Increasing Labor Minimum Wage Rates in China

One of the main advantages of the Chinese economy has always been cheap labor force. In fact, in the last twenty years, this sufficient factor encourages foreign companies to transfer their production to Chinese corporations. Moreover, China has attracted organizations from the labor-intensive industries such as textiles, toys and electrical appliances manufactories. For many years, cheap labor has been a beneficial phenomenon that enabled the country to develop its economy, restore infrastructure and attract investors. However, the situation has changed, and Chinese producers have to raise the wages of their workers. Undoubtedly, it made a significant impact on the manufacturing industry in China and the world trade system.

In fact, China is a country where the minimum wage level has stayed low for decades. However, in the past few years, economists have observed its rapid growth. Thus, Chinese government raised the minimum wage in the various regions of the country by 15-25 percent annually. The differences in the rate of payment increase in diverse regions of the country depended on many factors, including the price of housing. In addition, increasing minimum wage is a part of the government’s strategy for the development of balanced domestic consumption. Besides, Chinese authorities have sought to improve social protection of citizens, modernized the Labor Code and introduced new requirements for pension insurance. In fact, these steps have become a completely regular process (Huang, Loungani, & Wang, 2014). Back in 2003, there were the first signs of labor shortages. Moreover, labor supply fell because of the fact that younger generation was no longer willing to work for money, which previous workers earned at the end of the 90s. However, employers stayed interested in younger personnel because they are willing to work eleven hours per day and seven days per week in different manufacturing areas. Consequently, increasing labor shortage became one of the most important reasons for raising minimum wage.

The changes in the financial payment policy pursue two major political goals, namely the reduction of social discontent and the introduction of modern and sophisticated technology. Besides, this innovation will have a negative impact on export, which is the key growth driver of the Chinese economy. In fact, two factors produce an adverse effect on the price competitiveness of Chinese exports. Firstly, productivity growth in the export sector along with labor mobility between industries has led to increasing minimum wages throughout the economy (Brown, 2010). In fact, this change corresponds to the Balassa-Samuelson effect, which explains the rise in the real exchange rate by inflation caused by improved productivity and wages in the industry. Secondly, the current strengthening of the Chinese currency to the US dollar caused an additional increase in the cost of Chinese labor in the dollar equivalent. As a result, the Chinese economy began to lose natural governmental advantages in the production of export products.

Moreover, the growth of final consumption expenditures has stimulated an increased demand for imported goods. As a result, both of these processes have led to a decrease in the positive China's trade surplus in recent years. Besides, increasing minimum wages did not have a significant impact on the import of the country, collective and private enterprises. Moreover, the import of conventional trade is not statistically associated with the growth of wages in China because it depends on the final consumption expenditure and investment in fixed assets. Furthermore, it is necessary to consider that the growth of wages in China is accompanied by a faster rate of productivity (Huang & Yu, 2013). In this sense, additional costs are justified, and Chinese workers receive bigger salaries because they produce more products. Primarily, employees involved in high technology industries receive the highest income. Consequently, imports from China are still favorable for other countries. However, this process has a negative impact on the imports of countertrade. In fact, industries that use low-paid labor have felt the growth of wages in a particularly acute way. For this reason, the leading corporations have realized that the days when China was the largest country in the world with cheap labor finally passed.

Moreover, textile factories and enterprises producing toys will consider the possibility of transferring their production facilities to other Asian countries such as Vietnam, Indonesia, Cambodia, Thailand or Bangladesh (Huang & Yu, 2013). In fact, the cost of labor in some of these countries is 30 percent lower than in China. However, according to the world economists, the massive outflow of China's export production will not happen due to a number of reasons. These include an effective production base and developed infrastructure. In addition, the heads of organizations already know the requirements and rules of the manufacturing and distributing policy. Besides, many of the countries that are trying to replace China have unresolved issues related to the development of their infrastructure. In addition to these problems, Bangladesh and Cambodia face high political and inflation risks. Indonesia has burdensome labor laws and tax system along with a significant population growth and growth of the middle class. However, Thailand and Vietnam can try to excel China in the production of high technology products, electronics and automobile parts. Nevertheless, the demographic situation is beneficial to China. In spite of the high concentration of population in a certain region, none of the countries which aims to take the place of China in the world trade market will not be able to offer such a large number of employees. Therefore, Chinese producers must tolerate the growth of wages and compensate these changes by increasing prices for the end consumer.

As for the impact on the world trade system, the increasing minimum wages made a significant effect in a several countries and spheres. Firstly, the changes in the Chinese labor market have put the long process of the transfer of industrial enterprises from the USA to China to an end. Moreover, American consulting firm Boston Consulting Group released a study which states that US firms have increasingly renewed the abandoned industrial production for the North American market (Finn, 2007). The main reason of those changes is that the growth of labor productivity could no longer compensate rapidly increasing wages at Chinese enterprises. At the same time, the United States reduced the level of wages, and labor productivity continues to grow. As for Europe, the countries of this continent continue to invest in the deployment of production in China. For example, German enterprises produced mainly high technology products, and therefore they were initially set to a high level of salaries in China (Vogt, 2012). For such companies, the qualifications of the staff are more important than how much finance they will invest in wages. Moreover, the Chinese market is saturated with medium-sized companies from Germany, which have always taken a long-term decision about production sites. In fact, the reason for such policy lies in the fact that the training and retraining of the personnel is a long and expensive process. However, increasing minimum wage rate in China has a positive impact on foreign companies (Shambaugh, Sandschneider, & Hong, 2007). In fact, corporations from Europe and United States do not want to take back their capital from the Chinese organizations because they understand the growth prospects of the domestic consumption in China. Moreover, Chinese leadership provides a consistent policy to stimulate domestic consumption. In fact, they placed an emphasis on domestic goods, which leads to the growing purchasing power of the Chinese people and thus increases attractiveness of the domestic market.

However, China remains an important world’s factory for the production of the majority of industrial and consumer goods. Although minimum wages have been increasing in the recent years, China will remain among the manufacturing leaders due to the developed infrastructure and the adjusted logistical chains. Consequently, increasing minimum wages make a sufficient impact on the manufacturing industry, which is related to several economic issues. Firstly, the growth of salary greatly reduces the amount of cheap labor. Due to this fact, Chinese manufacturing industry loses its ability to produce the products in such amount as in the past. Secondly, due to the increasing minimum wages, foreign companies start to reduce the amount of investments in the Chinese manufacturing industry. This is related to the fact that the expenses on the wages were significantly increased. Finally, the growth of minimum wages raised the purchasing power of the Chinese people. Due to this fact, manufacturing industry could produce more goods for the domestic market.

Therefore, the increasing minimum wage rate in China made a considerable impact on the manufacturing industry and the world trade market. This process is connected with the growth of the cost of living, real estate bubble and a deficit of minimal skilled labor. Increasing wages in China closely also influence inflation and political fears of the authorities. Consequently, this process testifies the aggravation of the economic cheap labor model and threatens Chinese manufacturing industry. Due to these changes, some foreign organizations start to transfer their investments and production facilities to other Asian countries such as Vietnam and Cambodia that offer cheaper labor force. Apart from that, the massive outflow of China’s export will not happen because the country formed a well-developed infrastructure and has a certain experience in goods production. Furthermore, due to the increasing minimum wages, Chinese corporations lost the ability to produce a large number of products, but the Chinese people gained a bigger purchasing power. Therefore, the increasing minimum wage rates always undergo regular changes and make a significant impact on the manufacturing industry and the global economy.

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