this year for China, up from 7.8 percent in 2012, a 13-year low.

To prevent further harm to competitiveness China must ensure that increases in minimum wages don’t outpace gains in productivity, which should be fostered through incentives for companies to invest in new technologies, the ADB said.

Productivity Level

China’s labor productivity has grown quickly even as it remains less than 10 percent of the level in Singapore and the U.S., and about 20 percent of South Korea’s rate, Niny Khor, a Beijing-based economist for the ADB, said at the briefing.

Rising wages and other costs are being exacerbated by restrictions on workers’ mobility through the household registration system known as hukou, the ADB said.

“Key to reducing labor rigidity is reforming the hukou system,” the report said. “Steps are needed to reduce migration and transaction costs in the labor market.”

Changes in China’s labor market have occurred at a speed “unprecedented in history,” the report said. In 1990, more than 80 percent of urban workers were employed by state enterprises or collectives while by 2010 that fell to 45 percent, the ADB said.

China’s pool of 15- to 39-year-olds, which supplies the bulk of workers for industry, construction and services, fell to 525 million last year from 557 million five years earlier, according to data compiled by Bloomberg News from the U.S. Census Bureau’s international population database. The number employed in industry rose to 147 million from 117 million in the five years through September.

— With assistance by Kevin Hamlin

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