During the process of globalization, China has gained a position as an extremely important player on the world economic stage. The country has become particularly famous as a hub for the global manufacturing industry, with a large quantity of cheap labor that produces low-cost products.
However, there is now growing concern that the labor costs for China’s manufacturing workforce are growing rampantly. This could have obvious detrimental effects for Chinese exports, and foreshadow major restructuring of China’s economy, with important consequences for the rest of the world.
With this background, the research aims to answer the questions of whether wages are indeed growing as quickly as reported, and what factors could explain such growth. The paper pays special attention to the so-called Lewis model, as many analysts claim that it explains the great increase in compensation levels for Chinese manufacturing workers. The Lewis model is explained and its applicability to China is discussed.
The study also examines other possible explanatory factors to establish the causes of the increasing labor costs. The research aims to triangulate a diversity of sources, including quantitative data supplied by major national and international agencies, qualitative data in the form of media reports, and two company case studies conducted by the author.
The paper concludes that manufacturing wages have indeed risen sharply in recent years, and are likely to continue to do so. However, it is found that the labor costs for unskilled workers is not as important of a factor for manufacturing companies in China as is commonly believed. For export companies specifically, it is found that Chinese currency appreciation is a much greater economic threat.
In regard to the Lewis model, no conclusive evidence is found that it is a sufficient or even very good explanation of the rising manufacturing wages. Instead, it is found that a high level of inflation, especially in some parts of China, can explain a large part of the publicized increase in labor costs.
Source: KTH
Author: Rydbert, Erik